The Unhealthy Markets Edition

Summary

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Slate Money: "The Unhealthy Markets Edition"

Date: December 17, 2016
Host: Felix Salmon
Co-hosts: Cathy O'Neil, Jordan Weissmann

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Main Theme

This episode of Slate Money, titled “The Unhealthy Markets Edition,” dives into two big stories from the realms of business and finance:

1. The complicated realities behind corporate wellness programs, and
2. Collusion and price fixing in generic drug markets.
   The hosts also break down the recent decision by the Federal Reserve to raise interest rates, the ripple effects in financial markets, and end with their trademark “numbers round”—sharing surprising numerical facts from the week.

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Key Discussion Points & Insights

1. Corporate Wellness Programs: Promise and Peril

(02:21 – 11:57)

• Good Intentions?
  Companies like IBM and Johnson & Johnson are considering reporting the health of their workforce to shareholders, suggesting employee wellness as a company health metric.

  • “Isn't this a great idea, guys?” – Cathy O'Neil, [02:30]

• Carrots vs. Sticks
  Wellness initiatives can be positive ("carrots": gym discounts, free yoga) but may turn invasive or coercive ("sticks": mandatory annual physicals, sharing health data, insurance penalties).

  • “So carrots are good. What are the sticks? What are the bad?” – Felix Salmon, [06:05]

• Data Reporting Risks
  There’s concern that as companies report more health data, pressure will mount to minimize healthcare costs, ultimately leading to discrimination against “unhealthy” employees. This could entail higher premiums or job discrimination for smokers, those with chronic diseases, or higher BMIs.

  • “The more important this kind of thing becomes to shareholders, the more danger there is about discrimination against the sick.” – Jordan Weissmann, [11:24]

  • Cathy notices a worrisome trend:

    • “We're going to have pressure on companies to never hire sick people in the first place.” – Cathy O'Neil, [10:21]

• Legal Protections & Discrimination
  The panel notes that U.S. protections mostly cover distinct disabilities (ADA), not lifestyle factors like smoking or obesity. This gap could make many workers newly vulnerable.

• Summary Insight: What sounds like progressive corporate policy can mask harmful discrimination, especially against the vulnerable or chronically ill.

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2. The Federal Reserve Raises Interest Rates

(12:34 – 23:16)

• The Fed’s Move
  Janet Yellen and the Fed raised interest rates to 0.5–0.75%, a significant event after years near zero.

  • “Janet did what she probably would have done six weeks ago and raised rates to the lofty heights of half a percent to three quarters of a percent.” – Felix Salmon, [13:17]

• Historical Context
  Interest rates are still at historic lows, and the movement is more about trajectory than actual impact.

  • Context stats:
    • 8% in 1990, 6% in 1998, ~0% since 2008. – Cathy O'Neil, [14:37]

• Market & Political Implications
  Debate over whether the Fed is pulling back in expectation of potential fiscal stimulus from a new administration or simply keeping “dry powder” in case of future problems.

  • Felix argues:
    • “They're giving themselves some ammunition. ... You can’t cut rates if they’re at zero.” – Felix Salmon, [17:03]

• Predictions

  • Cathy: 1% at end of 2017
  • Jordan: 1.25%
  • Felix: 1.5% ([22:37])

• Speculative Theories
  Cathy posits undocumented immigrants leaving the workforce could drive up wages (and thus inflation).

  • “My theory is that inflation is going to rise because of the immigrant problem, not because of stimulus.” – Cathy O'Neil, [20:02]

• Inflation Targeting
  The Fed's “asymmetric” attitude: comfortable with slightly low inflation, hair-on-fire if it rises above 2%.

  • “It seems to have a rather asymmetric 2% inflation target ... much happier with 1% inflation than 3%...” – Felix Salmon, [21:00]

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3. Price-Fixing in the Generic Drug Industry

(23:16 – 31:35)

• Sudden Price Hikes
  The show covered disturbing hikes in generic drug prices—supposedly due to normal market forces—but new legal developments indicate actual price fixing.

  • “Department of Justice ... charged two drug executives ... in a criminal antitrust conspiracy to fix the prices of some of these generic drugs.” – Jordan Weissmann, [24:23]

• Mechanics of Collusion
  Drug makers allegedly coordinated to hike prices, sometimes splitting geographic markets:

  • “You take the western U.S., we’ll take the eastern U.S.—and we won’t compete on price.” – Felix Salmon, [25:17]

• Civil and Criminal Fallout
  Not only criminal charges (Heritage Pharmaceuticals execs pled guilty), but 20 states launched a civil antitrust lawsuit involving big names like Mylan & Teva. ([25:43])

• Everyday Cartels
  Felix points out collusion isn’t unique to pharma: similar behavior is seen in airlines, art auctions, IPO fees, and even real estate brokerages. Sometimes it’s explicit, other times more tacit—but the broader point is that markets often lack true price competition.

  • “Sometimes when it looks like a whole industry is a cartel ... maybe they are just a cartel and they're colluding...where there's smoke, there's fire.” – Jordan Weissmann, [29:30]

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4. The Numbers Round

(32:06 – 36:46)

• 757: The actual model of Trump’s jet (not 747; listener correction).

• $1 million: Difference between mean and median apartment price in NYC.

  • Mean: $2.2 million, Median: $1.2 million. [33:19]
    • “If you want to buy the median apartment in New York City, you’re going to have to pay $1.2 million...compared to the mean apartment, it’s downright cheap.” – Felix Salmon, [34:19]

• $7.5 billion: Projected size of the cybersecurity insurance market in 2020 (up from $3 billion today).

  • Cathy raises questions about how risk and insurance in cyber markets are calculated. [34:30]

• Zero: (Speculative) Number of PhD economists in the incoming Trump administration if Larry Kudlow heads Council of Economic Advisers. [35:33]

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Notable Quotes & Memorable Moments

• “These things which sound nice in theory ... are a sort of thin veneer hiding a bunch of discrimination.” – Felix Salmon, [11:30]

• “If you go to the little corporate milling-around area which used to be called a water cooler ... is it full of M&Ms, or is it full of carrots?” – Felix Salmon, [05:31]

• “We're going to have pressure on companies to never hire sick people in the first place...and that is just a shit show if you think about what that means.” – Cathy O'Neil, [10:33]

• “You have to understand the economics of prescription drugs ... it's really just like, yeah, it was a conspiracy.” – Jordan Weissmann, [25:25]

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Timestamps for Key Segments

• Introduction & Topic Tease: [00:08 – 02:21]
• Corporate Wellness Programs: [02:21 – 11:57]
• Fed Rate Hike Discussion: [12:34 – 23:16]
• Generic Drug Price Fixing: [23:16 – 31:35]
• Numbers Round: [32:06 – 36:46]

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Overall Tone & Takeaways

Engaged, irreverent, and deeply skeptical of conventional wisdom, the discussion style mixes data with sarcasm and humor. The hosts demystify the optimism around health initiatives while warning of hidden dangers, dig into economic policy with political and historical context, and highlight the pervasiveness of collusion—both legal and illegal—in mature markets.
Those who missed the episode will come away informed on the economic, social, and regulatory angles of the week’s biggest business stories.

Transcript

[A]

The following podcast contains explicit language.

[B]

Hello, and welcome to the Unhealthy Markets edition of Slate Money, your guide to the business and finance news of the week. I don't know how unhealthy the markets are. I have been bombarded all week with headlines about the stock market hitting new all time highs and the Fed Funds interest rate, the most important interest rate in the entire world is back in the news this week. It moved and it's not a common thing. It hasn't been a common thing in recent years for that thing to move. We are going to talk about the Fed and the Fed interest rates. We are going to talk about generic drug prices because those things have been going up like gangbusters, possibly, we now learn, due to illegal collusion. I, of course, am Felix Hammond of Fusion. My partners in Slate Money Crime are the usual pair of reprobates. Cathy o', Neill, the author of Weapons of Mass Destruction.

[C]

Hello, Felix. You're sounding so chipper this morning.

[B]

It's because I had beer last night. And we can talk a little bit about that. We also have Jordan Weissman, always happy.

[A]

To be on air with you two unrepentant drunks.

[C]

Money books losers.

[B]

We're feeling perky this morning on account of love. Last night we recorded the Slate Money live show all about beer.

[C]

I want to say perky. I was gonna go with like satisfied or something.

[B]

It went. It went well, I think. And all of you wonderful Sleep Money subscribers get to listen to it over the new year, I think is the time that we're going to drop that episode. So you have that to look forward.

[C]

To, listen to when you're hungover from your New Year's Eve party, I think.

[A]

Yeah, that's the perfect mode, right? Yeah.

[B]

I feel like if you really, if you really want a jumping New Year's Eve party, invite all your friends around and then just sit them down and say, listen to Slate Money. It'll be fun. But for the time being, we're gonna talk about the news of this week. And Kathy, you found an article which scared you.

[C]

It did, it did. I want to start out, like, pretending that this is good news. Can we do that?

[B]

Yeah.

[C]

I'm not experimenting.

[B]

I'm in the mood for good news.

[A]

Someone will play Give me some good news.

[C]

Okay. We're gonna say, oh, we're gonna be. We're gonna put on our happy faces. IBM and Johnson and Johnson are among those companies that are weighing the idea of reporting their, the health of their workforce in their quarterly statements and such to the shareholders. The idea being this is a one of the many markers of health of a company. Isn't this a great idea, guys?

[B]

When you talk about a healthy company like you people normally think of that in terms of balance sheets and profit statements and stuff, but you can take that very literally. And you can say, we are a really healthy company. Our workforce is super healthy. None of us ever get sick. And healthy bodies, healthy minds, and that makes us more productive. And no sick days. And so lower health care costs, our shareholder, and lower health care costs. And our shareholders are going to love us and probably bid up the share price just because they can see how healthy we are.

[A]

And lower health care costs. And lower health care costs.

[C]

Lower health care costs, don't mention.

[B]

So is that true that if you, if a company, you know, let's say I'm IBM and I have tens of thousands of employees and I'm negotiating a health care deal with an insurer, will that insurer look at how healthy my tens of thousands of employees are in aggregate and give me a lower price? If they're healthy, I mean, they do.

[A]

Look at your, like, history, how much you've. I mean, like there was that famous incident with aol, essentially where one of their employees, quote, spent a lot on like a hard childbirth. And that created problems as far as the company was concerned financially.

[B]

Well, no, that cost the company money, but that didn't raise the insurance premiums that the company was charged by its insurers, as far as I know.

[C]

Well, it might. I mean, they renegotiate that.

[A]

Yeah, they have to, they have to go year after year.

[B]

I think the answer is yes, you see. No, I'm going to stick to this for a minute. I mean, I think the answer is yes, but I don't think the answer is yes in the case of aol, because that isn't like having one employee who has like, you know, an expensive baby is not predictive of having future employees who have expensive babies. The insurers aren't going to say you have an unhealthy workforce, therefore we're going to charge you more because. Because your workers cost more to what.

[A]

The AOL example I probably shouldn't brought, because that was such a just fucked up example. Totally. And it may have been like the company just kind of covering for itself, but yes, I mean, having a, having an expensive, hard to care for workforce, it should theoretically be raising your premiums as a company in the end.

[C]

So this really ties into a growing market of what, what is called wellness programs that employees Start wellness programs. It turns out as of last year, 70% of employee employers actually institute have instituted wellness programs. And wellness programs can be really great and they can be really horrible. So we're about to switch into the slightly dystopian perspective, but basically it comes down to whether there are carrots or sticks involved. And the idea is if you want a healthy workforce which is good for everybody, then you can give them all sorts of opportunities like Google gives people opportunities to be healthy.

[B]

And, and like literally you can give them carrots. Like if you go to the little corporate milling around area which used to be called a water cooler and is now methodized into this whole huge part of all trendy offices with a lot of soft furnishings and free flowing coffee, you know, the question is, is it full of M&Ms. Or is it full of carrots?

[C]

And do you have exercise balls in that area? Do you have free yoga classes or do you give discounts to like gyms? That kind of thing could be good, can be good for people. Right?

[B]

And so that's the good. So, so carrots are good. What, what are the sticks? What are the bad?

[C]

The sticks are really kind of alarming. And I, I researched this in for my book as well and I looked into it. The sticks are things like, you know, basically how fat are you? How much do you smoke? Do you have chronic diseases and are you controlling your chronic disease as well?

[B]

And the way and the company asks requires the employees to hand over that information.

[C]

Not only that information, most wellness programs basically insist that you take, you get a doctor's, you get a full physical every year and that the data is collected by the company. And by the way, it's not sufficient to sign a form saying yes, I got a physical. The somehow the wellness program insists that you give the data to that because.

[B]

If they don't receive the data, then they can't go and report it onto their shareholders.

[C]

Yes.

[A]

So can we get into why like this is like getting really dystopian.

[C]

Yeah, let's do it.

[A]

So the second companies start reporting a cost to their shareholders, that means there will be pressure to keep that cost down more and more over time as that gets, you know, just becomes a natural part of your quarterly report.

[B]

I feel like someone jumped forward a step here. We like Kathy was talking about companies just reporting data on healthiness or whatever metrics you want to use for healthiness. And now Jordan, you're saying they're reporting a cost. What's this cost they're reporting?

[A]

Well, essentially, I mean, if you're reporting healthiness. The. To me, as far as I'm concerned, that that means there's going to be a obvious emphasis on how much you are spending on health care for your workforce. That is going to become a more and more pressing concern for insurers. That's. That just seems obviously where that's going to be going. And.

[B]

Okay, because again, just slow down because it might be obvious to you and it's not obvious to me, and it's probably therefore not obvious to everyone listening to this. So let's say I have one of these wellness programs and I'm paying for, you know, gym memberships and carrots and bouncy balls and yoga classes. And that's a cost, which I say this is. This is a really good investment because it's keeping my employees healthy and stopping them from going to the doctor and stopping them from having to take time off work and that kind of stuff. And you're saying that if I start reporting that cost, my shareholders are going to want that cost to go.

[C]

Let me connect some dots before, before we get to the shareholders, because I think the wellness programs themselves tout themselves as cost savings devices. And there's been a lot of controversy over exactly how that cost is actually being saved. A rand report in 2013 came out saying that in general, it doesn't necessarily. There's no, there's no good roi. There's no really good return on investment for these corporate wellness programs because as you mentioned, they do cost money. You have to get all these bouncy balls and you have to make all these systems put in place. The thing that, that we, I think we need to focus on because we're slate money, is that there's a question of whether it's saving the company money to institute this wellness program versus whether it's actually making the employees healthier. And I think there really is a distinction there. And the answer is essentially, there are certainly programs that save money, but the way they save money is by putting more onus on unhealthy people to pay for their insurance. So in other words, they're not making people healthier, but they are saving money.

[A]

So one of the things with these wellness programs is if you don't abide by them, if you don't follow, you know, the ten step plan they give you to deal with your smoking or whatever, sometimes you have to pay more money for your insurance.

[C]

So you actually have to pay more money if you refuse to take the tests. But in some cases, when they have real sticks and michelin tire company was one of the examples early on. If you don't improve your BMI or if you don't stop smoking, you actually have to pay even more extra money. So there's really like. Basically they're saying people who are unhealthy have to pay more for their insurance. And if you think about it, of course, that saves money.

[A]

Yeah, exactly. And so to me, when you're talking about presenting this information to shareholders, yes, there is going to be the obvious next step is to create more, present more and more data, specifically about your health care insurance costs and how much money you are saving by forcing people to spend more. All of that is going to become more and more part of the calculation and there will be more pressure to make your slightly unhealthy employees pay more for their insurance.

[C]

Not only that, but the reason I, I brought it up in my book is because one of the reasons I worry about it is not only are we going to have added pressure for companies to save even more money on health care, but we're going to have pressure on companies to never hire sick people in the first place.

[A]

Exactly.

[C]

And that is just a shit show if you think about what that means. It's like ageism. It's, you know, it's racism. Like who's sick in this country, who's unwell? Exactly. The people that should be protected from this kind of hiring problem.

[A]

Yeah. You know, you think about the protections we have for the, quote, sick in this country. They're mostly the ada, it's the American with Disabilities Act. So if you have a real, very distinct disability, you're in a wheelchair or something, then you're protected. But if you're a smoker or you're overweight, no, you're not a protected class in this country. You can be discriminated against by an employer. And so I don't think Americans have really thought about this before, that a lot of people may actually be vulnerable to discrimination for things like this in the future. And that's starting to become, I think, a distinct possibility. And, and the more important this kind of thing becomes to shareholders, the more the. The more danger. Yeah, the more danger there is about discrimination against the sick.

[B]

So it seems to me that what we're worried about here is these things which sound nice in theory. Corporate wellness programs, healthy workforce, fewer people taking sick days, everyone being sort of in shape, well rested, coming into work, full of women, figure out is a sort of thin veneer hiding a bunch of discrimination against the old and the sick and the infirm and the people who we really need to be worried about as a society.

[C]

Absolutely. There's like one statistic which is completely out of context. That was in the article on the Wall Street Journal that we found this in. Studies found that companies with high performing health programs for employees outperform the S and P index as much as 16% a year for me. Okay, that sounds great. Right? Healthy workforces are, are wonderful for companies. I'm thinking, oh, that's because Google is comprised of very young people and young people are not, are not sick. So it's like you don't have to think very hard to realize the code here, which is never hire old people, never hire people with disabilities. It's very scary.

[B]

Janet Yellen.

[C]

Yeah, Janet.

[B]

Janet Yellen raised interest as we kind of knew that she would. She held off raising interest rates before the election, partly in fear that there would be a Brexit style implosion in the markets were Donald Trump to win. Unlikely though that outcome was. In the end, of course, Donald Trump did win. The markets did not implode. Quite the opposite. They seem to be hitting new all time highs and thusly reassured that the world is not coming to an end. Janet did what she probably would have done six weeks ago and raised rates to the lofty heights of half a percent to three quarters of a percent.

[C]

Okay. Now, I don't know how many listeners remember this, but Jordan and I had a bet about almost a year ago, I think it was in January, about how high rates would go.

[A]

Okay, this, this sucks because people were giving me credit for saying on that episode that they wouldn't go above 1%.

[B]

Yeah.

[A]

However, you undercut me.

[C]

Yes, I did.

[A]

And you said, what did you say? 0.5?

[C]

I said they're not gonna go nearly up to.

[A]

Okay.

[C]

So I think I might have even said they're not going to go up again this year. And in which case I lose.

[A]

Yeah.

[C]

But in any other situation, I have one.

[A]

Yeah, no, it's true. It's true. There. They did not make the 1% barrier. So I was right. But Kathy was more right.

[B]

Interest rates. So the way that the Fed sets its interest rates is by manipulating this incredibly obscure indicator called the federal funds rate, which is all to do with interbank lending. And that has now reached, as I say, a range of between 0.5 and 0.75%. This is on any level low, but it is a sign that rates are reverting to normal. The Fed is saying that employment is, we've basically reached maximum employment. That Inflation is heading up towards the 2% target and that therefore we don't need the incredibly accommodative stance of ultra, ultra low monetary policy that we've had until now. So they've started to hike.

[C]

Just to give a little context here, I wrote down a few numbers that we had in the past of this interest rate, the Fed rate. It was up to 8% in 1990. It went to 6% in 1998. It was at 6.5 at 2003, 5, 5.25 in 2008. Now it did go down to 1% a few times during, in response to recessions, but it essentially has never been as low as it's since 2008, which went down to 0 to 0.25 and now it's all the way up to 0.75. Really incredibly tiny if you look at the graph over the last 20 years, incredibly just a tiny blip up.

[B]

And yet this is the point isn't really the level so much as the direction. The direction. And this is the Fed clearly saying, hey, we're going to raise rates. They put this handy little thing called a dot plot in every time they have a meeting. And one of the things that you see in the dot plot is where do they expect rates to be over the long term? What's their expected, like long term range for where rates are going to be. And they said very clearly in their dot plot that it's going to be 3%. And they said very clearly in the statement they're going to be raising rates slowly up to that level of about 3%. So we have a bunch of hikes ahead of us.

[A]

So I think that the, you know, wider significance for, for most people here is that this is sort of the Fed saying this economy is about as good as it get. Like this is what we're feeling right now, like this level of unemployment and labor force participation and just this general vibe, this is as groovy as we're gonna be. And so, you know, that has some political implications as well because there are all the, there's all this discussion about what's, you know, what's Voldemort going to do when he finally gets, you know, into, when he's finally inaugurated and what's, what's Congress going to do? And some of that has been, okay, they're gonna do big infrastructure projects, they're doing big tax cuts, and maybe that's actually going to have like a stimulative effect on the economy. And that's something that markets have been kind of pric. And right now what we're seeing the Fed say is we're not really going to let you heat up the economy that much. We think that the way things are going now is pretty much okay. We're probably not going to accommodate that. We're going to keep raising rates because we don't want to see inflation get out of control.

[B]

You see, I don't read the statement that way.

[A]

I do.

[B]

I'm reading the statement and they're saying the committee expects that with gradual adjustments, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further and inflation is expected to rise. I mean, the policy stance is still in the technical jargon, accommodative. They are still keeping interest rates well below where they would be in order to actually try and slow things down. I feel that what they're really doing here is they're giving themselves some ammunition. They're giving themselves some dry powder in the event that they need to cut rates if something bad happens. You can't cut rates if they're at zero. You can cut rates if they're at like one and a half. So if you slowly raise rates up to like one and a half and then there's an emergency, you can do an emergency rate cut.

[C]

There is totally agree with you, Phil.

[A]

So there's, there's some argument about whether or not the dry powder theory actually makes any sense because you're if, you know, essentially you're saying it's like, okay, you're raising rates now so you can lower them later, but by raising rates now, you're theoretically, you know, slowing the economy down somewhat, so you're almost going to have to raise them later. It's, you can argue about that. I will say as, as far as whether or not they're still accommodative, they are accommodating the economy. As it stands now that given like the fiscal stance that given what Congress is actually doing, how the government is spending, if that were to change, I think what they are signaling is that we're kind of comfortable raising rates slowly at the moment and we are planning to raise rates slowly. But if suddenly the government just dumps a pile of money on the economy, they're going to raise them a lot faster. I think that's obvious, and I don't.

[B]

Know if that's obvious, but it's also in line with what they've been doing all along, which is basically saying we hate this, but in the absence of the fiscal stimulus that the economy needs we're going to have to provide monetary stimulus. If the Congress actually goes ahead and does the fiscal stimulus that the economy needs, then we don't need to do the monetary stimulus and we can raise rates. So I think that's fine.

[C]

I'm going to come up with. I have a new, different theory and I want to come at it from the following direction. What is the Fed's mandate? I know they have a dual mandate.

[B]

They have a dual mandate of unemployment and low inflation or 2% inflation.

[C]

2% inflation. So inflation is actually below 2%.

[A]

Right.

[C]

But it's rising.

[A]

Yeah.

[C]

Now why is it rising? We had a conversation a couple of weeks ago when we were talking about fiscal stimulus or monetary stimulus. Like, what is it that's raising inflation? But here's a theory. What's really raising inflation is that immigrants, especially undocumented immigrants, are fleeing the country. And when they flee the country, companies need to pay more for the same work. And then when they have to pay more, the goods become more expensive. So farmers, for example, but anybody who basically hires a lot of undocumented workers so that their actual costs are going up. So inflation's going up. So my theory is that they actually, the Fed doesn't have to do anything to get inflation up to 2% because. Because Voldemort has scared away undocumented immigrants.

[A]

Do we have any evidence of that, that he's actually scared away undocumented immigrants? I think, like, inflation's creeping up on the margin.

[C]

Do you think the undocumented immigrant is like, oh, Trump, President Trump is going to, is warmly going to welcome me into this country?

[A]

I'm going to.

[C]

It's a theory, you guys. I have, I have a theory. You guys have a theory. My theory is that inflation is going to rise because of the immigrant problem, not because of stimulus.

[A]

I don't know if there's an immigrant problem yet. I don't. Data. Data.

[C]

Okay. It's a theory. We can compare in another year and we'll see.

[A]

I mean, I think a bigger thing is just like low oil prices or like oil prices stopped falling and now have risen a bit. And so that, that, that bite's been taken out of inflation. One thing that was keeping it down for a long time. So now we're kind of getting back to more of a normal cycle. And I think core CPI is also being put. I haven't looked at it last minute.

[B]

You have now said core cpi, which is the alarm bells going like, even by Slate Money standards, I am sure our listener.

[A]

Okay, inflation, if you don't count food and energy. Even that has been rising. I think a lot of that is health care costs. I haven't looked at it like the past 10 minutes, but I can double check later in the episode.

[C]

But anyway, anyway, the overall point is that inflation might be going up to a healthy 2% even without fed rate changes.

[B]

The more important point, of course, and this is a debate which has been raging for a while in theory and might actually become a debate in practice, is that although the fed has this 2% inflation target, it seems to have a rather asymmetric 2% inflation target and that it's much happier with 1% inflation than it is with 3% inflation. It is much happier with 0% inflation than it is with 4% inflation. Inflation. And so long as inflation is below 2%, they might make noises about we're not quite at our target yet. But they are. They're really not that unhappy about it.

[C]

Really. I was and I thought they were.

[B]

And that, well, they like it to rise. But if inflation goes above 2%, we will see because it hasn't got there yet. But they then suddenly their hair's on fire and they have to start raising rates because inflation, inflation, inflation. And it's a really horrible thing. We will see what happens.

[A]

I think that's absolutely right. There is still a strong strain of inflation phobia even after there's any deflation.

[C]

Phobia like we don't want to be Japan.

[A]

They've had some and I think we've seen, I mean we saw a bit.

[B]

Of that in 2009 and I think it went away pretty quickly even.

[A]

Yeah, there have been a few members. Like there's still one guy on the dot plot who is like doesn't want to raise rates at all. Like you can see there's one dude who thinks we should just keep them where they are.

[B]

Yeah, but.

[A]

But we don't know who it is.

[B]

But Narayana, Coach Lakota has left now.

[A]

So I don't know who.

[B]

The negative. The negative dot has disappeared.

[A]

That's true.

[B]

That was always fun.

[C]

I like the negative dot.

[B]

So, Cathy, since you made your prediction last year, we may as well have another prediction this year. Where are rates going to be at the end of 2017?

[C]

I think they're going to be at 1%.

[B]

Jordan.

[A]

I'm putting my future as a bond trader on the line here. Ok. So I'm going to tack on a political prediction which is there will that they're going to go up to like maybe 1.25 1.5? No, I'm going to 1.25. 1.25. And part of that was sticking close to Cathy now. Yeah, I'm going to go to 1.25. And partly because I think that there will be some sort of deficit increasing tax cut from the Republicans, almost certainly will be some sort of deficit increasing tax cut which will encourage the Fed to try to, you know, keep raising rates apace, whatever.

[B]

I'll take the over. I'll say it's going to be like one and a half and we'll revisit this time next year, see where rates are. So I was looking back my New York Times archives a story that the New York Times ran in 2014 about how all of these doctors had been prescribing a bunch of prescription drugs, a lot of drugs which have been around since like the 1830s and stuff, which was completely in the public domain and there was no rocket science to making them, and kept on prescribing them without any thought to them. And then suddenly one day their patients start coming in saying this needs pre approval and the drug has become incredibly expensive. And that what has happened, you know, and this was two, three years ago, this story is that a huge number of drugs which have always been cheap were starting to become expensive. These are not. This is not a patent problem. This is not a company's extracting rents from patent problem. This is just that the basic generic drugs which are in the public domain were becoming much more expensive. Jordan?

[A]

Yes.

[B]

Was this a criminal conspiracy?

[A]

Well, for a while we didn't think so, but now it's starting to look like maybe it was. So the news is this week the Department of Justice. Well, there are two pieces of big news. The Department of Justice on Wednesday charged two drug executives from a company, Heritage Pharmaceuticals, in a criminal antitrust conspiracy to fix the prices of some of these generic drugs. The two of them were doxycycline, which is an antibiotic that gets used for acne a lot, and glyburide, which is an oral diabetes medication. I mean, it's really just like an old school price fixing. Like literally, hey, I'm telling my salespeople to go talk to salespeople at other companies and let's agree on a price hike between us and our competitors. I mean, it's like, or they would.

[B]

Just divvy up the market. They would basically say, you take the western U.S. we'll take the eastern U.S. and we won't compete on price. And that way we'll both make more money.

[A]

There is Some of that as well. I mean, there are layers to it, but I mean, it's not anything complicated. Like, you have to understand the economics of prescription drugs and how the generics get manufactured. It's really just like, yeah, it was a conspiracy.

[C]

And so these two executives worked in the same place.

[A]

Yeah, it's these two guys. But here's, here's why.

[C]

How would that work? I mean, obviously they have to have people from other companies.

[A]

So here's to collude. So here's the thing. They were charged in what's known as a criminal information. These two guys, when that comes out, that's basically two people who are pleading guilty. They are. When it's a criminal information, not like an indictment. You know, those guys have flipped. And so this involves not just this small company heritage, but there are a lot of companies that have been investigated and some of the big names have gotten subpoenas. Companies like Mylan, Teva. And then here's the other big piece of news. The next. The next day, 20 different states filed a civil antitrust lawsuit. The attorneys general, these states against just a roster of generic drug companies saying kind of detailing, again, this antitrust conspiracy where it was price fixing.

[C]

So stupid question. Like, if I'm a hospital and I'm sourcing my drugs.

[A]

Yeah.

[C]

Don't I have a palette of choices to choose from?

[B]

Like, if you, if you're looking for a generic drug which is made by three different companies, you definitely get to choose which one you want and you'll normally choose the cheapest. Yeah. And what happens in a price fixing cartel is that those three different companies will get together and basically agree to keep on hiking the price of the drug. And so long as they all keep on hiking the price of the drug, then the hospital has no choice but to pay more and more and more.

[C]

Okay.

[A]

Yeah.

[C]

That's how that works.

[A]

And again, like, you know, you read the details of this conspiracy and it's, you know, I mean, some of it's kind of funny. You would have industry ladies nights where like, you know, women from these companies would get together to like, have dinner and then talk about, like their proposals that they were getting from clients and how much they should be charging them and stuff. Like, I mean, it's pretty. Or this is all alleged. Like, this is, you know, sharing this kind of, this information that you're not supposed to be.

[B]

And the thing which strikes me is that this is. It looks like there's going to be a bunch of civil and criminal cases here and that there was a Certain amount of like clearly illegal cartelization in the industry and that people will probably wind up going to jail. And that's a good thing. What worries me is that you don't need that for collusion to happen. That if you just go back one week to when we were talking about the airline industry, there's this kind of unspoken understanding between the airlines that they're not going to compete on price. And that's made them all much more profitable. I know a lot about the art auction industry. And what you see in art auctions is they have this thing called the buyer's premium. It's the extra amount that they charge the buyer over and above the cost of the. The hammer price. And when Sotheby's raises their buyer's premium, Christie's raises it the following day. And then when Christie's raises it, Sotheby's raises it the following day. And you don't need to collude. No, I mean, Alfred Taubman, the former chairman of Sotheby's, went to jail for colluding with Christie's on this. But you don't need to collude. All you need to do is just kind of like watch what the other one does and then do the same thing.

[C]

Not to be like a free market freak or anything, but like, why hasn't another company stepped in and said, I can make these generic drugs for cheap?

[A]

Well, so a couple of things here. First off, you do have to go through the whole regulatory. There are hurdles to doing, you know, to creating a generic drug. And I think that actually is part of where there are only so many companies too. And there has been some consolidation in the industry and it gets easier to collude as it smarter as things do as an industry consolidates. I do want to push back a little, Felix, on your point, which because among health wonks, among reporters, the initial impulse was to try and explain this rise in prescription drug prices that we were seeing in terms of market forces. It's like, okay, well there's a consolidating industry and you get this effect of shadow pricing when they just kind of watch what they're doing and they imitate each other, but they're not necessarily doing anything illegal. And well, there were drug shortages, cuz some factories had to shut down and kind of jumping through all these hoops to explain these rising prices. And, and as it turns out that all may have been a factor, but also there is some illegal activity. And so I think one thing a case like this should remind us is you Know, sometimes when it looks like a comp, like a whole industry is a cartel and people are colluding, maybe they are just a cartel and they're colluding. Like, maybe where there's smoke, there's fire. And I think that should be a little bit of a wake up call, especially going forward with, you know, in the future with antitrust policy.

[B]

Well, I feel like there's another thing, since this is slate money, another area where there's a kind of implicit collusion, which is a really fascinating one, which is IPO pricing. If you're a company and you're going public, you pay your lead investment bank 7% of the proceeds. Why do you pay them 7% of the proceeds? Because that's just the kind of standard amount that you pay them. And no bank ever competes on price. No one ever says, hey, we'll take you public for 4%. And why don't they?

[A]

Yeah, I mean, that's like the 2 in 20 thing, right? Like, hedge funds are just like, oh, it's an industry standard. Everyone knows the standard. Where it's actually. Well, that's collusion in a way, when you're all getting around and just saying.

[B]

That if you, if you want to sell an apartment in New York city, you pay 6% as a fee to the real estate brokers. Why? Because that's the standard. You know, there are 45 different brokerages in New York, but they all charge exactly the same 6%. So we see. So there are actually. It's not hard to look around us and see areas where the market is not working in that you don't have competition driving prices down. And I think the lesson of these lawsuits is just that sometimes when you look around and you see that it turns out there is illegal activity going on. And then sometimes I would say what's going on is still collusion. It's just not illegal collusion. So the numbers round this week, the first number is not really my number, but is the number which every single listener of Slate money either emailed or tweeted us about. And it is 757, which is the number of the Boeing model of jet which Donald Trump owns and flies around with. He has a Boeing 757. He does not, contra to the slate money last week, have a Boeing 747. We regret the error.

[A]

It's actually. So I do want to just discuss this for a second because as many people pointed out that we had a whole conversation about how Trump's plane was so wasteful because it was this giant monster and a 757 for those who are not is a wasteful monster. Yeah, it is still a wasteful monster, but it is a significantly smaller wasteful monster than the 747. However, our main point still stands. If you go and compare what Trump flies around in to a typical private airplane that a wealthy man has, it is still burning up gas left and right and requires longer Runway, et cetera, et cetera. So our point still stands directionally and.

[B]

But I will say, you know who does have a private 747? Larry Page and Sergey Brin.

[A]

Do they actually.

[B]

They share one.

[A]

That's awful.

[B]

So since I was talking about real estate prices, I'm going to go first with my number. My number is $1 million. On slate money, we love to geek out about the difference between different types of averages and the difference between the mean and the median. $1 million is now the difference between the mean apartment price in New York and the median apartment price in New York.

[C]

Let me guess.

[B]

Go on.

[C]

2 million mean 1 million median.

[B]

Very close. Yes. It's 1.2 million median. 2.2 million mean.

[C]

Crazy.

[B]

That's a huge difference. This time last year was 800,000, which is the difference between the 1.1 million median price and the 1.9 million mean price. The mean price has gone up by $300,000 in one year. The median price just by a mere $100,000.

[C]

I thought our real estate bubble was breaking or something. Doesn't sound like it.

[B]

I think what's happened in New York is that the prices, they've kind of been leveling off. What's happened is there's been a significant decrease in transactions. The number of units, the, the number of sales of apartments in New York has dropped by about 20%.

[C]

I think we'd expect the prices to go follow that.

[B]

But New York property prices in general move slowly, especially in New York. So once the rate of sales drops significantly for a significant amount of time, and then maybe eventually prices will go down. But for now.

[C]

But they'll never be affordable.

[B]

For now. If you want to buy the median apartment in New York City, you're going to have to pay $1.2 million, which seems like a lot of money, but compared to the mean apartment in New York City, it's downright cheap.

[C]

Okay, My number is 7.5 billion, which is the size of the cyber insurance market, at least projected in 2020. That's just a huge amount. It's now about $3 billion. What I'm talking about here is things like data breaches. And what I'm talking about here is things like 1 billion Yahoo users.

[B]

So wait, this is, this is the amount that companies are paying in premiums to insure themselves against that kind of breach. So let's say that I'm Yahoo and I had cyber insurance and someone stole a billion pieces of user information and I have this insurance. Then what do I get? Does the insurance company pay me like $2 billion to reimburse me for the cost of the amount that Verizon is not going to pay me to buy me? I mean, I'm not quite sure how you get reimbursed for this.

[C]

And I'm not even sure how an insurance company would determine your risk. And like, if they determine that you have a large risk would then wouldn't they make you like, go to like further extent to protect yourself? I'm not really sure how the system works. We can look into it.

[A]

For another topic, Jordan, my number is zero, which it's slightly speculative, but it's how many PhD economists, I think are actually going to be involved in the Trump administration at this point? Right.

[B]

You mean Larry Kudlow does not have a PhD economics.

[A]

So news broke this week that Larry Kudlow will in all likelihood. Yeah. That you've never. You're so lucky. Is the CNBC talking head who used to be in the Reagan administration and then was the chief economist, quote unquote, at Bear Stearns. That ended in tears. He wasn't there during the crash, but it ended in tears earlier and then, you know, became a media figure essentially. He doesn't have an undergraduate degree in economics. He doesn't have a graduate degree. He actually, he went, I think he went to the Woodrow Wilson School for like public policy stuff and graduated or left without a master's. Typically, the CEA is headed by some. You know, this is where you're supposed to get the smart economist in the room. It's Jason Furman. Currently, it's the one place they are supposed to have that type of expertise, guaranteed.

[C]

Are they supposed to have a whole crew of economists?

[A]

Yeah, they have a staff too. And maybe he will have some staffers, but I kind of feel like there's a chance that there will be zero.

[C]

Is this what Larry Summers was to Obama at the beginning of Obama?

[A]

Yes, at one point? No, Larry Summers was not cea. He was the nec, which is where.

[B]

Gary Cohn is now. So Gary Cohn is the new Larry Summers, Larry Kudlow is the new Jason Furman. What could possibly go wrong? So that's it for us this week. Thank you for listening to Slate Money. Thanks again to everyone who made it out to our live show at Union hall in Brooklyn. Thank you to Union hall in Brooklyn. They were awesome. If you like this show, subscribe to us so you get to listen to that show when it comes out. Email us. The address, as ever, is slatemoneylate.com the producer of Slate Money, Zach Dynasty, and the executive producers are Steve Lichti and Andy Bowers. And all of the other Panoply podcasts can be [e-mail] panoply so we will talk to you next week on Slate.

[C]

Out.

[A]

My prescription.