Tag: Faculty

On June 13, the Federal Reserve released updated inflation figures showing that the Consumer Price Index grew at a 4% annual rate in May. The difference in consumer prices from April to May, however, was just 0.1%. These two numbers paint very different pictures of the current state of inflation and the American economy.

The confusion comes from the way in which we calculate inflation, according to John Horn, a professor of practice in economics at the Olin Business School at Washington University in St. Louis. Horn earlier explained how the “math” of inflation works.  

“As a refresher, inflation is an annual measure—the increase in prices over 12 months,” Horn said. “The Bureau of Labor Statistics creates a representative basket that an average person would buy, then calculates the price for that basket. The formula for inflation is:

“That’s just the definition of a percentage change: the change over time divided by the initial value. Using this formula means inflation can increase really fast but has a hard time coming back down. That has nothing to do with economics; it has everything to do with math.”

Take a very simple example. Say the monthly price for the basket of goods is $100 every month and has been for a couple of years. That means inflation is 0%, since (100-100)/100 equals 0%. If the price suddenly increased to $110 in January, then inflation would be 10% because (110-100)/100 equals 10%.

But here’s how annual inflation numbers can distort the economic reality: If prices stayed flat in February, then the price of the basket would still be $110, and inflation would be: $110 (current February’s price)-100 (last February’s price)/100 (last February’s price). That’s 10% again. And in March, if prices stayed flat at $110? Then current March equals $110, last March equals $100, so inflation is (110-100)/100, which equals … 10%.

In this simple scenario, there was a one-time fast increase in prices and then prices stayed stagnant for a full year, but the lag in inflation calculation would lead to 10% inflation for a full year.

“This is troublesome because the news reports and headlines would scream, ‘Inflation stays stubbornly high at 10%,’” Horn said. “That’s true, but in terms of buying power, there was only a one-time increase in prices. For the rest of the year, prices stayed flat—admittedly, at an elevated rate. And that’s assuming prices remain stagnant after January. Even in a healthy economy, we expect prices to rise modestly — typically around 2% annually.”

“When prices continue to rise modestly after a one-time spike in prices — as they did in 2022 — it can make the situation seem much worse than it really is,” Horn added.    

Perception versus reality

The latest Bureau of Labor Statistics figure shows inflation for May 2023 was 4%—good, but still above the Fed’s target level of 2%. What should inflation have been if prices had started rising at 2% starting in August 2022?

“Under this scenario, the annual inflation rate in May would have been 3%,” Horn said. “Is that below the 4% we’re actually at? Sure, but not that far off to think we’re wildly stuck in an inflationary economy. In fact, since December 2022, we’ve been off this 2% trendline by about 0.5 to 1% each month — pretty steadily, in fact. We are running only slightly ahead of where we should be.”

“Overall, inflation is not running away—as you can see in the chart—it’s gliding back to the path we’d like to see of around 2%,” Horn said.

When thinking about the economy, and inflation in particular, Horn said it’s important to not fall into “base rate fallacy” thinking by focusing too much on specific details — like the prices of commercial real estate, used cars or eggs — and ignore the larger-picture trends. For example, there are some worrying trends in rental rates, since those prices are rather sticky for longer periods of time, baking in those changes into inflation for longer. But those changes are often offset by changes in other products’ prices in the overall basket.

While rental prices are currently keeping inflation up, unemployment — which is often mentioned as a driver of higher inflation — has stabilized at the rates we saw right before the COVID-19 pandemic, when inflation was right around the Fed’s target of 2%, Horn said.

Looking back to last summer, Horn pointed out that many feared the Fed would either overcorrect by raising interest rates too high, which would throw the economy into a recession, or it was going to undercorrect and raise interest rates too little and create endemic inflation that would never come down.

“No one had great confidence that the Fed could achieve the soft landing, whereby the economy didn’t enter a recession while inflation slowly came back down to the 2% target,” he said. “We clearly didn’t have a recession, and while we’re still about a percentage point too far above the tarmac, the plane appears to be on an approach glide path.

“At least, if we take a longer view and remember the math behind inflation,” Horn said.

Nicolae Gârleanu, an expert on asset pricing, was installed as the H. Frederick Hagemann Jr. Professor of Finance at Olin Business School at Washington University in St. Louis during a ceremony May 8.

Gârleanu joined WashU in 2021, bringing two decades of teaching and research experience. Most of Gârleanu’s research is in asset pricing, where he concentrates on various facets of liquidity and the extent to which consumption and production dynamics are consistent with asset returns.

Gârleanu’s papers have been published in prestigious academic journals such as Econometrica, the American Economic Review, the Journal of Political Economy and the Journal of Finance. In 2020, he was the co-recipient of the prestigious Stephen A. Ross Prize in Financial Economics for his paper “Over-the-counter markets,” written with Darrell Duffie and Lasse Pedersen. Additionally, Gârleanu serves as associate editor for the Journal of Economic Theory and the Journal of Financial Economics.

The Hagemann professorship was established in 1997 through the leadership of Hagemann’s brother, Paul O. Hagemann. H. Frederick Hagemann earned a bachelor’s degree in business administration from WashU in 1926. He began his career with Kaufman-Smith Co. in St. Louis, an investment banking house that subsequently merged with Boatmen’s National Bank. He later became president and chief executive officer of the Rockland Bank in Boston. Hagemann also served on the university’s Board of Trustees from 1965 until his death in 1996.

Anjan Thakor, dean of Olin Business School and the John E. Simon Professor of Finance, presided over the installation ceremony at the Charles F. Knight Executive Education and Conference Center. Gârleanu delivered an address, “Understanding Asset Prices: A World of Imperfections.”

Above: Gârleanu receives a medallion from Kurt Dirks, acting provost, during his installation ceremony May 8. (Photo: Jerry Naunheim Jr./ Washington University)

Tat Chan, an expert on economics and marketing, was installed as the Philip L. Siteman Professor of Marketing at Olin Business School at Washington University in St. Louis during a recent ceremony.

Chan has been teaching at the business school for more than 20 years. His research examines various types of consumer and firm behaviors, offline and online, using advanced empirical methods. He also currently serves as a senior editor at Marketing Science, a top journal in marketing.

The professorship was established in 1985 by Washington University emeritus trustee Alvin J. Siteman and his wife, Ruth, in memory of Philip L. Siteman, Alvin’s late father and the founder of Site Oil Co.

Anjan Thakor, dean of Olin Business School and the John E. Simon Professor of Finance, presided over the installation ceremony, which took place at the Charles F. Knight Executive Education and Conference Center. Following the installation, Chan delivered an address, “Information Effects in the Digital Age.”

Watch a recording of the ceremony here.

WashU Olin’s Anthony Sardella, an established national authority on domestic drug shortages and the economics of pharmaceutical supply chains, emphasized in recent testimony to a congressional subcommittee the depth of US vulnerability to further prescription drug shortages and the need to reduce dependence on other countries to produce essential medicines.

Sardella, adjunct lecturer and senior research advisor to Olin’s Center for Analytics and Business Insights, testified May 11 before the Oversight and Investigations Subcommittee of the Energy and Commerce Committee in the US House of Representatives.

The trend toward overseas production of essential medications has left the US drug supply chain vulnerable and threatens our health security, Sardella told the members of Congress. Indeed, it’s been happening for 30 years as drug manufacturers—particularly those producing generic drugs—take advantage of lower overseas labor and production costs.

“Economic conditions indicate that this environment will worsen, increasing quality and supply risks to the nation’s healthcare security,” Sardella testified.

Establishing WashU as a thought leader on the subject

Days later, The New York Times picked up portions of Sardella’s testimony in a story it published under the headline “Drug Shortages Near an All-Time High, Leading to Rationing.” An industry trade group known as SAMS—Securing America’s Medicines and Supply—also reported on the testimony in a piece commending Congress for investigating the issue.

“The research conducted at CABI has established WashU as a thought leader in the understanding of drug supply chain risks, the economics around those supply chains, why they are causing drug shortages, and why we’re at further risk of additional shortages,” Sardella said.

It’s not the first time Sardella and CABI’s work has gained national attention. Last year, Sardella was invited to a White House listening session hosted by the Biden Administration, including senior industry officials along with academic and nonprofit experts in the field of drug production and pharmaceutical shortages.

Insights the administration gleaned from that session contributed to a report called for by an executive order from President Joe Biden. That order also established the National Biotechnology and Biomanufacturing Initiative and pledged more than $2 billion for biotech and biomanufacturing efforts.

During his testimony and in past white papers, Sardella has called for a multi-faceted approach to incentivize domestic drug production and increased investment in research and development. He also emphasized the need for increased transparency in the drug supply chain and greater coordination between government agencies and private industry.

Covering the issue from various perspectives

Sardella has so far published four research papers that center on the core issue of domestic shortages of essential medications. The first highlighted the economics of the industry that have compelled production to move outside the United States. Sardella proposed a series of funding incentives and policy recommendations to bring more prescription drug production within US borders.

The second focused closely on generic drug production and the risk to US healthcare security thanks to the heavy reliance on overseas production—mostly in India and China—of “active pharmaceutical ingredients,” the active ingredient in medications. For example, out of 52 COVID-related medicines, 75% had no US source of API. And of the top 100 generic medicines consumed in the US, 83% had no US source of API.

A third paper centered on the question of whether US drug makers had the capacity to manufacture essential medicines. Sardella and his research team surveyed 37 US generic pharmaceutical manufacturing sites and found their answer: Yes, capacity exists. In fact, half of domestic drug production capacity sits idle.

In April, Sardella published a fourth paper analyzing pricing and earnings trends in the generic drug production industry and how they create vulnerabilities in the supply chain.  “Generics aren’t really sexy as an industry compared to brands,” Sardella said. “But the administrators know that 90% of the prescriptions written each year are for generic drugs. This is the workhorse of our healthcare system.”

Among the solutions Sardella proposed: Create comparative quality metrics allowing differentiation among competing generic medications. The paper also proposes public support for private-public entities that can collaborate to counter hyper-competition within the industry. He cites as an example the API Innovation Center, a nonprofit Sardella founded to enable the delivery of commercially competitive, US-made APIs.

Sardella said he was appreciative of the opportunity to testify before a congressional subcommittee.

“It was gratifying to know that the research we’ve done has the ability to drive policies that secure our health security in the United States,” he said.

Pictured at top: Olin’s Anthony Sardella testifying May 11, 2023, before a US House subcommittee on domestic drug shortages and the economics driving them.

A large-scale study to see if politically partisan cues can induce people to get COVID-19 vaccines proved that, yes, they can.

The researchers created a video ad campaign—with Fox News clips about Donald Trump supporting vaccinations—and the ad led to an increase in vaccines across numerous counties by a total of more than 100,000.

The study involved creating a 27-second video compilation of Trump’s comments about the vaccine from Fox News interviews. The researchers then presented the video to millions of U.S. YouTube users in October 2021.

Results indicate that the resulting video campaign increased the number of vaccines in each county where the video was shown by 103 on average, multiplied by 1,014 counties. The study did not include any counties where at least 50% of people were already vaccinated. The budget was about $100,000, coming to about $1 or less per vaccine.

“The campaign was cost-effective,” said Brad Larsen, an associate professor of economics at Olin Business School and lead author of “Counter-stereotypical messaging and partisan cues:  Moving the needle on vaccines in a  polarized U.S.,” accepted for publication at the journal Science Advances.

The research has more implications for Americans’ health. The partisan divide has spilled over to other vaccines as well, with Republicans now far less likely than Democrats to get flu shots or to view other immunizations positively—a divide that did not exist before the pandemic.

The deepest fault line

The Kaiser Family Foundation estimated that, among the 27 percent of American adults who remained unvaccinated for COVID in late October 2021, 60% were Republicans, far above their share in the electorate. Although race, ethnicity, income, urbanicity, education and age were also associated with Americans’ decisions to get vaccinated, political partisanship was the deepest fault line, the paper reports.

For their research, the scholars wondered if a remedy for the partisan divide over COVID vaccines might stem from mechanisms like those that created the disparity in the first place: partisan cues. Of course, research already showed that many people form preferences by following cues from their party leaders, a regularity that has grown stronger as the parties have polarized.

They thought that messages publicizing Trump’s support for COVID-19 vaccines—support he did little to advertise after leaving the White House—might inspire the vaccine-hesitant among his supporters to get vaccinated. So, Larsen and coauthors created the public service announcement (PSA) featuring news clips of Trump on Fox News encouraging people to get vaccinated. By using both Trump and Fox—inconsistent messengers about the seriousness of the pandemic—they created a counter-stereotypical message.

The study is coauthored with Timothy Ryan and Marc Hetherington from the University of North Carolina Chapel Hill, Steven Greene from North Carolina State University, Rahsaan Maxwell from New York University and Steven Tadelis from the University of California Berkeley.

‘A political remedy’

The PSA includes four separate video clips: The first and third are from a Fox 13 News Utah segment recorded on March 16, 2021. The second is from a phone interview between Donald Trump and anchor Maria Bartiromo recorded on the Fox News Channel on the same date. The fourth is from a social media post of Ivanka Trump from the spring of 2021. The researchers hired a video editor to combine the clips and overlay them with a soundtrack.

Knowing that many users might stop the PSA from playing as soon as possible, news of Trump’s endorsement needed to occur immediately, Larsen said. Within the first three seconds of the ad, the Fox 13 Utah anchor says, “Donald Trump is urging all Americans to get the COVID-19 vaccine.”

Larsen said, “It catches people’s attention, and it can change the way they think. And that was our hope.”

He and his colleagues tested the ad through a large randomized controlled trial on YouTube, targeting counties that lagged in vaccine uptake. Overall, a total of 11.6 million ads reached 6 million unique viewers. They then measured the effect of the campaign on county-level vaccination counts in data from the Centers for Disease Control and Prevention.

With 1,014 treated counties, the total increase in vaccinations from the campaign was 104,036, costing about $1 or less in ad spending per vaccine.

“Given plentiful evidence of small, undetectable effects of public messaging in other settings, these results are encouraging and represent a large return on investment,” the authors write. “The result also highlights an approach to increase vaccinations for a fraction of the cost of other interventions, such as vaccine lotteries or direct payments.

“In short, we find that a problem with political origins also has a political remedy.”

As many of you know, Radhakrishnan Gopalan tragically lost his battle with cancer on December 6, 2022. Radha was an exceptional scholar, teacher, colleague, mentor, friend and father. While Olin may have lost Radha’s presence in our halls, we now have an opportunity to commemorate his legacy forever.

You may recall that I previously announced a scholarship in Radha’s name, and I was thrilled to see the support it received. Now, I am honored to announce that WashU Olin Business School will create an endowed scholarship in Radha’s memory.

Establishing the Radhakrishnan Gopalan Endowed Scholarship will ensure Radha’s impact on WashU Olin students continues for years to come. The scholarship will be a part of Washington University’s endowment. That means it will exist in perpetuity and will be awarded to a deserving Olin student every year. 

We invite you to support this meaningful and lasting tribute to Radha by making a one-time gift or multi-year pledge toward the Radhakrishnan Gopalan Endowed Scholarship.

I am grateful for this expression of Radha’s profound impact on our community. Thank you for joining me in this ongoing effort to honor our beloved friend and colleague.