There are some worrying trends I see among Americans and especially conservatives. On many key issues having to do with free market, trade, and economics people seem to be mimicking old liberal arguments (many debunked long ago) and (often inadvertently) end up calling for more government intrusion into their daily life and livelihood.
Much of this, of course, is due to noneducation of the subjects at hand. While I don't profess to be an expert on these matters I am well-read enough to understand that government intervention has both seen and unseen, often unintended, consequences on my family's bottom line. But because the "reforms" are packaged as populism -- things that create a division or dichotomy between "the people" and "the elite" -- in this case "the elite" usually being auto-makers, oil companies, drug companies or politicians and lobbyists.
After all...
Who would be against strengthening campaign finance laws?
Who would be against forcing auto-makers to make more fuel efficient vehicles?
Who would be against protecting the environment?
Who would be against cheaper pharmaceuticals or Canadian drug imports?
But each of these things has often unintended but very bad consequences for the individual consumers and citizens whom have been fooled into believing they need government protection. Each of the "reforms" often more harm individual liberty than they do "reform" anything.
Each new set of campaign finance reform laws, for example, attempt to correct the overreach and consequences of past campaign finance reform laws. The McCain-Feingold campaign finance reform bill was created to correct problems created by the Watergate-era campaign finance reform bills. In it's wake, McCain-Feingold ended up curbing free speech guaranteed to us by the First Amendment (in the form of prohibiting broadcast advertisements that name a federal candidate within 30 days of a primary or caucus or 60 days of a general election). This created a vacuum, explained by Reason's Jonathan Rauch, "filled by private groups that are unaccountable to the voters," also known as "527s." To date, there is more money in politics than before, but like damming water running downhill, the law simply shifted the path to groups with anonymous and often very powerful backers whom do not have to answer to voters.
Next, forcing auto-makers to make more fuel efficient vehicles by raising CAFE (Corporate Average Fuel Economy) standards really only does two things: increased the number of highway deaths due to auto-makers making lighter, smaller cars, and increase the price of cars whose engines really do become more fuel efficient. You'll save at the pump but never enough to make up for the extra money you paid to purchase the more expensive fuel-efficient car.
Protecting the environment? On an almost daily basis I cite article after article showing that the cause of global warming and defining of carbon dioxide as a pollutant has little to do with the environment and much to do with continuing grant funding, justifying new taxation schemes, and empowering those few corporate-NGO blocks who have devised way to make money off the red-herring issue (and faulty science at that).
Finally, I'm going to post Megan McArdle's recent commentary as someone who understands the consequences of the continued demonization of pharmaceutical companies and "progressive" populist demand for cheaper drugs. Socialist medicine, single-buyer healthcare, national healthcare, etc., are really just repacked descriptors by our politicians for a monopsony -- the opposite of a monopoly, a monopsony is one buyer to many sellers.[McCardle:] Yesterday I wrote:
So the most probable outcome of introducing monopsony power here [in the U.S.] is that the market for drugs shrinks to the point where it will support few-to-no new drugs.
Not to put too fine a point on it, Tom responded:This seems crazy.
He is not the only one for whom this seems a little nuts. But it is not. Let me explain.
People who think that there will be continuing R&D in the pharmaceutical industry are basically thinking of it as a budgeting problem. They think of the pharmaceutical industry's gross income as a budget to be allocated between various functions, such as marketing and R&D. They may concede that by changing the size of the budget, you may shrink the amount of money to fund R&D, because there will be less money in the kitty. (Though many or most hope that shrinking the size of the pie will force pharmaceutical companies to transfer money from the advertising budget to R&D1). But, their reasoning goes, there will still be money in the kitty; if you allow pharmaceutical companies 1/3 as much gross income, you will get 1/3 as much R&D. Or perhaps they will cut their advertising budgets to zero, and then you will get 2/3 as much R&D. But still, you will get something.
I don't think of R&D as a budgeting problem; I think of it as an investment problem. After all, even if the pharmaceutical industry has no profits right now, they can borrow the money in the financial markets at fairly attractive rates.
The main obstacle to R&D, then, is not the current state of pharmaceutical industry profits; it is the potential return on the investment in R&D. After all, Merck doesn't have to make drugs; it could generate a nice, safe return of 5% a year in government bonds. Or it could get into some other business, such as making soap. If you drive down the profits on new drugs too far, it stops making sense to invest in new drugs, even if there is a small profit to be made on current production.
Developing new drugs is very, very risky. Depending on what you think constitutes a drug candidate, somewhere between one in one thousand, and one in ten thousand drug candidates makes it from a lab bench to clinical trials. Each of the failed drugs was very expensive, particularly if it got partway through clinicals, which run about $500 million per course.
The problem is, once you've developed a drug, it's easy to copy. It's also usually trivially cheap to produce. And your patent is rapidly running out. This gives a monopsony buyer a lot of leverage to force down your price--you're almost always better off taking something. This is particularly true if the monopsony buyer has the power to break your patent and license its generic manufacturers to turn out cheap but near-perfect imitations of your product2. This is, in fact, what Europe has done; they make pharmaceutical firms sell to them at cost plus. The lion's share of the profits on any drug come from the United States; what they get in Europe and Canada and the rest of the world is (thin) gravy, a price that is just a little bit better than not selling any drugs there.
Now imagine that America drives drug prices down to that sort of "cost+10" or "cost+20" level. The pharmaceutical firms will keep making the drugs they already have, because there will still be a little profit there. But they would have to be psychotic to invest billions of dollars over a 20 year time horizon in exchange for a one in a thousand chance of making that small a profit. Would you put 20% of your income now into an investment that might yield a profit of 10% of your income--in thirty years?
But they have to invest in R&D, say my interlocutors; otherwise they won't have any drugs to sell! This makes the odd assumption that they can't do anything else. But history is full of companies that used to do something else entirely--and also, of companies that went out of business when their market collapsed.
1 This belief is wrong, for reasons I will explain in another post.
2 The patent threat seems to be the most plausible reason that pharmaceutical firms do not raise Canadian prices to US levels.
Labels: CAFE, campaign finance, civil liberties, Economics, free markets, healthcare, mccain, Oil, pharmacy, supply-side, taxes, the moderate trap
[National Review's Kate O'Beirne]: The Washington Post recently reported that Virginia and 17 other states are considering the vaccine requirement “at the urging of New Jersey–based pharmaceutical giant Merck & Co. . . . [which] stands to earn hundreds of millions of dollars annually on Gardasil, according to Wall Street estimates.” Public-health organizations have joined Merck in urging that the vaccine be made available in public clinics and encouraging its coverage by private insurers, but they don’t support Merck’s push for a school requirement.
There were 210 cases of cervical cancer in Maryland last year. Democratic state senator Delores Kelley introduced a bill to require the HPV vaccine for sixth-grade girls. Following complaints from parents and recent non-compliance problems with current mandated vaccinations, Kelley has withdrawn her bill (though she has spoken openly of reintroducing it next session). She explains that she was unaware of Merck & Co.’s lobbying efforts, and that she learned about the new HPV vaccine through a nonpartisan group of female legislators called Women in Government. More than half of its listed supporters are pharmaceutical manufacturers or other health-related companies. Women in Government is spearheading the campaign to mandate the HPV vaccine through school requirements, and some watchdog groups question the support it receives from Merck & Co. “It’s not the vaccine community pushing for this,” explains the director of the National Network for Immunization Information. Governor Perry’s critics point to his own connection with Gardasil’s manufacturer: His former chief of staff is a lobbyist for Merck & Co. in Texas.
Now, one very important fact downplayed in Kate O'Beirne's story regarding Gov. Rick Perry's executive order for mandatory Gardasil vaccinations of school girls: Parents may overrule the order by having a state form notarized at their local FedEx Kinko's.
So in the end all the bickering about government overstepping its boundaries, alleged profit motives - what company doesn't lobby for profits? - and an odd alliance between the right-leaning family-values groupies and the reactionary left-wing anti-Big Pharm crowd, is much ado about nothing.
[National Review's Kate O'Beirne]: The Washington Post recently reported that Virginia and 17 other states are considering the vaccine requirement “at the urging of New Jersey–based pharmaceutical giant Merck & Co. . . . [which] stands to earn hundreds of millions of dollars annually on Gardasil, according to Wall Street estimates.” Public-health organizations have joined Merck in urging that the vaccine be made available in public clinics and encouraging its coverage by private insurers, but they don’t support Merck’s push for a school requirement.
There were 210 cases of cervical cancer in Maryland last year. Democratic state senator Delores Kelley introduced a bill to require the HPV vaccine for sixth-grade girls. Following complaints from parents and recent non-compliance problems with current mandated vaccinations, Kelley has withdrawn her bill (though she has spoken openly of reintroducing it next session). She explains that she was unaware of Merck & Co.’s lobbying efforts, and that she learned about the new HPV vaccine through a nonpartisan group of female legislators called Women in Government. More than half of its listed supporters are pharmaceutical manufacturers or other health-related companies. Women in Government is spearheading the campaign to mandate the HPV vaccine through school requirements, and some watchdog groups question the support it receives from Merck & Co. “It’s not the vaccine community pushing for this,” explains the director of the National Network for Immunization Information. Governor Perry’s critics point to his own connection with Gardasil’s manufacturer: His former chief of staff is a lobbyist for Merck & Co. in Texas.
Now, one very important fact downplayed in Kate O'Beirne's story regarding Gov. Rick Perry's executive order for mandatory Gardasil vaccinations of school girls: Parents may overrule the order by having a state form notarized at their local FedEx Kinko's.
So in the end all the bickering about government overstepping its boundaries, alleged profit motives - what company doesn't lobby for profits? - and an odd alliance between the right-leaning family-values groupies and the reactionary left-wing anti-Big Pharm crowd, is much ado about nothing.
