January 24, 2011

Pharmaceutical companies monopolize public research

Private pharmaceutical companies earn monopoly profits on the back of public research. Over the last 10-15 years, they have shifted from doing the bulk of the basic research to merely navigating government barriers to entry and patent churning, while the bulk of the basic scientific research has fallen on universities and has been paid for with public money. One way to corral runaway medical costs and prescription drug costs would be to end this practice by replacing the monopoly status of a patent with an open-fee agreement that paid a return on investment for innovation costs, but that didn’t use the force of government to prevent businesses from manufacturing and selling life saving drugs that were principally developed with public money. As the old econ example of the perfectly inelastic product goes, “How much would you be willing to pay for a life saving drug? However much you have.”

Most of the basic scientific research (especially biomedical research) is done at the university level with public funding, yet the end drug makes its way to monopoly status. Researchers at Johns Hopkins game the system and withhold research until they have patent protection and their own company setup to profit from molecules that were invented with public money. It is about as brazen as if I'd set up a toll booth on the public road in front of my house because I repainted the lines or patched a couple of potholes while on the city's payroll. It is the theft of work product, and the victim is society as a whole.

The trend of recent years has shifted such that universities invent the molecule and the pharmaceutical companies figure out dosage levels and navigate FDA hurdles. Pharmaceutical companies have significantly scaled back their basic research and increasingly resort to "patent churning" where they develop new applications, or slightly different versions. Think Rogaine Foam or Retinol for fighting wrinkles instead of acne. The release of these "innovations" tends to coincide almost exactly with the patent expirations showing that this gamesmanship is slowing innovation. Worth skimming is OUR DAILY MEDS, the 2008 book by Melody Peterson.

Private pharmaceutical companies spend $17 billion/yr on RD. The Federal government spends 25B. The key difference is that the Fed's money is spent doing basic research and pharma’s money is spent navigating FDA approval and tweaking existing drugs to qualify for new and extended patent protection. This is very much the story of private monopolists exploiting public research. While there are exceptions to every rule and practice (especially if you go back to the 1960s and '70s), the National Academy of Sciences shares my thesis and shared it before the 111th Congress on March 3, 2009:

After WWII until roughly the end of The Cold War, American corporations operated some amazingly distinctive and productive scientific research laboratories....

Today, these corporate laboratories are still highly capable of developing new products (Intel, for example) and conducting superb applied research but they do very little basic research compared to earlier years. The major responsibility for conducting such research now is with our universities.
[See HERE.]

Their 2009 position represents a shift from their 1996 position. The '96 position does, however, show that even 14 years ago exploitative suspicions and accusations were sufficient to warrant a PNAS response: 

We find evidence of significant reciprocal interaction, and reject a simple “linear” dichotomous model in which the public sector performs basic research and the private sector exploits it.
[See HERE.]

The CBO also shares this thesis. From a 2006 CBO report on research development in the pharmaceutical industry:

Nevertheless, introductions of innovative new drugs have slowed. At the same time, drug companies have been able to charge high retail prices for new drugs that are only incrementally different from older drugs whose prices have fallen.

Only about one-third of the drugs approved annually in the United States are new compounds; the rest represent modified forms of—or new uses or—existing drugs.

-- Also at my Seeking Alpha blog --

January 19, 2011

Maryland minimum wage bogus argument

The liberal lobbying group Progressive Maryland is pushing hard to raise the minimum wage to $10/hr and is using a novel argument to support their position.  The group argues that such a policy would be economically stimulative and good for business by putting more money in consumers' hands and therefore would increase demand for business. They are arguing a valid point that an increase in aggregate demand will lead to an increase in total output and employment. Their logic breaks down in their use of one-sided accounting that completely ignores the impact of increased labor costs on businesses.  Their creativity and strategy to shift the debate off the standard fairness paradigm of equality versus efficiency is commendable.  Their understanding of 3rd-week introductory economics material is not.

Such policy absolutely, positively, and without any serious doubt or debate will reduce both total output and total employment.  The only serious debate is to what degree.  That's because of the Golden Rule of microeconomics:  A business will produce where marginal revenue=marginal cost. Put simply, this means that a business will continue to produce as long as each additional unit of production brings in more revenue than it costs. If production costs exceed revenue, the business will scale back production. A government mandated increase in labor costs will increase marginal costs and therefore result in a cutback in production and employment. While there would be some increased demand or consumption due to the income effect of higher wages, such benefit would be diluted for the affected business, while the costs would not be diluted. The net impact would be the employment-reducing cost increase. Payroll taxes which are a tax on gross wages (as opposed to net profits) have the exact same impact due to the marginal revenue=marginal cost Golden Rule.

Progressive Maryland’s goal is noble. However, their method of achieving it is no more logical than painting over your interior drywall to fix your leaking roof. The root causes of wage stagnation for the last 40 years are highly complex, and admittedly much of it (arguably most of it) is at the federal level due to pro-inflation monetary policy and the expansion of the payroll tax. At the state level, regulations aimed at limiting entry level entrepreneurship (such as basic home improvements, cosmetology, and taxi driving) have kept people in the clutches of vertical hierarchies of employment when they could have struck out on their own. State unemployment insurance -- which applies only to the first $8,000 of wages -- is a tax that is disproportionately burdensome on lower incomes. A revenue neutral rate adjustment to apply the tax to all wages would help lower incomes.

The absurdity of Progressive Maryland’s argument is that they fail to concede any tradeoff cost. Just a bit of critical thinking sees that there must certainly be a tradeoff cost. Otherwise, why not make the minimum wage $100/hr? And in failing to identify or concede any tradeoff cost, Progressive Maryland violates the Golden Rule of all economics: There is no free lunch.

-- Also at my Seeking Alpha blog --

January 4, 2011

Obama's economic New Year's resolution hypocrisy

President Obama stated that his New Year’s resolution is “to do everything I can to make sure the economy is growing, creating jobs, and strengthening our middle class.” He is either incompetent, corrupt, or some combination of both.  If he truly were dedicated to “doing everything to grow the economy,” he would turbo-charge small business creation and growth with the following:

1. Deregulate:  Eliminating needless federal regulations would have the same stimulative effect as a $650 billion/year tax cut, enough to grow GDP 10%, and reduce unemployment 3%.  The cost of federal regulation has been estimated as high as $1.75 TRILLION (14% of the entire economy) with a disproportionately high burden on small business, and as low as $843 billion as of the year 2000.  Environmental and workplace safety regulations (the only regulation aimed at correcting negative spillover effects such as pollution) account for only 1/3rd of this cost.  The remaining 2/3rds fall under tax compliance and economic regulations. Deregulation at the state level would also provide a boost, and it is at the state level where most of the purely anti-competitive regulation is found. Virtually every case study of state level business regulation (such as occupational licensing) reveals it to be created and perpetuated by cartels whose aim is to stifle competition and keep their prices up, as opposed to some public outcry caused by harmful business practices.
2. Exempt small business from the payroll tax: Current tax law imposes a 7.5% surcharge on labor paid for by the employer. Smaller, start-up businesses usually have not achieved the economies of scale that larger, more established businesses have. This puts them at a competitive disadvantage relative to larger businesses. Exempting this surcharge cost would serve as a “business incubator” and allow more businesses to “grow-up” to compete against big businesses. The unemployment rate would drop by approximately 1% based on the price sensitivity of labor demand alone, and another 2% drop based on the tax cut multiplier combined with Okun’s law. The combined effect, on top of the deregulation effect, would drop the US headline unemployment rate to the full employment range of 4-5%.
3. Reign in intellectual property law abuse: Patents, copyrights, and trademarks use the force of government to prevent innovation, improvement, and progress. The scope and duration of these monopoly protections have expanded over the years while the burden of proof has shifted from the IP holder to the party accused of IP infringement. Scaling back IP law would allow more new business formation and growth.  Intellectual property law is the monster that created the RIAA shakedowns, one of which resulted in a $675,000 judgement against a man who downloaded 30 songs.

The current position of each aforementioned policy area serves to do two things: Reduce total wealth, and concentrate that wealth in the hands of the few and the powerful. It is a giant boat anchor shackling the entire US economy so that a few may enjoy a comfortable existence while the rest of us try to drag that anchor forward. There is only one reason why these programs perpetuate: The concentrated benefits vs. diffuse costs of public choice theory. They exist because the few that they favor are powerful enough to pay politicians to protect them, and the cost for any average person to fight this would far exceed the cost this orchestrated theft imposes on that individual. Every single one of these programs robs pennies from the masses to put dollars in the hands of big business and politicians.

There are also some distinct policy failures that should be abandoned if the President were truly serious about his resolution:

1. Spending money we don’t have: The deficit is being monetized which moves the cost of spending money we don’t have from the next generation, to the next month. Higher food and fuel prices are showing that you can’t increase real wealth by printing money. You can only redistribute it upwards.
2. Temporary fixes for permanent problems: Call your tax policy permanent. Regardless of what level tax rates are set at, if the public perceives them as temporary, investment decisions will be made accordingly.
3. Bailing out the reckless and the foolish:  From banks, to automakers, to state governments, it seems everyone is too big to fail. Gordon Gecko was wrong: Greed is evil. Competition is good. Too big to fail=no competition. No competition=unchecked greed which equals unchecked evil. The cost of the bank bailout is far greater than corporate media will let on and that which was “repaid,” used some shifty smoke and mirrors tricks and one sided accounting.

We must breakdown that which forcibly prohibits men from starting businesses, growing businesses, and providing otherwise legal services in exchange for money. Maryland will file criminal charges that carry jail time for hanging drywall, cutting hair, or applying makeup without the required state license. Missouri won’t allow a man to start a new moving company unless he first gets permission from the existing moving companies that he will be competing against. Until President Obama is standing on his desk screaming at the top of his lungs about these injustices, he is merely a member of the exploitive ruling class giving lip service to the masses with his intellectually disingenuous resolution.

-- Also at my Seeking Alpha blog --