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Trade policy debate to begin for mid-term elections?

rdan

Trade policy debate begins in Pennsylvania?

America’s economy is now struggling to recover from the Great Recession. But even when the economy was said to be humming, it did not work for most Americans. Wages were stagnant or declining and the costs of basics – health care, housing, college – were soaring. Growth was built on unsustainable debt, as the country borrowed $2 billion a day from abroad and Americans spent more than they earned. Wall Street captured fully 40 percent of the country’s profits.

President Obama has stated that we can’t go back to the old economy, and shouldn’t want to. We must make more, sell more and consume less. The question is: What is our economic strategy in a global economy?

“The fight for American manufacturing is the fight for America’s future,” Obama has declared. That fight will require a fundamentally different economic strategy, one that will ensure a sustained prosperity that is widely shared, one that will leave the American dream within reach of those who work hard.”

So how do we actually start?

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Medicare and "present value"

by reader coberly

Andrew Biggs wrote that current Medicare recipients have not paid enough for the benefits they will recieve. He states that “since this is zero sum, it means that future taxpayers will get less than they pay for.” Here is an excerpt of what he said, followed by my comments.

Biggs said:

unlike Social Security benefits, which increase only to keep up with inflation, Medicare benefits grow in real terms. The Medicare Trustees project that health costs will grow around 1 percentage point faster than the growth of per capita GDP, which in turn they project will grow around 1.3 percent faster than inflation over the next 15 years. So I assume that real Medicare benefits will increase by 2.3 percent each year.

to make taxes and benefits comparable, I convert each to present value terms, assuming a real interest rate of 3 percent. This means that taxes paid in the past have 3 percent interest added each year, to account for the fact that these taxes could otherwise have been invested. Likewise, future benefits have 3 percent annual interest deducted, to account for the fact that retirees must wait to receive them.

So what do we get? This typical person paid around $64,971 in Medicare payroll taxes over his lifetime. Likewise, after netting out Medicare premiums, he’ll receive around $173,886 in lifetime Medicare benefits. The net? He can expect to receive around $108,915 more in benefits than he paid in taxes over his lifetime.

Alternately, let’s put this in terms of return on investment: the typical worker’s Medicare taxes produce an annual compound return of around 6.25 percent above inflation. This is comparable to the return on stocks, without any of the risk. A low-income worker with earnings at half the average wage would receive an 8.45 percent return on his Medicare taxes, while even a high earner at twice the average wage would receive a 4 percent real return—again, without any market=2 0risk.

While we can quibble about some of the assumptions and calculations, the scale of Medicare transfers to current beneficiaries is undeniably huge. And since Medicare’s pay-as-you-go financing is zero sum, these transfers, like similar overpayments to early participants in Social Security, will result in future Medicare beneficiaries receiving far less in benefits than they will pay in taxes.

My objections are below the fold.

My objections to Biggs’ main argument are first that “present value” is not a useful way to evaluate programs like Medicare and Social Security, which are insurance programs. As such they would need to be compared to otherwise similar insurance programs, not to imaginary “investments” with different risks.

Moreover, I question the logic of claiming that Medicare is “zero sum.” It seems to me that for this to be true there would have to be an endpoint at which all the taxes that are ever going to be collected, and all payments that are ever going to be made, have been.

It is easier for me to imagine that while the costs of medical care for each generation might increase so that under pay as you go each “paying” generation pays more than the last, and each “receiving” generation gets “more than it paid for,” this “profit” will continue for each generation in its turn as each subsequent generation lives longer than the last with the benefit of increasingly expensive medical care. It seems likely to me that this approaches a limit, and entirely possible that each generation does a little bit “less better” than the last, but that hardly seems a reason to abandon a program that provides badly needed insurance for each generation in turn.

“Generational equity” is a delusion. Each generation will face different problems like war, depression, inflation, the draft, better or worse weather, compared to which a small difference in the “return on investment” is not worth worrying about… especially an entirely imaginary, projected, difference based on an entirely arbitrary “present value” discount rate. and a complete misunderstanding of the difference between insurance and investment.

Medical care, like retirement costs, are consumed on a “daily bread” basis. Unless you can show that you have a better way to pay for it, with adequate guarantees, talking about it in “present value” terms is false precision and solving the wrong problem. This doesn’t mean that we ought to ignore projections of higher future costs, but it does mean we don’t need to cut off our own heads to avoid the future high cost of living.
_________________________
by reader coberly

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Poverty Levels and Health care reform

By divorced one like Bush

It seems to go without saying, that if there is reform, there will be some type of assistance for those who need it. Some numbers are bandied about as to the cutoff points. The Mass Connector has it’s formula up that you can play with by punching in your own numbers and picking a Mass zip code.

However, I have noted in my very early posts here at AB, that we seem to have slowly understated over time the amount of money actually required to be middle class in the US. I looked at this further here. It’s not just the amount of money, it is the standard of living that has been down graded as we argue over implementing social policy. The clearest standard is that it takes two earners to accomplish what one earner use to. Now, with 47 million and rising, bankruptcy due to medical bills hitting 73% of all filings, having health care seems to no longer be a marker of having achieved middle class and thus the American Dream.

Such thinking could be a problem if we truly want to solve our issue of access to health care services. Mass knew that those at 350% to 450% of poverty would have difficulty buying insurance in their system. They may not view it as such, but this is an admission that our numbers regarding what income level is middle class (other than simple mean and median) are bogus. We are lying to ourselves and when we lie to ourselves, we prevent ourselves from actually resolving the issue in question. We’re faking ourselves out! In doing so, we are further moving away from what was the accepted standard of living as representative of the American Dream. In fact, it has occurred to me that the political approach of redefining what will be considered a successful campaign and thus problem solved regarding any social oriented piece of legislation by reducing the expectations or size of the problem to be resolved has only lead our standard of living and thus the American Dream being defined down. It’s one step removed from just plain ignoring the problem as if it does not exist. Though ignoring a problem is at least not patronizing to those with the problem as is defining it down and declaring it solved.

This brings me to the defined poverty level. A couple weeks ago I received an email as part of an ongoing health care debate that claimed to prove via a referenced article that there are not 47 million uninsured because 48% of those are earning 250% of poverty which is about $65K and thus choose not to purchase health insurance. I suspected there was something wrong and thus went looking.

Well, it turns out that 250% of poverty at $65K per year is for a family of 5! A gross income of $65K for a family of 5 leaves nothing for purchasing health insurance. It is also an income level that in Mass would have subsidies to help pay for health insurance.

I then thought: I wonder what the poverty level was in the old days. You can find the data I used here.
You can find the converting here. Then click on “Relative Values – US” in the left hand column.

The following chart looks at 5 decades (though I could not find exactly 1960 and 1970) and then compare them using CPI, Unskilled Labor, GDP per Capita and Share of GDP.
Certainly based on the CPI conversion, the numbers coming forward to today seem to be as they should. But then, poverty levels are based on CPI. However, looking at Unskilled labor, that family of 5 is getting under paid compared to the old days of 1962. The family has been on a over all downward trend. In the 70’s it was a real roller coaster being down by ’73, up by ’75, heading down by ’76, bottoming in 1978. Even their poverty level based on GDP/cap and share of GDP bottomed. Funky times indeed. From the 1978 bottom this family had a steady gain but, it peaked in 1996. This is the same year the income share to the 99% fell below personal consumption.

What I find most interesting is just how dramatic the change at 250% of poverty level for a family of 5 is based on the GDP share and per capita. My interpretation is that a person at this level of income has continually become poorer even though the income that is considered 250% of poverty level has remained constant comparatively over the decades based on CPI. I guess this bodes well for those who have finagled the CPI? Most interesting, is 2007. It is the only year where this family’s income was valued more than the share of GDP and GDP per capita values. Frankly, I don’t know what to say about it. It is no wonder people don’t know if they are coming or going regarding their financial condition. Though a tendency toward the “going” feeling certainly can be understood. Even the anger expressed at the town halls can be more readily appreciated in that the mind can only handle so many cycles of ups and downs before it finally starts to crack.

It is this clash between the CPI and the GDP converters that is the fake out. If we continue to have such a dichotomy, then our efforts to assure “affordable health care” will be never ending because we are simply not being honest about how much it costs to be middle class and have the American Dream. Nor should we expect the apparent lunacy to subside as longs one’s mind has to deal with the clash between what it is living verse what it is being told it is are living.

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Thanks to Ben Bernanke, Ben Bernanke Doesn’t Need to be Reappointed as Fed Chair

by Tom Bozzo

Back in 2005, I argued at Old Marginal Utility that “Greenspan exceptionalism” was not very well founded in that observers rarely engaged in a proper counterfactual analysis of how well Alan Greenspan performed relative to the next best monetary policy technocrat. That’s a fairly stringent evaluation criterion, and even Brad DeLong’s glass-half-full response revealed what could be considered major errors in Greenspan’s judgment. 2009 hindsight of course shows that there was another major error in inflating the housing bubble, failing to recognize it, and allowing his Rand discipleship to overcome common sense in using Fed powers even to skim the froth.

Now some elite opinion favors Ben Bernanke’s reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late among other things.

So what should the counterfactual-based evaluation of Bernanke say? What would the hypothetical panel of smart graduate students have done? It seems even harder to suggest that Bernanke was essential than Greenspan — in this case, because well-read economists should have had it from Ben Bernanke the academician that in a depression-level crisis you don’t skimp on the monetary policy intervention. Meanwhile, Bernanke gets no points for prescient instincts as the save-the-world interventions have seemed to be firmly of the close-the-barn-doors-after-the-horses-have-bolted variety.

Meanwhile, significant elements like the opaque lending programs have the appearance if not reality of being in part the predator state (a la Jamie Galbraith) in action. There’s a line of ‘b-b-but Bernanke and Paulson saved the world’ opinion along the lines of this bit of fail from the often incisive Joe Nocera:

So why the anger? Why the suggestions of “cover-up” and “lies”? On Thursday, as I watched Mr. Paulson being castigated, it dawned on me. Seven months later, with the palpable fear of a financial collapse largely subsided, it really all boils down to how you view what happened last year. Was it, as Mr. Towns believes, a bailout of a handful of unworthy but too-big-to-fail institutions? Or was it, in the eyes of Mr. Paulson, a rescue of a teetering financial system? My vote is for the latter.

To which the obvious response is, duh, who says it has to be one or the other? A reality-based critique of the bailouts allows them to be both effective at saving the world and unconscionable screw-jobs that kept an array of bad actors from paying for their greed and incompetence. (The latter clearly feeds a lot of the underlying sentiment of the tea partiers, even if it’s ultimately the greedy and incompetent who are marshalling it.) However, considering Team Obama’s political tone-deafness, it’ll be a pleasant but major surprise if they don’t let Bernanke go back to Princeton for some R&R.

(Cross-posted at Marginal Utility.)

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Small Business topic

rdan

H/T Naked Capitalism for this New York Times article concerning the loan program established in May to help small businesses as part of the stimulus program.

With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.

While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.

Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical.

Rdan here. What is a small business? is discussed here at Angry Bear and Small Business link is here,

SBA loans to big box stores ,

small business as an American dream ,

and the real world of small businesses ,

and gov intervention discourages local agricultural development.

Update: kharris points us to Grameens Foundation. Especially for the really small business.

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Watch out! We have been tweetered on Health Care

by Bruce Webb

No not ‘tweeted’, this is a whole new verb.

In a post yesterday Ken directed us to a debunking by Milt Shook of a list of talking points by Alan Caruba. Milt’s piece at his blog Please… Cut the Crap is here: Deconstructing Right Wing Lies. Important stuff and I’ll get back to it. But even more important was my discovery right in my local paper that this list wasn’t the product of Caruba’s source, but instead was the compilation of a series of tweets put out by someone named Peter Fleckenstein aka Fleckman. The article originated in the Denver Post: Tweeter’s talking points echo nationwide When you combine this with some new polling reported by MSNBC last night showing a very wide fact gap between those who rely on Fox News and those who look to CNN/MSNBC, which parallels that of cross tabs by party, race and region. In short it looks like Southern white males who identify themselves with the Republican Party cumulatively don’t believe a word that comes out of Obama’s mouth on anything and the result is so profound as to skew the polling.

For example MSNBC led off in their online version with this headline: Americans still skeptical about Obama’s plans Well no wonder, because a substantial part of the American population has been conditioned in such a way that they will and mostly have accept each and everyone of the talking points below the fold as pure, unadulterated truth.

Because ohmigosh, I heard it on Twitter, it must be true. I don’t know what we can so about this, starting with Shook’s takedown is a good start, but in the end there seems no way to cut through the tweet, it’s gone viral. List below the fold (hopefully, my browser doesn’t show the break, if yours doesn’t sorry for all the screen room).

Page after Page of Reasons to Hate ObamaCare What follows careens between claims that are simply ridiculous to ones that are just false to ones that are somewhat plausible but wrong to misreadings to half-truths. Some of the claims may actually be true, just seen through a lens that hates anything which hints at Socialism. But be that as it may the next wingnut you run into will have heard some or all of these on Rush or the Dori Monson show and will believe every word of it. In light of this it is follow to try to craft any kind of bargain with the Repubicans, their constituents would see any ‘Yes’ vote on anything as a treasonous betryal.

Here are just a few very good reasons to hate ObamaCare:

• Page 22: Mandates audits of all employers that self-insure!
• Page 29: Admission: your health care will be rationed!
• Page 30: A government committee will decide what treatments and benefits you get (and, unlike an insurer, there will be no appeals process)
• Page 42: The “Health Choices Commissioner” will decide health benefits for you. You will have no choice. None.
• Page 50: All non-U.S. citizens, illegal or not, will be provided with free healthcare services.
• Page 58: Every person will be issued a National ID Healthcard.
• Page 59: The federal government will have direct, real-time access to all individual bank accounts for electronic funds transfer.
• Page 65: Taxpayers will subsidize all union retiree and community organizer health plans (read: SEIU, UAW and ACORN)
• Page 72: All private healthcare plans must conform to government rules to participate in a Healthcare Exchange.
• Page 84: All private healthcare plans must participate in the Healthcare Exchange (i.e., total government control of private plans)
• Page 91: Government mandates linguistic infrastructure for services; translation: illegal aliens
• Page 95: The Government will pay ACORN and Americorps to sign up individuals for Government-run Health Care plan.
• Page 102: Those eligible for Medicaid will be automatically enrolled: you have no choice in the matter.
• Page 124: No company can sue the government for price-fixing. No “judicial review” is permitted against the government monopoly. Put simply, private insurers will be crushed.
• Page 127: The AMA sold doctors out: the government will set wages.
• Page 145: An employer MUST auto-enroll employees into the government-run public plan. No alternatives.
• Page 126: Employers MUST pay healthcare bills for part-time employees AND their families.
• Page 149: Any employer with a payroll of $400K or more, who does not offer the public option, pays an 8% tax on payroll.
• Page 150: Any employer with a payroll of $250K-400K or more, who does not offer the public option, pays a 2 to 6% tax on payroll.
• Page 167: Any individual who doesn’t have acceptable healthcare (according to the government) will be taxed 2.5% of income.
• Page 170: Any NON-RESIDENT alien is exempt from individual taxes (Americans will pay for them).
• Page 195: Officers and employees of Government Healthcare Bureaucracy will have access to ALL American financial and personal records.
• Page 203: “The tax imposed under this section shall not be treated as tax.” Yes, it really says that.• Page 239: Bill will reduce physician services for Medicaid. Seniors and the poor most affected.”
• Page 241: Doctors: no matter what speciality you have, you’ll all be paid the same (thanks, AMA!)
• Page 253: Government sets value of doctors’ time, their professional judgment, etc.
• Page 265: Government mandates and controls productivity for private healthcare industries.
• Page 268: Government regulates rental and purchase of power-driven wheelchairs.
• Page 272: Cancer patients: welcome to the wonderful world of rationing!
• Page 280: Hospitals will be penalized for what the government deems preventable re-admissions.
• Page 298: Doctors: if you treat a patient during an initial admission that results in a readmission, you will be penalized by the government.
• Page 317: Doctors: you are now prohibited for owning and investing in healthcare companies!
• Page 318: Prohibition on hospital expansion. Hospitals cannot expand without government approval.
• Page 321: Hospital expansion hinges on “community” input: in other words, yet another payoff for ACORN.
• Page 335: Government mandates establishment of outcome-based measures: i.e., rationing.
• Page 341: Government has authority to disqualify Medicare Advantage Plans, HMOs, etc.
• Page 354: Government will restrict enrollment of SPECIAL NEEDS individuals.
• Page 379: More bureaucracy: Telehealth Advisory Committee (healthcare by phone).
• Page 425: More bureaucracy: Advance Care Planning Consult: Senior Citizens, assisted suicide, euthanasia?
• Page 425: Government will instruct and consult regarding living wills, durable powers of attorney, etc. Mandatory. Appears to lock in estate taxes ahead of time.
• Page 425: Government provides approved list of end-of-life resources, guiding you in death.
• Page 427: Government mandates program that orders end-of-life treatment; government dictates how your life ends.
• Page 429: Advance Care Planning Consult will be used to dictate treatment as patient’s health deteriorates. This can include an ORDER for end-of-life plans. An ORDER from the GOVERNMENT.
• Page 430: Government will decide what level of treatments you may have at end-of-life.
• Page 469: Community-based Home Medical Services: more payoffs for ACORN.
• Page 472: Payments to Community-based organizations: more payoffs for ACORN.
• Page 489: Government will cover marriage and family therapy. Government intervenes in your marriage.
• Page 494: Government will cover mental health services: defining, creating and rationing those services.

Note they are just under halfway through the bill here. I am assuming the page numbers correspond to the original Tri-Committee bill, a version of which is here: http://edlabor.house.gov/documents/111/pdf/publications/AAHCA-BillText-071409.pdf (1.8 MB file). Please address individual claims from either the pro or con perspective in comments, but personally I am thinking it is like pushing back the tide of crazy. A tide coming our way at a 140 characters at a time.

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Excellent Article in the Washington Post

Robert Waldmann

This is an extraordinarily good article by Washington Post standards.
OK I’m biased. The topic is how great my dad Thomas Waldmann MD is, but it is really a good article. In particular, when explaining what is so extraordinary about my dad it addresses an important issue of general interest.

“Carrying out clinical studies is a real challenge and it has become more so in the past years,” Stephen Katz, the director of the National Institute of Arthritis and Musculoskeletal and Skin Diseases, said.

“The challenge to get the product to meet quality control standards is extremely hard, but Tom has been unwavering in his commitment to doing so. He did it all himself, he went to all the meetings himself and made sure it got done. He paved the way for others,” Katz said.

Indeed.

I talk to my dad about his work at least once a week. The effort of scientific research plus patient care plus writing articles for academic journals is negligible compared to the effort of getting permission from the IRB and especially the FDA to try to treat people. He’s just asked for permission to try to treat people with IL-15 (with a document of about 1,000 pages) and he doesn’t know what to do with his time now that he is just working as a scientist and a physician and not a supplicant of the FDA.

Interestingly the author of this really very good article is The “Partnership for Public Service” which wrote it “jointly” with the Washington Post. Fine by me so long as the article is good (which it really is).

I give a slightly edited description of said partnership

“This article was jointly prepared by the Partnership for Public Service, a group seeking to enhance the performance of the federal government and washingtonpost.com.”

Oddly after writing a good article, they miss-punctuated the byline incorrectly adding a comma in a way that made it appear that washingtonpost.com was a co-author of the article and not an organization, like the federal government, which the Partnership is trying to improve (good luck with that).

Anyway for more on the organisation which managed to get a brief substantive excellent article on a highly technical subject published on www.washingtonpost.com see their web site

http://www.ourpublicservice.org/OPS/

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Co-ops. Workable?

by Tom aka Rusty Rustbelt

Co-ops. Workable?

The compromise to the “public plan,” as Robert points out in an earlier post, is the creation of co-ops (Robert wants to set up one giant co-op, which of course is his way of saying we should set up the “public option” whatever we call it).

But suppose the co-op option becomes law.

A co-op could serve as both the insurer and the provider. Not a new concept, but not a widely used management model. Most are small and local.

Or the co-op could be just the insurer, essentially a not-for-profit insurer, not a new concept.

Being a health care operations and finance guy, I sat down to design a few different co-ops (I am a planning and checklist freak, also a devotee of the Critical Path Method (CPM) for start-ups).

Hmmm, difficult.

The level of sophistication required to design and operate a real co-op is considerable. Keeping any co-op of size in financial balance would be incredibly difficult (any properly designed co-op would have to lay off catastrophic risk on those evil insurance companies).

Co-ops would have to hire sophisticated and experienced insurance and operations managers and install sophisticated information systems. These actions would be very expensive, and very complicated, especially in a quick start-up period.

Getting providers on board is another huge issue, whatever the co-op model might be.

Can this be done? Yes. Would this be easy? No way.

Now I think about designing a “public plan.” Not easy either.
________________________________________
by Tom aka Rusty Rustbelt

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Innovation

a cross post by Susan of Texas

Innovation

Like many other pundits with good employer-provided health insurance, Megan McArdle has decided the rest of the country cannot have any type of national health care or insurance. She has given many reasons: rationing will kill your granny, drug companies need to charge the US more to subsidize drugs for the rest of the world, the government will wrap its claws around you and take away your dessert, the government is incapable of implementing any programs successfully, and it will destroy Medicare and Medicaid and raise taxes for everyone. She wavers on which aspect is most important–she said it was public choice theory, then she said it was giving the government a greater role in health care markets, and now she says it is drug company innovation.

It’s obvious that she is just throwing everything out and seeing what sticks and she can’t give a logical, fact-based argument because she doesn’t have one. McArdle can gin up fear and throw out bad information however, and for weeks she has been doing just that. Let’s take a look at her latest effort, about innovation.
McArdle finally narrows down her argument against government-run health care to one and only one issue: it will destroy innovation, because high US drug prices pay for drug companies’ research and development of new drugs and medical procedures.

I’m fundamentally worried about a utilitarian calculus. As long as I think that single-payer will fundamentally depress innovation, I’ll remain opposed.
Profits are the pull on the overwhelming majority of the innovation that actually results in a new drug or piece of equipment–not a good target, not an intriguing idea, but something you can actually use on a patient….

Critics of our system say that it is horribly wasteful and inefficient. I quite agree. But innovation is horribly wasteful and inefficient. It’s quite common for drug researchers at mean-old profit-oriented pharma to go their entire lives without working on a drug that actually makes it past Phase III trials and into patients.

Those kinds of crazy bets are exactly the kind of thing that the centralized, rational, efficient systems that progressives like to build (or at least, dream of building) have the hardest time allowing. And when such systems do make start spending big, they don’t tend to get made where the biggest market is–i.e. the most patients with the strongest demand. Instead the decisions are political: which disease has the best organized interest group to lobby the government?

Those are just inherent qualities of a government system. They’re the qualities of the systems that progressives lionize in government–the reason that othercountriesspendless. I acknowledge that it can work very well as long as there are some irrational, decentralized, uncontrolled countries in the mix figuring out how to deliver the technology you’ll eventually use, for the same reason that a really surprisingly large number of children can forego vaccination without risking disease.

But at this point, the US is the only country left providing a hefty incentive for inventing new treatments. If we stop, the whole world suffers, and we along with it. So for all the many bad points about our system, for now, I’d like to stick with it.

It has been pointed out to McArdle that six of the top ten drug companies are European, the US market is only part of the world market for drugs, the US should not have to subsidize any other country’s innovation needs, European companies also innovate, US drug innovation and spending on R&D are decreasing, the government funds a tremendous amount of research that is the basis for much of the drug companies’ “innovation,” and drug companies are mainly innovating by re-working old drugs, but these facts do not change her views. McArdle states 80-90% of European drug companies’ profits come from the US and the US provides almost all medical innovation, and therefore we can’t have health insurance reform or national health care.

Dr. Marcia Angell, former editor of the New England Journal of Medicine, has debunked these excuses, as have others.

In the past two years, we have started to see, for the first time, the beginnings of public resistance to rapacious pricing and other dubious practices of the pharmaceutical industry. It is mainly because of this resistance that drug companies are now blanketing us with public relations messages. And the magic words, repeated over and over like an incantation, are research, innovation, and American. Research. Innovation. American. It makes a great story.

But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companies—dwarfed by their vast expenditures on marketing and administration, and smaller even than profits. In fact, year after year, for over two decades, this industry has been far and away the most profitable in the United States. (In 2003, for the first time, the industry lost its first-place position, coming in third, behind “mining, crude oil production,” and “commercial banks.”) The prices drug companies charge have little relationship to the costs of making the drugs and could be cut dramatically without coming anywhere close to threatening R&D.

Second, the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of “new” drugs are not new at all but merely variations of older drugs already on the market….

Third, the industry is hardly a model of American free enterprise. To be sure, it is free to decide which drugs to develop (me-too drugs instead of innovative ones, for instance), and it is free to price them as high as the traffic will bear, but it is utterly dependent on government-granted monopolies—in the form of patents and Food and Drug Administration (FDA)–approved exclusive marketing rights. If it is not particularly innovative in discovering new drugs, it is highly innovative—and aggressive—in dreaming up ways to extend its monopoly rights.

And there is nothing peculiarly American about this industry. It is the very essence of a global enterprise. Roughly half of the largest drug companies are based in Europe. (The exact count shifts because of mergers.) In 2002, the top ten were the American companies Pfizer, Merck, Johnson & Johnson, Bristol-Myers Squibb, and Wyeth (formerly American Home Products); the British companies GlaxoSmithKline and AstraZeneca; the Swiss companies Novartis and Roche; and the French company Aventis (which in 2004 merged with another French company, Sanafi Synthelabo, putting it in third place).[5] All are much alike in their operations. All price their drugs much higher here than in other markets.

Since the United States is the major profit center, it is simply good public relations for drug companies to pass themselves off as American, whether they are or not. It is true, however, that some of the European companies are now locating their R&D operations in the United States. They claim the reason for this is that we don’t regulate prices, as does much of the rest of the world. But more likely it is that they want to feed on the unparalleled research output of American universities and the NIH. In other words, it’s not private enterprise that draws them here but the very opposite—our publicly sponsored research enterprise….
People need to know that there are some checks and balances on this industry, so that its quest for profits doesn’t push every other consideration aside. But there aren’t such checks and balances.

A study done by Ralph Nader’s Public Citizen’s Congress Watch in 2003 had similar findings:

One of the biggest controversies swirling around the drug industry goes beyond its high prices and huge revenues to the question of what pharmaceuticals do with all their money. Financial reports show that the companies plow far more money into profits than into research and development. Consider:
–As a whole, Fortune 500 drug companies channeled 17% of income into profits last year. Yet they spent just 14.1 % of revenue on R&D.
–Specifically, seven 0f the nine profitable Fortune 500 drug companies devoted more of their revenue to profits than to R&D.

The drug industry contends that it needs extraordinary profits, built on high prices, to fund expensive and risky R&D. Ironically, when some analysts contemplate the future of the industry, their greatest concern is large pharmaceutical companies’ over-reliance on advertising and marketing of existing drugs-especially their “blockbusters”-and their failure to keep enough innovative drugs in the research pipeline.

In Pharmacetical Innovation, edited by Frank A. Sloan and Chee-Ruey Hsieh, the editors repeat the same information; drug innovation has greatly slowed, the “free” market is heavily weighed towards drug companies, and drug companies are increasing profits tremendously through advertising and other tactics such as outsourcing drug manufacture to China and other places, not just through innovation.

McArdle expects her audience to accept her statements as fact and does not support them with evidence. All drug companies depend on the US’s high prices to create most new medical innovation and we can just take her word for it. But McArdle is not alone in clinging to her Pharma-friendly beliefs. She can rest easy knowing that Rick Santorum also believes the exact same thing and will back up everything she says with the power of his personal beliefs as well.

“You look at any other place around the world that has gone to a more socialized version of healthcare [and you find that] the government doesn’t pay for innovation and quality,” the former senator says. “It pays for quantity. It pays for trying to cover as many people with the cheapest available technology. This will dramatically stifle innovation in our country.”
America, says Santorum, is where most innovative medicine is conducted because the market rewards excellence and innovation.

And who can argue with the Free Market Fairy?
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by Susan of Texas

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