Tuesday, July 29, 2003

Fair Trade, not Free Trade-Yes, I just said that. No, I don't have a maniac Gephardt supporter holding a gun to Eileen's head. However, in the case of the drug-importation bull bill, the old protectionist mantra seems to make sence. Orrin Judd's not having a great day. First, he overdoes his support of Leon Panetta-"Leon Panetta is very much the best the Democrats have to offer. He'd be a better governor than anyone who will be contending for the office in the coming recall election, including any of the Republicans. He would, in fact, be a great Treasury Secretary for Mr. Bush." He's good, but he's not that good. He's a smart liberal and the best the Democrats have to offer, but he wouldn't be my first choice. If it boiled down to a Riordan-Panetta race, I could see myself voting for Panetta, but that's a real stretch. Then, Orrin links to a Lew Rockwell piece in support of the drug-importation bill. Approvingly. Lew is slick here. First, he run through three cases of truly bad protectionism, then he turns his gaze to the Canadian drug importation issue.
Everyone knows that pharmaceuticals are far cheaper around the world than they are in the US, due mainly to stringent patent laws that prohibit free-market competition and guarantee producers huge profits.
Drugs are cheaper around the world. However, they are cheaper for two reasons other than the ones Rockwell cites. One is the smaller incomes in most countries around the world depresses demand. The second, and more pernicious for an alleged libertarian, is that government-run health systems act as monopsonists (a market with one buyer). As the only buyer in the market, they can force businesses to sell at variable costs, since monopsonists can squeeze sellers just like monopolist can squeeze buyers. The patent gives the company a 17-year monopoly on their product, and after that 17 years (often much less, since it typically takes many years to get a drug ready for sale even after getting a patent), the firm will have brand loyalty even after competitors can make generic versions. The reason we give patents is to allow firms to reclaim the R&D money that they spend developing the product. Otherwise, they'll have a very small window of opportunity before competitors make legal knockoffs of the drug they spent years developing. They don't guarentee a drug maker huge profits. First, the drug has to work and not have any huge side-effects. Then, if it works, you're having to count on a market for the product being there. If you do come up with a winner, you've got a nice cash cow, but you've also got a lot of stillborn cattle along the way as well.
However, these same companies also compete in real market conditions, by exporting their drugs to foreign countries at a profit.
That's precious, Lew. Most of the industrialized countries' health care systems work as a monopsonist; not what I'd call "real market conditions" Yes, they do make a contribution to their fixed cost, but not much. The idea is to make them sell at just above variable costs. If they price things below variable costs, the company would opt not to sell in that market. The other factor that comes into play with Canada is that if the lost profits from Americans ordering cheap Canadian drugs is bigger than the modest profits from selling to Canadians, then the drug company is better off not selling to Canada. That may either force the Canadians to raise their prices offered or start to go into the generic drug business.
These same drugs have been coming back into the US market and selling for much lower prices, which has given rise to demands that re-importation be blocked—at the very time when the Bush administration is imposing more medical socialism to lower the retail price of drugs!
Yes, they're looking at expanding Medicare to cover drugs, Lew. However, those cheap Canadian drugs are a product of well-worn medical socialism.
The issue is very simple from the point of view of free trade. Should Americans be able to buy American-made prescription drugs from other countries at cheaper prices than they would have to pay in the US? Of course, the answer is yes. All that free traders are asking is that US firms be willing to let Americans buy US drugs at market prices when they are imported from other countries.
Lew, those aren't market prices in Canada. Not in the sence you would normally think of.
The only possible reason to pay more would be if you want to dump vast sums of money on the US drug industry for no good reason. Consumers might want to—they can send Eli Lilly a fat check--but they shouldn't be forced to.
The good reason is to encourage the development of intellectual property. If you would like the pharmaceutical industry to stop doing R&D and go to a generic drug format, fine. However, don't she-dog when you see your take-home pay drop when your taxes are raised to get the NIH and CDC put those drug researchers on the federal payroll. Or, don't she-dog when the drug that would save your life down the line doesn't get made.
And yet some free traders have gotten on board with the desire to use protectionist means to boost prices and thereby add fuel to the fire of socialized medicine. It's expected that politicians sell their souls. But what about think tanks? The American Enterprise Institute, Cato, Competitive Enterprise Institute, the Heritage Foundation, the National Center for Policy Analysis, National Review, and many other organizations and "free market" publications have come out for banning re-importation. Why? They say that re-imported drugs are unsafe, would undercut US drug makers, dry up research funds, and make drugs more difficult to regulate.
I'm not sure about the unsafe part, but the last three seem legit. The middle two are dead-on (see above) and foreign pharmacies might be real hard to deal with if they screw up.
Doug Bandow of Cato, for example, argues that because foreign countries do not have free markets for drugs, they shouldn't be permitted to export to the US which does. Of course that is precisely the same rationale used by the catfish and textile industry to ban competitive products. If anything, the claim is even more absurd since we are not talking about competitors but the very same firms that already sell in the US. So hysterical has been the campaign that re-imported drugs are said (by Michael Krauss) to be "an invitation to terrorists."
Bandow's NRO piece is a dead-on overview of the topic. Krause's comments about terrorists shipping tampered drugs into Canada and on to the US is over-the-top if not hysterical.
As with other protectionist schemes, it is really about taxing Americans and imposing price floors to benefit a politically influential industry.
I don't see a price-floor here, Lew. I see them trying to get rid of foreign-imposed price ceilings. If you want cheap drugs, move to Canada. Your paycheck will be a lot lighter and will go a lot less far with 13% sales taxes, but you'll get your cheap drugs.
Krauss actually admits this when he says: "Do we want pharmaceutical progress? Then we must pay for these goods, even if other nations don't do their part."But protectionist profits are not the reason for pharmaceutical progress. The reason is innovation, which depends in no way on patents and protectionism in drugs any more than with any other form of innovation.
Doing away with intellectual property rights does hinder innovation, for it makes the skull-sweat of doing R&D not worth as much. Can you be innovative without patent protections? Yes, but you'll be less interested in doing it yourself, for you'll be sharing your good ideas with your fellow man rather than have a 17-year window as an monopolist for your idea.
The proof is precisely that American firms are willing to sell at such low prices to foreign nations; they must be making a profit.
Not a "profit" in the true sense. They're making a contribution to their fixed costs, but if everyone made them sell at just-above-variable-costs, they'd go bankrupt in a hurry, for their wouldn't be any extra money left for R&D.
In short, the arguments used in favor of cracking down on drug re-importation are identical to all the arguments used for all forms of protectionism. They always amount to the same thing: special pleading for a protected US industry at the expense of consumers. Fortunately, the drug protectionists have been beaten back by the House, which voted yes on a bill to permit wholesale re-importation of pharmaceuticals—a bill that was opposed by the whole of the drug industry as well as the FDA and the Beltway thinktanks.
The open question here is whether this bill is in the long-term best interest of consumers. In the short term, it will mean cheaper drug prices and lower profits for pharmaceutical companies. However, in the long run, it will mean fewer new drugs being invented and shorter lives for us all. Unless the federal government steps in and cranks up drug research to make up the slack; that will mean that everyone gets to pay for drug research and not just the people who benefit from it. A high price for Viagra is paid for by people who want to have help getting an erection in their old age; I don't have to spring for that. However, if you fast forward to the world that Rockwell prefers, I'm having to pay taxes for all kinds of research that I'm not interested in.
The role of free traders in promoting protectionism is particularly notable, for it proves that libertarians have a useful role to play on Capitol Hill after all. Their studies, arguments, articles will be read, cited, and praised so long as they are willing to call for expanded government. If however, they stick to what they should be doing, which is calling for freedom, they must suffer under unrelenting marginalization, as they do most of the time in Washington.
If you keep coming up with half-baked arguments, you'll suffer unrelenting marginalization, or at least the regular fisking.
For all their rhetoric about free trade and free enterprise, you can always count on the Republican Party to back a protectionist plan if it is supported by a big business with good connections. The Bush administration has followed in the footsteps of the previous Bush administration and even the Reagan administration—and most famously the Hoover administration—in violating its supposed principles to help its friends.
Other than the steel quota fiasco, Bush has been by-and-large on the side of free trade. Did you catch the free trade deals with Chile and Singapore? Not exactly Smoot-Hawley, sir.
The costs of all of this are incalculable, and the American consumer is paying them. American retailers and wholesalers are paying them as well. This drains resources that could be going to boosting prospects for the US economy.
The other legit types of protectionism he mentioned earlier I'll buy, but the drug importation bill is moving towards a sicker world and aiding socialist around the world and at home; not what I think Rockwell would like.
Who benefits from mercantilism is no mystery: look at the list of lobbyists and signatories to the complaints. It is pure special pleading that cannot, in the long run, even help the assisted industries. The pressure of globalization combined with the irresistible pressure of free markets will eventually prevail over all political attempts to design the market to the government's liking.
The drug importation bill doesn't help free markets; it helps socialist medicine become more entrenched around the world and will help socialize drug research in the US. Sometimes the paleolibertarians like Rockwell or Lincoln-basher Tom DiLorenzo are so free-trade, they can't see other problems that might justify some barriers.

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