But What Would The Democrats Do?

by hilzoy

Now we know. From the Washington Post: Democrats have been planning what they will do if they regain control of the House of Representatives.

"House Democrats have formulated a plan of action for their first week in control. Their leaders said a Democratic House would quickly vote to raise the minimum wage for the first time since 1997. It would roll back a provision in the Republicans' Medicare prescription drug benefit that prohibits the Department of Health and Human Services from negotiating prices for drugs offered under the program.

It would vote to fully implement the recommendations of the bipartisan panel convened to shore up homeland security after the Sept. 11, 2001, attacks, Democratic leaders said.

And it would reinstate lapsed rules that say any tax cuts or spending increases have to be offset by spending cuts or tax increases to prevent the federal deficit from growing."

All of these proposals are very good, and very important. Reinstating the PAYGO rules, in particular, is crucial. These are the rules that kept spending in check, and helped bring down the deficit, in the 1990s. And it's pretty clear why: it's a lot easier either to cut taxes or to increase spending when you can just defer all sacrifices for the indefinite future. Money for nothing: what could be more delightful? Of course, it's not actually free; future generations will have to pay for our profligacy. But since they aren't here to object, why not party on?

Reinstating the PAYGO rules prevents this from happening: when you actually have to propose cuts in order to pay for your new proposals, their costs become clearer, and representatives who might not behave responsibly otherwise are forced to do so. It also means that Democrats are serious about bringing down the deficit: they are proposing not just airy, unspecified "spending cuts", but an actual proven mechanism to force Congress to behave. That's very good news.

Raising the minimum wage is also a really good idea: as the Post notes, it hasn't been raised in ages, and it should be. (A good discussion of the policy questions, including the evidence that suggests that raising the minimum wage does not decrease the number of jobs available to low-wage workers, is here; a statement by 562 economists, including four nobel laureates, supporting a raise in the minimum wage is here (pdf).

The Homeland Security part is a no-brainer. If anything was obvious after 9/11, it was the need to really strengthen homeland security. But, as the federal response to Katrina showed, we have actually regressed in disaster preparedness, and we're still debating whether or not to do anything serious about such crucial areas as screening incoming cargo.

The Democrats also have a very good security plan. It was easy to miss when they announced it, since as soon as they announced the press conference at which they presented it, President Bush announced a press conference of his own that started ten minutes earlier, and that preempted media coverage.

Repeating the claim that the Democrats have no ideas and no plan does not make it true.

Comments

[Tim]

Saw this on Huffington. I finally agree with Dubya on something.

High point

[Gary Farber]

That Republicans have been running around, building bridges to nowhere, and spending money like crazy, and opposing PAYGO, only shows what complete hypocrites they, and their voters, are.

I realize it's unpleasant of me to point that out, but, really, it's far more unpleasant of all concerned for them to have voted for such nonsense. Republicans didn't have to inflict that on all of us.

But they did.

Republicans are for deficits, and wildly spending money on nonsensical museums and bridges, and endless other crap.

Sad, but true.

[Tim]

Republicans are for deficits, and wildly spending money on nonsensical museums and bridges, and endless other crap.

I think that's just a side effect. They are for spending money on Republicans, preferably rich ones. Anything actually being built is irrelevant. As a matter of fact, if it's useless, so much the better. There's additional money in fixing it.

The Democrats better be careful in their proposals that they do not give the Repubs the slightest opening for blame for the various approaching calamities. Let the GOP be discredited for the next decade or so.

[Mr. K.]

Many people in this country don't care about federal deficits, simply because they live their own lives pay check to pay check, with a huge mortgage, car loan, credit card debt, and are basically figuring if they can make the minimum payments, all is good. But these same people are on the edge of a cliff. I think a lot of them could be swayed to the moderate side if they believed the Dems would help them finally get a raise. It's obvious that the Republicans are pro-business and pro-rich at the expense of the poor and middle class. That's why their economic policy is called "trickle down". The key is explaining that raising the minimum wage won't result in a loss of jobs while giving the finger to big business and the lobbyists. I hope they have the guts to do it.

[lilylily]

I've been thinking about the whole Bush-isn't-a-real-conservative thing that Greenwald, Digby and others have been discussing.
I think that a philosophy is best understand by evaluating the actions that result, not by listening to the words. The Republican party has been claiming to represent conservative values for about one hundred years. Their track record is consistant: they are the party of, by, and for people who already have lots of money and want to use the polictical systemn to extract more for themselves. Fear is used to get the not-rich to screw themselves by voting for Republicans. The fundamental difference between the Republicans and the Democrats is that the Denocrats think the goverment has a responisbility to serve the common good and the Republicans think the government has a repsonsibility to serve them. All that crap about believing in limited government, fiscal responisbility etc. has never been anything but a lot of hot air.
People like Sebastian who adhere to an ideology which they consider to be conservatism have no real relevence to the policies of the Republican party because their philosphy doesn't match the expectations of either the party leadership or the typical Republican voter. No Republican will ever get elected by telling the voters that farm price supports should be eliminated, Social Security is socialist and that disaster relief is a local matter. Even Republican voters expect the government to serve THEIR needs. They just don't think the goevernment should serve anybody else and they want someone else's taxes to pay for their demands.
Republican leaders just toss a bone to the conservative ideologs every now and then just like they do to religious fanatics and people who are afraid of terrorists. Bush hasn't abandoned the conservative philosophy. He and the Republican Congress have just had the power to show us how Republicans rule when given the chance.

[The Stuffed Tiger]

I'm thrilled to see some substance on the table. However, there's still a big component missing: vision. I can't wait to see the minimum wage increased and our deficits addressed, but what else can we expect? It's hard to predict because Pelosi hasn't defined a 21st Century progressivism to replace the New Deal. This is a fantastic change but I really want a vision for the country, too.

American Prospect has a fantastic article right now about what our broad vision and specific policies can be.

[Sebastian Holsclaw]

"It would roll back a provision in the Republicans' Medicare prescription drug benefit that prohibits the Department of Health and Human Services from negotiating prices for drugs offered under the program."

I'm deeply ambivalent about this in practice. Medicare benefits already from price negotiation between the insurance companies and the drug companies. Anyone who thinks that the insurance companies don't drive a hard bargain hasn't been paying attention. The insurance companies negotiate prices very well right now. I annoyingly can't find the cite now, but I had read that the CBO estimated very little to no extra price savings through direct price negotiation.

If no extra price changes, why am I worried?

See this AARP press bulletin on the subject.:

The largest PBMs, representing millions of people, wield considerable market power and use a number of tools to hold down costs. But experts disagree on the savings they could achieve for Medicare, with estimates ranging on average from 10 to 30 percent.

"The question is discount from what?" says [Democratic Representative] Tom Allen. "A discount from the price set by the manufacturers? Their initial ability to charge whatever they want is the problem."

Democrats will try to repeal the provision forbidding the government to negotiate prices with drugmakers. "Every other government in the developed world has that power," Allen says. "Why shouldn't we?"

AARP takes a somewhat different tack. "We think Medicare should be empowered to negotiate prices," Rother says, "if competition among plans doesn't provide the expected level of savings."

In the last few years Allen has become the Democratic point man on health care issues in the House yet [perhaps 'therefore'] he says ridiculous things like: "Their initial ability to charge whatever they want is the problem."

As for "every other government", we see what happens when every other government 'negotiates' drug prices--they don't pay enough to cover research costs. While it certainly isn't objectively fair that much of the world can free ride of US research payments (and the US is trying to change that through the WTO and international intellectual property agreements) I would much rather have lots of research and low drug prices for lots of fabulous new drugs when they go generic 17 years later than low drug prices now and fewer drugs later.

Government price negotiations on generics would be fine. You can harness the power of the market between competeing manufacturers, and you can't threaten to remove someone's patent. The research costs have already been paid and the formula is unprotected.

I'm concerned that real negotiations aren't going to give the savings that people believe, and once the precedent has been set that Medicare directly deals with the price, we are going to go beyond negotiations.

[CaseyL]

That's a genuinely good plan. One quibble: re-instituting PAYGO may stop the deficit from getting exponentially worse, but it doesn't address what we do about the deficit we have now.

Over at Drum's place, someone noted that during the 1950's (the era the Right yearns for (when they're not yearning for the 1890s)) the top tax rate was 91%.

91%!!

Can you imagine the howls if anyone proposed raising the top tax rate to even half of that?

I thought about what the country was up to in the 50's, and where that tax money was going. And, sure, a lot of it was going to the military: the Cold War was pretty darned warm, then. A fair bit was also being spent on the Space Race, which was white hot then, also as a consequence of the Cold War.

But quite a bit had to be spent on building the then-brand-new interstate freeway system. IIRC, one of the initial justifications for building those huge ribbons of concrete across the country was Cold War related; i.e., we needed to be able to mobilize and move mass numbers of troops and materiel. But there's no denying it turned out to be, and had to be recognized even then as, a major infrastructure for civilian use as well.

Quite a lot of that tax revenue was also going to build colleges, and to funding the GI Bill. The GI Bill made it possible for millions, tens of millions, of people to get a university education who otherwise would never have been able to go. And there weren't nearly enough universities to hold them all. So: boom! colleges and financial aid everywhere!

And possibly a lot of the money went to building houses for all those returning GIs and their families. The baby boom started in 1956: a huge demographic bulge that needed to be accommodated. Young families in a country just emerging from two major wars after it had just emerged from a capital-D Depression simply didn't have the financial resources to do that without help.

A 91% tax rate... that paid for highways, housing, and higher education.

If anyone back then said, "No, the best use of our tax dollars is to make more billionaires," they certainly weren't taken seriously by even the Republican Administration of the time.

(Note to Jonah Goldberg and his ilk: I guess that means Eisenhower was a liberal, too, huh?)

Mind you, every single one of those huge expenditures could be, and probably was, rhetorically justified by the Cold War. We needed a lot of people... a lot of well-educated people... a lot of well-educated people who owned their own property... in order to fight the Communist Menace. We needed to win hearts and minds here at home if we were going to win hearts and minds abroad.

I look back in wonder.

And I wonder where we will find leaders who can draw parallels from that time to this one:

Are we fighting a WoT? Is it one we can win militarily? Or do we need to set an example of freedom, dignity, self-autonomy, and social communality that rivals the hateful nihilism which is all terrorism offers?

The parallels are there to be drawn. Dammit, we can even evoke a Republican idol to help us draw them. We could revive the whole idea of Common Good as a strategic asset - if only we could communicate that to the 2006 and 2008 hopefuls.

[hilzoy]

Seb: I don't get the problem with allowing the government to negotiate for prices in Medicare Part D. The VA and other parts of the government already have this same power, and it has yet to produce disaster.

[Sebastian Holsclaw]

"The VA and other parts of the government already have this same power, and it has yet to produce disaster."

The VA is a very small percentage of medical care, Medicare isn't now and is projected to be much more. And for some Democratic Congressman it is to provide the model for even larger or universal health care--which I wouldn't be opposed to nearly as much if it weren't for the research/price issues.

[Nell]

I notice a potential hundred-billion-dollar annual savings that isn't in the Dem program... Can you guess what it is?

[cleek]

And for some Democratic Congressman it is to provide the model for even larger or universal health care--which I wouldn't be opposed to nearly as much if it weren't for the research/price issues.

what is a research/price issue ? surely the drug companies wouldn't negotiate a price that would put them out of business.

[cleek]

Can you guess what it is?

i can guess. but i, like the Dems, dare not speak its name.

[John Lopresti]

I subscribe to the spendthrift Democratic Party tradition. Pelosi is saying a lot of important things on many topics but she keeps many inclinations well within conservative bounds. PayGo was a Republican ploy to shut down historical Democratic Party budget overruns; the dispute in PayGo typically was Republicans selecting the most uplifting social safety net programs as target for the PayGo cost reductions to offset the increased programs' aggregate new expenditures.

The current paradox in Republican rule is the Republicans lifted a page from the Democrats' book by using war to guarantee the patriotic vote. And the cost of the war is off the books in the sense that the budget is not designed with a lineitem for the war; rather the war is a separate piece of legislation.

Both parties are redefining themselves. The Republicans have to grasp their new identity having absorbed all the emigrated Dixiecrats.

And the Democrats have to contemplate what leadership will mean to them in a post-union world in which yet another historical constituency will be contributing progressively less toward defining what it is to be a Democrat.

The whole destruction of social fabric at the heart of terrorism policy is reconfiguring both parties. In a way social upheaval has been a substrate in modern American life for several decades, whether explicit, or incrementally, barely recognized.

Constructively I support the classic ideal Republicans espouse, of the rich assuring their offspring attend good schools, the outcome guaranteeing enhanced quality of life for both their scions and for society at large. Logistically, though, the only fair way to get there is by the Democrats methodology, because they bring bring more people along instead of winnowing an ever narrower elite. However, if the Democrats wax too theoretical the Republicans then take to the airwaves with criticism that the Democrats are elitist liberal intellectuals. One supposes the rejoinder is leadership from the Democrats, but leadership is a reflection of the social fabric; if that cloth is snarled by uncivil terrorism, my theory says fewer Democrats are inspired to lead and lead well.

The polls are showing now, however, the public is making generic commentary on the current administration and congress; the public is longing to hear from the loyal opposition. It will be interesting seeing what material Pelosi has to mold into shape in the lower chamber after autumn 2006 elections. I find her instinctive and bright. Maybe PayGo is a starting point, but it is a fictitious quagmire. Too bad JKGalbraith nonagenarian passed a few weeks ago; he would have a nice explanation. Got to go to the library now; got to re-read his books and lectures; then email Pelosi. This calls for farsightedness. She is a great person to do it.

[Nell]

Not that I'm complaining about having some, any, positive program. The minimum wage is at its lowest in real terms for decades.

[Frank]

CaseyL- That was inspiring thank you.

[bleh]

Well, these so-called ideas sound very nice, but as everybody knows, what's really going to happen if Democrats are elected is that Hillary and the Feminazis are going to raise your taxes to pay for a huge regulatory program that will take your guns away and use them to force churches to perform gay marriages for brown people on welfare.

[hilzoy]

bleh: you forgot about banning the Bible and turning America into a UN protectorate.

[worsethan]

sure, the UN, the Black Helicopters--those were bad enough.

But if the Democrats get into power, it'll be far worse--they're going to mandate that the Black Helicopters run on alternative fuels.

[liberaljaponicus]

Hillary and the Feminazis
I thought that their first album was good, but after that, they just started churning out that cookie cutter pop.

[Steve]

Sebastian makes an important point in concept. However, it seems like the major pharmaceutical companies are substantially flush with cash - meaning that if there was further profitable research to be conducted, they'd presumably be doing so. So we're not necessarily in a place where cutting into pharma's profits via the negotiation power cuts into the amount of useful research that can be performed; but it's something to be wary of.

[Sebastian Holsclaw]

"So we're not necessarily in a place where cutting into pharma's profits via the negotiation power cuts into the amount of useful research that can be performed; but it's something to be wary of."

Pharma needs to be more profitable than your average company because it is much riskier than your average company. If it was only just as profitable as your average company everyone would invest in other safer companies.

[Bernard Yomtov]

Pharma needs to be more profitable than your average company because it is much riskier than your average company. If it was only just as profitable as your average company everyone would invest in other safer companies.

Oh for Pete's sake, Sebastian. I don't want to reprise our previous discussion but I would suggest you find an introductory finance text and read it before making this sort of assertion.

[bains]

REPUBLICANS HATEFUL AND BAD...

republicans hateful and bad...

repubs... hate...

Support all Dems!

[Steve]

Pharma needs to be more profitable than your average company because it is much riskier than your average company. If it was only just as profitable as your average company everyone would invest in other safer companies.

This doesn't have anything to do with the point I made. If additional research were sufficiently profitable for the pharmaceutical companies, they'd be doing it with the excess cash that we know they have from their public financials. Since they're not, legislation that would impact pharma's profitability would obviously hurt the industry's bottom line (and help consumers), but it wouldn't result in less research being conducted, which is the social harm we're concerned with.

[Sebastian Holsclaw]

"Oh for Pete's sake, Sebastian. I don't want to reprise our previous discussion but I would suggest you find an introductory finance text and read it before making this sort of assertion."

Bernard, I'm making an assertion that is 100% in line with basic economics. Pretending that I lack basic education when I am in fact quoting the basic economics line doesn't make it look like you know what you are talking about. In our previous discussion your diversification point was in a word, confused. You shifted back and forth between a focus on pharma, a focus on general companies and a focus on research without carefully drawing distinctions between any of them. When I tried to pin you down on them you withdrew. Diversification is made by balancing between different types of known risks. If you have too many unknown or poorly understood risks you can't properly diversify because you can't properly balance. Pharma companies have tried to diversify their risks of not having successful products with consolidations and takeovers--allowing larger companies to have broader portfolios. It has been a deeply mixed endeavor at best. Your point about general portfolio diversification from an investment perspective doesn't make sense if you substantially lower the pharma profits. Adding a high-risk low-return investment to a portfolio that has low-risk low-return investments and medium-return medium-risk investments is just silly, not well designed diversification. You aren't getting enough out of the high-risk to bother with it if it has a low return. Would anyone have purchased 'junk bonds' at 4%? No. The only reason people even tried them was because they had a high yield. It turns out they didn't have a high enough yield to support things (and that sometimes the risks were underplayed), but that suggests that they were even riskier than people thought, not that lowering the yield would have made them more attractive.

"If additional research were sufficiently profitable for the pharmaceutical companies, they'd be doing it with the excess cash that we know they have from their public financials. Since they're not, legislation that would impact pharma's profitability would obviously hurt the industry's bottom line (and help consumers), but it wouldn't result in less research being conducted, which is the social harm we're concerned with."

Steve, this suggests that you are not understanding the point I was making. You invest in a company that you hope will make a certain profit. If you can make the same profit on a near-sure thing that you could make on a risky thing, you should invest in the near-sure thing. In order for it to make sense to invest in the risky thing you need to have the chance at a greater reward. If you reduce the profits by law of the risky thing to somewhere near the profits of the near-sure thing people will not invest in the risky thing.

[cleek]

i don't see why the US taxpayer is in any way responsible for helping any company maintain their business model (that goes for pharma, media and oil). if the business climate changes, it's up to the company to respond - it's not up to us to maintain the current business climate.

and in any case, i still don't see why you're so scared of our being able to negotiate - again, why would any company negotiate themselves out of business ?

[Steve]

If you reduce the profits by law of the risky thing to somewhere near the profits of the near-sure thing people will not invest in the risky thing.

This kind of assumes that big pharmaceutical companies get their money by constantly rounding up investors. In fact, they get their money by selling products. And even though it's not the job of the government to guarantee any company a particular stock price, a huge percentage of the research in this country is government-subsidized. So if you're an investor deciding where to put your money, you can invest in a company that depends entirely upon market receipts, or you can invest in a company that benefits from a high level of public subsidies. The latter has an attraction that makes up for the higher degree of risk.

But anyway, let's stipulate that pharmaceutical companies need a higher profit margin than other businesses. So why does a law which permits Medicare to negotiate prices necessarily reduce profit margins to the same level as other businesses?

Every insurance company except for Medicare has the power to negotiate; yet we don't call that "driving pharmaceutical companies out of business," we call it the free market. Medicare is simply one more insurance company, and although they have a few more members than the larger insurers, they certainly don't have unlimited market power.

What happens if consolidation in the health insurance industry continues to the point where we end up with a private health insurer with more subscribers than Medicare? Will we then pass a law prohibiting them, as well, from negotiating prices?

You've established why pharmaceutical companies rely on higher-than-normal profit margins. I don't think anyone questions that permitting Medicare to negotiate will cut into those profit margins. What you've failed to establish is that it would cut into those profit margins to such a degree that pharma would be no more profitable than any other industry. This seems like the "sky is falling" type of scenario that any industry pushes when faced with adverse legislation. Again - the excess cash on hand of pharmaceutical companies demonstrates that we can cut into their profit margins, in this case simply by letting free-market principles apply, without cutting into useful research.

[Charles Bird]

Since the Democrats have also shown little interest in spending control, and moving to implement all of the 9/11 report's recommendations will significantly add to spending levels, PAYGO is basically a backdoor way to raise tax rates. Democrats should be at least be honest enough to call it what it is.

Raising the minimum wage sounds all well and good, unless you own a small business. Ask yourselves why Wal-Mart is in favor of raising the minimum wage.

The Economic Policy Institute is a left-wing think tank with liberal economists such as Robert Reich and Lester Thurow (how did that zero-sum game turn out?). Not that there's anything wrong with that, but you know what their positions from the get-go and that they're going to round up signatories who support raising the minimum wage. Predictable as clockwork, making for a one-sided perspective in this post, which is also predictable. Tim Kane writes:

A survey published in the Winter 2005 Journal of Economic Perspectives, an academic publication, reports that 71 percent of economists at America’s top universities agree with the statement “a minimum wage increases unemployment among the young and unskilled.” About one-third of the economists agree outright, and another third agree with reservations. Think about that: the consensus among top economists is that the very existence of a minimum wage harms those who, according to its supporters, need it most.

If we were really serious about the welfare of those in the entry-level pay scale, we should do a better job of preventing more illegal immigrants from coming across our borders. That, and strengthening the EITC rather than sticking the bill to business owners.

The Democrats security plan didn't get little press because of Bush (but he's nice and convenient whipping boy here), but because, after reporters and analysts read the plan, there wasn't anything terribly newsworthy about it. If it were newsworthy, it wouldn't have been trumped by a single press conference.

But good for the Democrats for making up a plan.

[Sebastian Holsclaw]

The difference between the government and insurance companies is that the government can pull or threaten to pull your patent if your drug is 'important enough' or if you are being 'predatory' in your pricing. The person who can effectively burn your business to the ground is not a normal customer for market purposes.

[Sebastian Holsclaw]

"a huge percentage of the research in this country is government-subsidized."

This is frankly overplayed. A vast majority of pharmaceutical research is not in fact government-subsidized. Finding a target area (usually academic work and of the type I presume you are talking about) and getting from that to a drug are vastly different things. You would have a much better argument (though still in my opinion bad argument) in an area with more direct links--like aerospace. Going from target to drug is no trivial matter. And it is so hard and costly in fact that almost no government funded research university even tries.

"Again - the excess cash on hand of pharmaceutical companies demonstrates that we can cut into their profit margins, in this case simply by letting free-market principles apply, without cutting into useful research."

What excess cash are you talking about? You can refer to company filings on sec.gov for reference if you have some company in mind. Is someone sitting on cash that they should be spending? Or are you talking about "excess profit" in which case I have already outlined my position and you have (so far as I can see) not responded to it.

[Steve]

Seems to me there are pretty straightforward ways to address that problem through legislation. The VA is part of the government, and yet no one's business has been burned to the ground in aid of the VA, right?

[Jesurgislac]

A vast majority of pharmaceutical research is not in fact government-subsidized.

According to the NIH: "An internal National Institutes of Health (NIH) document, obtained by Public Citizen through the Freedom of Information Act, shows how crucial taxpayer-funded research is to top-selling drugs. According to the NIH, taxpayer-funded scientists conducted 55 percent of the research projects that led to the discovery and development of the top five selling drugs in 1995."

"The industry fought, and won, a nine-year legal battle to keep congressional investigators from the General Accounting Office from seeing the industry’s complete R&D records. (See Section IV) Congress can subpoena the records but has failed to do so. "

read the rest

I think it's just a basic, any area of science and any country, that the vast majority of the basic research will always be government-funded: no private company has the resources or the will to pay researchers to follow ideas that can't be guaranteed to be profitable.

[liberaljaponicus]

Sebastian, I'm wondering if you have any specific examples in mind about 'pulling patents' because the quotes suggest you have some specific real life examples in mind.

I also found this piece interesting.

[john miller]

CB: "PAYGO is basically a backdoor way to raise tax rates."

And the problem with that is exactly what?

Are you saying that although you believe the country needs to be secure, you are unwilling to have your taxes raised for that purpose? And that is not mind-reading, it is a legitimate question.

One of the real crimes of this administration IMO, is that they have stressed the importance of the WOT (or whatever the nom de jour is), without asking for any sacrifice from this country except for the blood, arms, legs, etc of those on the frontlines.

Taking the Democrats at their word is in effect saying that if there is a real risk to this country, to face that risk and minimize it will require some sacrifice on the parts of all Americans, not just the low and middle class.

[Bernard Yomtov]

Pretending that I lack basic education when I am in fact quoting the basic economics line doesn't make it look like you know what you are talking about.

You are not quoting the basic economics line. And I do in fact know what I am talking about.

In our previous discussion your diversification point was in a word, confused.

Your failure to grasp the point does not make it confused.

When I tried to pin you down on them you withdrew.

I withdrew out of frustration, Sebastian. I had said what I had to say, several times over. I grew tired of it. Kevin Donaghue explained it. You refuse to understand it. You continually confuse the risk of individual R&D projects with the risks of a large pharma company, and the idiosyncratic risk of pharmas with the systematic risk, or portfolio risk if you prefer, faced by a potential investor in pharmaceutical companies.

Your point about general portfolio diversification from an investment perspective doesn't make sense if you substantially lower the pharma profits.

The point I was, and have been, addressing, is that pharma is some delicate abnormally high-risk undertaking that we dare not breathe on lest it collapse. The companies aren't that risky as investments. Do they become worse investments if their profits drop? Of course they do. But that is a far cry from an argument that no change whatsoever can be made without sacrificing the entire pharmaceutical R&D establishment.

Besides, even your view of the idiosyncratic risk is exaggerated. Yes, development is chancy, chancier than many other companies' product development activities. But most other companies do not enjoy the combination of patent protection and products with demand that does not become elastic until prices get very high. That goes a long way towards offsetting the development risks.

[Steve]

The pharmaceutical companies I'm familiar with all pay a substantial cash dividend to shareholders. That's cash that could be funneled into profitable research projects - were it the company's judgment that profitable research opportunities are available. Obviously their judgment is that they're already doing all the research they ought to be doing.

[Steve]

PAYGO is basically a backdoor way to raise tax rates. Democrats should be at least be honest enough to call it what it is.

And Republicans should be honest enough to admit that a tax increase is necessary, and that Bush is flatly lying when he says we can cut the deficit in half by 2009 AND make the tax cuts permanent. Well, I shouldn't go that far. Maybe he just got bad intelligence from the budget director.

The fault lies with those who irresponsibly cut taxes during a "time of war," not with those who are compelled to unwind the tax cuts in order to clean up the mess.

It's all well and good to talk about "spending discipline," but it's unclear what cuts in spending could be implemented that would result in a significant decline in outlays. The conservative blogosphere seems to be fascinated with "earmark reform," a fine idea, but please. It's a drop in the bucket.

By far the largest component of our budget is military and defense-related spending, the sort of thing we're not allowed to cut unless we want to fight the terrorists with spitballs, I'm given to understand. So what else should be cut? The Department of Education (I hear this one a lot)? Gee, at least Republicans should have the "honesty" to campaign on that platform.

[Tim]

The number I've heard thrown around is about .5 billion dollars to fully develop a new drug. How many drugs actually smoke this much development money and then don't make it? If the answer is almost of them then Sebastien might have a point. If the losers get killed earlier in the development process then he doesn't.

Riskier than other industries? A refinery can cost upwards of $4 billion and take 5 years to build. If it's a radical new design you can count on $50-100 million in development and pilot plant costs. And then you need full demand for 10-15 years to pay the thing off. Pharmaceuticals only look risky if you're comparing them to defense contractors.

[hilzoy]

I'd go further than Steve. Yes, the PAYGO rules are at least a mechanism for preventing the Bush tax cuts from being made permanent. However, the fact that the Democrats are willing to embrace them anyways shows, in my book, that they actually care about the good of the country.

No politician likes raising taxes. And contrary to conservative mythology, liberals are no exception. The willingness to raise taxes when it's necessary is a sign of having some principles. Talking about the need to make the tax cuts permanent at a time when deficits are exploding, while pretending to be serious about fiscal discipline, is a sign of having none.

[Sebastian Holsclaw]

"The pharmaceutical companies I'm familiar with all pay a substantial cash dividend to shareholders."

Arghhh. See risky companies must have better returns than safe companies or you wouldn't invest in them. Heaven knows their share prices aren't typcially skyrocketing.

"The VA is part of the government, and yet no one's business has been burned to the ground in aid of the VA, right?"

I've already answered that question. The VA is a miniscule portion of the health care world. Medicare is not. The VA also has a very restrictive formulary. Medicare does not.

[cleek]

Medicare does not.

but it could.

[Jesurgislac]

Arghhh. See risky companies must have better returns than safe companies or you wouldn't invest in them. Heaven knows their share prices aren't typcially skyrocketing.

"At Pharma's price peak in November 2000, its price/earnings ratio was a whopping 45, double the level for the stock market as a whole. This attested to the premium that investors were willing to pay for a share in this sector. But the current level is just 18, close to broad stock market levels. In other words, the sector has lost virtually all of its premium rating in the last four years." cite, 2005

You do seem to be grossly overstating claims that are only doubtfully true, Sebastian, which suggests to me that your argument is based, not on facts verified by neutral sources, but on the campaigning material produced by the pharmaceutical industry itself.

[Sebastian Holsclaw]

"A refinery can cost upwards of $4 billion and take 5 years to build. If it's a radical new design you can count on $50-100 million in development and pilot plant costs. And then you need full demand for 10-15 years to pay the thing off. Pharmaceuticals only look risky if you're comparing them to defense contractors."

Time required to build and time to pay off are not particularly good indicators of risk. Many not particularly risky companies have long term debt. What can make refineries a risky development is the capriciousness of last-minute environmental objections. Furthermore, despite the demand for new refineries in the past 20 years there haven't been many new ones built have there? Is that what you want for pharma?

"The number I've heard thrown around is about .5 billion dollars to fully develop a new drug. How many drugs actually smoke this much development money and then don't make it? If the answer is almost of them then Sebastien might have a point. If the losers get killed earlier in the development process then he doesn't."

You are misinterpreting the statistic. That number includes the losers.

[Sebastian Holsclaw]

"Medicare does not.

but it could."

Ha!

[john miller]

" Medicare does not."

I question that. I do not have the facts re VA's formulary, so I will not dispute your claim.

However, Medicare doesn't even have a formulary under the current prescription plan. Each insurance company has its own formulary. And I can tell you, after investigating for my mother-in-law, they vary widely.

Some have a totally open formulary, meaning they will cover every prescription drug out there, but the co-pays avry between drugs.

Some have no coverage at all for various drugs.

Not to argue your premises about pharma as a whole, but it should be mentioned that not only could Medicare, but through the insurance companies, it already does.

[Sebastian Holsclaw]

"At Pharma's price peak in November 2000, its price/earnings ratio was a whopping 45, double the level for the stock market as a whole. This attested to the premium that investors were willing to pay for a share in this sector. But the current level is just 18, close to broad stock market levels. In other words, the sector has lost virtually all of its premium rating in the last four years."

Did you note that came up in the context of dividends? Generally speaking in pharma stocks the very large companies offer good dividends and the smaller ones are hoping for large jumps in price. You can get higher than average returns by having large dividends or by having a large price increase, or both. In the very lucky years for big pharma they have had both. The stock prices of most of the big ones have cratered in recent years (highlighting my point about volitility.)

And BTW, in the past three years very few of the large pharma companies have been outperforming the SP500 in terms of total return. Strange for companies that are raping the consumer and ripping off the world, no? I'll respond to your "Public Citizen" report when I get home--but even on my first pass I see some methodological issues that make me very skeptical of it. (Quick preview, counting the existance of even a single cite to a paper with government funding in the development of a drug is a really bad way of measuring contribution. In fact I'm completely shocked that under that methodology they still only get it to the 60% range. I would have guessed you could push it into the 90s under that methodology. I'm also skeptical about their counting of research costs since it doesn't seem to count the cost of acquisition of research from smaller companies--that research has to be paid for somewhere at some point.)

[Sebastian Holsclaw]

"I question that. I do not have the facts re VA's formulary, so I will not dispute your claim."

There is a government study from around 2001 or 2002 about the VA formulary (note this is before the recent Medicare drug benefit). I can't find it right this second, but it basically said that the formulary was somewhat more restrictive than Medicare and somewhat more restrictive than most insurance companies. They found that in general this shouldn't conflict with medical needs (though if it is more restrictive than most insurance I would prefer not to hear the VA solution from the same people who think that insurance companies are too restrictive--and this comment isn't directed at you john, or anyone in particular). As such it avoided the label "overly restrictive".

"Not to argue your premises about pharma as a whole, but it should be mentioned that not only could Medicare, but through the insurance companies, it already does."

But it doesn't. There are insurance companies through Medicare with unrestricted formularies.

BTW, I think that formularies are an ugly area of medical coverage issues--I'm certainly open to the idea that they aren't well handled at the moment. But they just highlight the fact that US consumers want all the best without the price. Changing that to single payer or nationalized health isn't going to change the fact that health consumers hate paying the trade-offs.

[Steve]

First of all, I think I was very clear about the reason for bringing up the dividends paid by pharmaceutical companies. The reason was not "these companies have a lot of extra cash, so we can rape them." The reason was "these companies have a lot of extra cash, proving that they're not passing up profitable research opportunities (because if such extra opportunities existed, the extra cash would be spent on them).

What we are seeking, by asking that Medicare be empowered to negotiate, is that the pharmaceutical companies should not be granted a special exemption from the free-market principles that require every other company to negotiate prices with its customers. The burden is not on us to show that pharmaceutical companies are making obscene profits. The burden is on the pharmaceuticals to show the harm that would result if their exemption from free-market principles were taken away. They'll still have the benefit of government-funded research that goes well beyond what many other market sectors enjoy.

And all you do, Sebastian, is keep repeating the principle that pharmaceuticals need to show higher profit margins than other companies, without showing the actual effect that empowering Medicare to negotiate would have. Your argument is simply "this would make profit margins go down, and that's a bad thing." Without showing how much they would go down, or that they would go down to the point where the public good is harmed, that argument means nothing.

[Sebastian Holsclaw]

"The reason was "these companies have a lot of extra cash, proving that they're not passing up profitable research opportunities (because if such extra opportunities existed, the extra cash would be spent on them)."

They are paying their investors because people long invest in companies that have both declining stock prices and ever-lower dividends.

"What we are seeking, by asking that Medicare be empowered to negotiate, is that the pharmaceutical companies should not be granted a special exemption from the free-market principles that require every other company to negotiate prices with its customers."

The companies negotiate with the insurance companies who administer the plan. I'm not asking for a special exemption.

[Sebastian Holsclaw]

That's "don't long invest"

[Steve]

If you don't have a problem with the companies negotiating with Medicare the same way they negotiate with other insurers, I don't understand what we're arguing about.

[kenB]

I hear this idea tossed around a lot, but I don't understand exactly how it relates to the current setup. Is the idea that the HMOs would simply no longer be involved in the part D coverage?

[Francis]

Let's see if I've got this pharma thing correct.

1. Pharma is a tremendously risky business, as compared to other Fortune 500 companies. (counter-arg: film, video game mfrs. Also, big pharma has multiple revenue pipelines, so risk not so disproportionate.)

2. As a risky business, pharma has a harder time attracting capital, and its patent rights are more important than patents for other companies. (counter-arg: stock price is actually a reflection of future profitability. Pharma's cost of capital is comparable to other industries. Pharma does not issue stock to pay for cost of developing new meds. As for IP issues, see film, music industries, esp. in 3rd world and China.)

3. Big Pharma generates a unique social good. (counter-arg: none.)

4. The only way for Big Pharma to continue generating the unique social good is for the US taxpayer, via medicare and medicaid tax dollars, (and, currently, US citizens with health insurance) to pay drug prices that are disproportionate to the rest of the planet.

Counter-arg: There are any number of ways to lower the cost of drugs without killing the golden goose of new drug creation.

1. Reform the FDA so that drugs are disapproved only on safety grounds. Let the marketplace determine effectiveness.

2. Increase direct subsidy of drug development.

3. There's ample evidence that there's a lot of "fat" in drug companies' budgets. Reduced income from the American taxpayer won't necessarily reduce the number of drugs coming to market.

4. Shorten the patent term so that drug companies have to work harder in getting new patentable drugs online. Eliminate patent protection for 'me-too' drugs unless there's evidence that the drug has reduced / different side effects.

5. Having the US taxpayer (and the US insured) negotiate for prices will only mean that prices will rise in the rest of the West which is currently free-riding on american subsidies.

i'm no specialist in this area. but it seems to me that the issue of profits made by drug companies is conceptually distinct from the issue of the societal good of new drug development. As a society, we shouldn't care at all about the stock price or p/e ratios of drug companies. we should care only that the patent system and the health care system are designed to maximize the number of new drugs developed. there seems to be a lot of evidence (including a raft of complaints that there aren't enough new drugs in the FDA pipeline) that this society has NOT structured the incentives correctly.

[Sebastian Holsclaw]

"The only way for Big Pharma to continue generating the unique social good is for the US taxpayer, via medicare and medicaid tax dollars, (and, currently, US citizens with health insurance) to pay drug prices that are disproportionate to the rest of the planet."

Do you mean the rest of the planet EXCLUDING all other US payers? True, we could cut off the free riding of other countries by cutting down on research, but I'm not convinced that is a fabulous solution. We could also try to get them to pay the research costs in prices--through patent negotiations--and we are in fact trying to do so. But ultimately I would rather have lots of new drugs with the US letting other people free ride than no free riding but many fewer drugs. Think of it as "doing our part" for the international community.

"As a society, we shouldn't care at all about the stock price or p/e ratios of drug companies. we should care only that the patent system and the health care system are designed to maximize the number of new drugs developed. there seems to be a lot of evidence (including a raft of complaints that there aren't enough new drugs in the FDA pipeline) that this society has NOT structured the incentives correctly."

I agree and disagree. If you can come up with a system that regularly gets more pharma drugs out, I'd be happy to look at it. If it involves a government takeover of much of the research, I would like you to try it out in another country for a decade or so first (and when comparing you need to exclude sales in the US to get a good understanding of what is actually driving things). I don't think subsidies tend to end up in the right places lots of the time, I would rather trust market knowledge and let the government subsidize only clear market failure areas (vaccines in many cases as an example). Government subsidies tend to lock in outdated priorities.

In a very broad view, I suspect that the general societal utility would be better served by decreasing general litigation exposure for risks below a certain statistical threshold so long as they are openly disclosed. I wouldn't mind shortening patent periods if the FDA approval process were streamlined to a comparable time frame.

[Charles Bird]

And the problem with that is exactly what?

Nothing, really, john. Just saying that PAYGO could stand a little truth in advertising. BTW, I've been against cutting tax rates for $200,000-plus bracket for quite awhile, not that many conservatives are with me on this.

[cleek]

Think of it as "doing our part" for the international community.

many Big Pharma companies are not US-owned. why should we subsidize those companies, too ?

[matttbastard]

Charles:

I've been against cutting tax rates for $200,000-plus bracket for quite awhile, not that many conservatives are with me on this.

Would you mind explaining in a bit more detail why you're against the slashing of upper-income tax rates? As you've alluded, it's not a position typical of most conservatives in the US (or most anywhere, for that matter:P)

[Sebastian Holsclaw]

"many Big Pharma companies are not US-owned. why should we subsidize those companies, too ?"

We are subsidizing the pharma research. It is the profit potential of the US market that other countries are free riding off of. It doesn't matter which company makes the money, it is the research that is important. We are doing our part by providing the incentive for the research.

[cleek]

It is the profit potential of the US market that other countries are free riding off of. It doesn't matter which company makes the money, it is the research that is important.

Sebastian, would it be fair to summarize your position as "the current pharmaceutical production and distribution system is great. any change is unwelcome. don't bother proposing anything, i don't wanna hear it" ?

you don't want to change who pays, how they pay, or who comes up with what is paid for. it's all great as-is ?

[Francis]

SH: But ultimately I would rather have lots of new drugs with the US letting other people free ride than no free riding but many fewer drugs.

so you're willing to raise taxes to pay for Medicare with Part D?

[Sebastian Holsclaw]

"so you're willing to raise taxes to pay for Medicare with Part D?"

If we are going to have a Medicare D of course we should raise taxes to pay for it.

[CharleyCarp]

BTW, I've been against cutting tax rates for $200,000-plus bracket for quite awhile, not that many conservatives are with me on this.

A great subject for a post, here and on RedState. Both because it's an interesting topic to explore, and because it'll be a good test for the pre-conceived notions of your readers, both hateful and appreciative.

I'd ask, though, that you omit the obligatory 'Dems are sh*theads' line, just to further confuse.

[Kaethe]

We are subsidizing the pharma research

Exactly. We are subsidizing them directly by funding basic research at universities throughout the nation. We subsidize them indirectly by permitting them to charge whatever the hell they can get away with. The only reason their profitability has been down these past six years, is relative: those subsidized oil companies have been making world-record setting profits. Previously it was the pharmaceuticals companies who were the most profitable companies.

[dutchmarbel]

I thought Sebastian would do a seperate post on the pharma-research-profit item?