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By Thomas Sowell
Hoover Institution PressCopyright © 2002 Thomas Sowell
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DRUGS AND POLITICS
A tourist in New York's Greenwich Village had his portrait sketched by a sidewalk artist, who charged him $100.
"That's expensive," the tourist said. "But it's a great sketch, so I'll pay it. But, really, it took you only five minutes."
"Twenty years and five minutes," the artist replied.
The same misconception of costs runs through the much more serious issue of the prices of medicine and government regulation of those prices. When a pill whose ingredients cost a quarter is sold for two dollars, that is an open invitation to demagogues to begin loudly denouncing the pharmaceutical drug company's "obscene" and "unconscionable" profits at the expense of the sick. But the people who are doing this are counting only the five minutes and ignoring the twenty years.
The physical ingredients of the medicine are its cheapest ingredients. The ingredient that costs millions of dollars — sometimes hundreds of millions — is the knowledge gained from years of research, and trial and error, which finally results in the creation of a new medicine. That is what the price of the pills has to cover, if we expect investors to continue to pour vast sums of money into drug companies that are trying to discover new cures for such diseases as cancer, AIDS and Alzheimer's.
Other companies, manufacturing generic equivalents, pay only the costs of the physical ingredients, having copied the enormously expensive formula free of charge — legitimately after the patent has expired and not so legitimately in other countries, where patent laws are not taken as seriously as in the United States. The company that simply uses someone else's formula free of charge can sell the same pill for 35 cents and still make a profit.
Somebody has to pay the high costs of discovery or the development of new drugs will be slower and therefore more people will needlessly suffer and die. While allowing patent laws to be over-ridden by politicians allows some people to buy the drug at low prices, based on the low current costs of manufacturing the medicine, that just leaves the far greater overhead costs of creating these medicines to be paid by others.
Worst of all, it leaves the even higher costs of needless pain, suffering and premature death to be paid by those whose relief is delayed for years by policies like these, which slow down the development of new medicines to cure their afflictions.
The United States has been one of the few countries resisting political pressures to impose price controls on pharmaceutical drugs, or to water down the patent laws which allow the original discoverer of new drugs to have a monopoly for a fixed number of years, so as to recover the costs of discovery before other companies get to use their formula free of charge.
The United States also produces a wholly disproportionate share of all the new life-saving drugs in the world. But politicians ignore this connection. Other countries have scientists capable of developing new medicines, but the economics and politics of the situation discourage companies in those countries from making the huge investments made by American pharmaceutical companies under American patent law.
Unfortunately, the Bush administration has recently begun to cave in to the demagogues at home and abroad. After Congressional liberals like Ted Kennedy, Henry Waxman, and Charles Schumer began making noises about a need to get the drug Cipro cheaper because of the anthrax scare, the administration threatened to over-ride the patent for the drug unless the manufacturer supplied it at a cheaper rate.
The retail price of Cipro was $5 a pill and the government itself says that someone stricken with anthrax needs to take two pills a day for five days and cheaper antibiotics thereafter. Is $50 too much to pay to save your life? And is it worth jeopardizing a whole system that has made this country the leading creator of life-saving drugs, just to get the demagogues off the Bush administration's back politically?
The administration also caved at a recent international conference in Qatar, where foreign countries gained the right to set aside international patent agreements whenever they choose to decree a public health "emergency." This allows them a free ride on costly American research, at least until they kill the goose that lays the golden egg — new life-saving medicines in this case.CHAPTER 2
THE REAL REVOLUTIONARIES
The twentieth century was, among other things, a century of revolutions — not only bloody uprisings and military coups, but also revolutions in science, politics and in the way people live. However, as much as the political left loves to use words like "change" and "revolution" as if they had a monopoly or a copyright on them, the actual track record of the left pales in comparison with the social revolutions created by the free market.
No government of the left has done as much for the poor as capitalism has. Even when it comes to the redistribution of income, the left talks the talk but the free market walks the walk.
What do the poor most need? They need to stop being poor. And how can that be done, on a mass scale, except by an economy that creates vastly more wealth? Yet the political left has long had a remarkable lack of interest in how wealth is created. As far as they are concerned, wealth exists somehow and the only interesting question is how to redistribute it.
The history of the American economy in the twentieth century was an incredible story of the luxuries of the rich becoming commonplace among the masses and even the poor. When liberal and radical intellectuals speak of a period of "change," they almost never mention the 1920s, because it was not an era of the kinds of political changes they favor. But it was a pivotal decade of change in the material well-being and expansion of the horizons of most Americans, including the poor.
It was during the 1920s that electricity, the automobile and radio reached the masses, when motion pictures came of age and began to talk. While technology and mass production spearheaded the changes of the 1920s, this was also a decade that saw a revolution in more efficient distribution systems through grocery and department store chains that brought the cost of many goods and services down within the reach of ordinary Americans.
All this added up to a social revolution — but it was not "change" as defined by the intelligentsia, because it happened independently of them and of the government, and was not part of any master plan or ideological crusade.
As late as 1930, most American homes did not have a refrigerator but, by the end of the decade, most did. By 1970, virtually all families living in poverty had refrigerators. By 1994, most American households below the poverty line had a microwave oven and a videocassette recorder — things that less than one percent of all American households had in 1971.
All of this went into raising the standard of living of the average American. It was not political rhetoric, mass rallies or poses of moral indignation that gave the people a better life. It was capitalism.
Even in the homeland of socialism, the Soviet Union, it was capitalists who created much of the industrialization for which the Communists took credit. The first new automobile factory built under the Communists was built by the Ford Motor Company. Germany's Krupp and I. G. Farben were also key builders of Soviet industry, along with DuPont, RCA, International Harvester and others from the capitalist world.
Even when it comes to the redistribution of wealth that is at the heart of the ideology of the left, the market does it better. Most American millionaires did not inherit their wealth, but created it themselves. As for the poor, imagine anyone so radical as to promise to move the bottom 20 percent of Americans out of that bracket within a decade and put more of them up in the top 20 percent than were left back where they were originally.
Yet this happens regularly and with no fanfare in the American economy. But even a big change in the distribution of income like this does not count with those who talk about income brackets and ignore the actual flesh-and-blood people who move in and out of those brackets. Most people who were in the bottom 20 percent in 1975 were in the top 20 percent at some point before 1992.
The poor will always be with us, so long as they are defined as the bottom 20 percent, even if yesterday's bottom 20 percent are now among "the rich," as such terms are defined by those with a stereotyped vision of a static world.
Dynamic income changes among people are concealed by talking about brackets, as if the same people stayed in those brackets. The left cannot accept the kind of income redistribution that does not fit their vision. These and other benefits of a free market will certainly never be called a "public service."CHAPTER 3
There are few things more heartwarming than watching people rise out of poverty to a better life. When it is a whole nation in the process of doing so, it is especially inspiring. That is the theme of a marvelous new book titled India Unbound by Indian hi-tech entrepreneur Gurcharan Das.
In a well-blended combination of facts, history and personal experiences, the author spells out how and why India took so long after achieving independence from Britain in 1947 before its economy began to improve dramatically after the 1991 reforms that allowed more of a free market to operate. That was a decisive turning point, with businesses no longer being suffocated by some of the most pervasive and intrusive government controls in the world.
Before the reforms, Indian entrepreneurs could not make the most basic decisions about their own businesses without permission from an army of government bureaucrats. Decisions about hiring, firing (virtually impossible), expanding output or ordering raw material were all subject to the whims, the delays and the extortions of bribes by petty officials who knew little and cared less about the realities of business.
The Indian entrepreneur "has to bribe from twenty to forty functionaries if he is serious about doing business." Moreover, he must "grovel" before these petty tyrants who have been armed with the power to say "yea" or "nay" to a sweeping range of business plans. Even some of India's biggest and most distinguished enterprises, the Tata industries, had more than a hundred proposals to start new businesses or expand old ones end up "in the wastebaskets of the bureaucrats."
Another great Indian industrial empire, that of the Birla family, was likewise refused the government permissions needed to expand. The net result was that they bought pulp in Canada, had it converted to fiber in Thailand, had the fiber converted to yarn in Indonesia and then had the yarn made into carpets in Belgium. All the while, India remained a very poor country in need of economic growth and the jobs and incomes that these operations could have provided.
At one time, it was a violation of the law to produce more output than you were authorized to produce by the government. A manufacturer of cold medicines was fearful that his sales had overshot the mark during a flu epidemic and had to have a lawyer spend months preparing a legal defense, in case he was hauled before a government commission.
Gurcharan Das is careful to point out that these and many other economically disastrous policies grew out of good intentions. Indian leaders from Jawaharlal Nehru to his daughter Indira Gandhi put their faith in the government-planned economy and distrusted both businesses and the consuming public. What they lacked in any serious knowledge of business or markets they made up in socialist dogma and smug self-righteousness.
When the head of the Tata industries tried to explain some facts of life to Nehru, the prime minister's response was: "Never talk to me about profit, Jeh, it is a dirty word."
Though the Indian statist leaders thought of themselves as looking out for the poor, their policies have been estimated to have held back economic development to the point where the average Indian's income would have been hundreds of dollars a year greater without their restrictions. In a country with millions of very poor people, some suffering from malnutrition, the loss of a few hundred dollars in annual income meant far more than it would have meant to the average American.
Like so many socialistic policies around the world, those in India were not relaxed or ended because of better understanding but because of bitter experience. When these policies had the Indian government on the verge of bankruptcy, its leaders had no choice but to make fundamental changes in the economy, in order to qualify for help from the International Monetary Fund and the World Bank.
After the 1991 reforms freed Indian entrepreneurs from suffocating government controls, the economy took off. Growth rates reached new heights, Indian businesses expanded and foreign investments poured in. The kind of hi-tech success that Indians had achieved in Silicon Valley they now began to achieve in India.
Although this is a book about India, many of its lessons are universal — and have not yet been learned by American political, intellectual and media elites.CHAPTER 4
CAPITAL GAINS AND "TRICKLE DOWN"
Among the suggestions being made for getting the American economy moving up again is a reduction in the capital gains tax. But any such suggestion makes people on the left go ballistic. It is "trickle-down" economics, they cry.
Liberals claim that those who favor tax cuts and a free market want to help the rich first, hoping that the benefits they receive will eventually trickle down to the masses of ordinary people. But there has never been any school of economists who believed in a trickle-down theory. No such theory can be found in even the most voluminous and learned books on the history of economics. It is a straw man.
This straw man is not confined to the United States. A critic of India's change from a government-dominated economy to more free market activity in the 1990s accused those behind this change of having "blind faith in the 'trickle-down' theory of distributing the benefits of economic growth among different socio-economic groups in the country." But free-market economics is not about "distributing" anything to anybody. It is about letting people earn whatever they can from voluntary transactions with other people.
Those who imagine that profits first benefit business owners — and that benefits only belatedly trickle down to workers — have the sequence completely backwards. When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens. Money goes out first to pay expenses and then comes back as profits later — if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.
Even with successful businesses, years can elapse between the initial investment and the return of earnings. From the time when an oil company begins spending money to explore for petroleum to the time when the first gasoline resulting from that exploration comes out of a pump at a filling station, a decade may have passed. In the meantime, all sorts of employees have been paid — geologists, engineers, refinery workers, truck drivers.
Nor is the oil industry unique. No one who begins publishing a newspaper expects to break even — much less make a profit — during the first year or two. But reporters and other members of the newspaper staff expect to be paid every payday, even while the paper shows only red ink on the bottom line.
In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a "trickle-down" theory. As for capital gains, some countries don't tax capital gains at all. They tax a business' earnings, but not capital gains, which are harder to define and sometimes illusory.
The real effect of a reduction in the capital gains tax rate is that it opens the prospect — only the prospect — of greater future net profits. But that is enough to provide incentives for making current investments. Reductions in the capital gains tax rate tend to draw money out of tax shelters like municipal bonds and into creating jobs and productive capacity. That's the point!
As with all taxes, a distinction must be made between tax rates and tax revenues. Tax revenues went up while tax rates went down in the 1980s. Similarly in the 1960s and the 1920s. That is because incomes rose more than tax rates fell. But still it will be claimed that we cannot "afford" to cut tax rates because it would create deficits. Spending creates deficits — and it is big spenders who fight hardest against cutting tax rates.
It is not faith but empirical evidence that is overwhelming on the actual track record of tax cuts and free markets. By the 1980s, this mounting evidence convinced even left-wing governments in various parts of the world to cut back government operations and sell government-owned enterprises to private industry. Faith had nothing to do with it.
Excerpted from Controversial Essays by Thomas Sowell. Copyright © 2002 Thomas Sowell. Excerpted by permission of Hoover Institution Press.
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Table of Contents
PART I: ECONOMIC ISSUES,
PART II: RACIAL ISSUES,
PART III: POLITICAL ISSUES,
PART IV: EDUCATIONAL ISSUES,
PART V: LEGAL ISSUES,
PART VI: SOCIAL ISSUES,
PART VII: RANDOM THOUGHTS,