Archives: 01/2018

The Return of Drug Reimportation?

In his State of the Union address last night, President Trump said that one of his “greatest priorities” is to reduce the price of prescription drugs. “In many other countries,” he said, “these drugs cost far less than what we pay in the United States.” Alluding thus to the “drug reimportation” issue, he added that he had directed his administration “to make fixing the injustice of high drug prices one of our top priorities. Prices will come down.” That won’t be easy.

Back in 2004, when Congress took up the idea of lifting the ban in place on importing lower-priced drugs from abroad, I wrote a long, complex Cato Policy Analysis on the issues at stake, urging, as the subtitle said, “The Free Market Solution.” Unfortunately, three years later, when the Senate finally acted, the bill was anything but a free market solution. In fact, it amounted to importing foreign price controls, as I explained in a piece in the Wall Street Journal. Fortunately, the bill died, but in the face of state efforts along the same lines in 2013, I wrote this time at Cato@Liberty, explaining why the “simple” solution of lifting the ban would not work. Drawing from that post, here’s why, in a nutshell. (See the Policy Analysis for the complex details.)

Given the Food and Drug Administration’s safety and efficacy standards, it takes 12 to 15 years and upwards of a billion dollars to bring a new drug to market, but only pennies a pill to manufacture it thereafter. Obviously, drug companies need strong patent protection or they’d never undertake that research and development.

But when they go to market a new drug, they find a relatively free market only in America. Everywhere else they face socialized medical systems and strict price controls, so they segment markets and price their drugs differentially, garnering such profits as they can from each market. Naturally, therefore, they have to guard against “parallel markets”—vendors in low-price markets reselling the drugs (at a profit) in high-price markets, especially when supply limitations and no-resale contracts are legally suspect. That’s where the reimportation ban comes in. If low-price drugs sold abroad flood the American market, displacing higher-priced domestic drugs, there go the profits—and there goes the R&D needed to discover new drugs.

Naturally, Americans resent having to subsidize the rest of the world, in effect, which is why letting them import cheap drugs from abroad plays so well politically. But we’re faced here with a Hobson’s Choice—which I’ve only sketched in this post. As I said, it’s a complex issue, involving treaty arrangements, patent law, and much more, rooted ultimately in the socialized medical systems we find abroad, toward which, alas, we ourselves are moving. In fact, the ultimate aim of many of the reimportation proponents is to have the federal government subsidize, if not do, the R&D needed to bring new drugs on line. Talk about bad medicine.

Berkeley Advances Junk Science in the Name of Consumer Protection

Residents of Berkeley, California are a little bit scared about potential radio-frequency exposure from cellphones. Despite the FCC’s conclusion that there’s “no scientific evidence” linking “wireless device use and cancer or other illnesses,” the city mandated that any party buying or leasing cellphones communicate a specific message to every customer about radio-frequency exposure. Getting bad vibes from that requirement, CTIA (the wireless industry’s trade group) sued Berkeley for violating the First Amendment by compelling that speech.

It’s a cornerstone of First Amendment law that the right to speak necessarily entails the right to remain silent. This principle ensures the freedom of conscience and prevents citizens from being conscripted to serve as unwilling bullhorns for government communications. Likewise, it is a bedrock principle of First Amendment law—recently affirmed by the Supreme Court—that content-based restrictions of speech must survive the strictest scrutiny to pass constitutional muster.

Unfortunately, these rules don’t apply with the same force to regulations of “commercial speech,” which the Supreme Court has ruled need not meet the same rigorous standards of review as other types of speech. In a 1985 case called Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, the Court went further and created an additional narrow exception. Zauderer allowed courts to apply less rigorous scrutiny when analyzing the constitutionality of disclosures of “purely factual and uncontroversial information” when mandated in an effort to combat misleading commercial speech. The Zauderer standard also requires that any disclosures not be “unduly burdensome” and be “reasonably related to the State’s interest in preventing deception of consumers.”  

In ruling against CTIA, the U.S. Court of Appeals for the Ninth Circuit further eroded that already lax standard of judicial review. Instead of requiring Berkeley to show a need to combat consumer deception – and how the mandated disclosure provision alleviates that need – the Ninth Circuit skipped right over Zauderer to find that compelling speech content posed no constitutional issues because mandated disclosures need only be reasonably related to “non-trivial” government purposes. This dangerous dilution would allow government entities to compel a nearly unending amount of speech on any number of controversial topics, even if the compelled script was itself misleading.  

CTIA is now petitioning the Supreme Court to review that flawed decision. The Cato Institute, joined by the Competitive Enterprise Institute and Cause of Action Institute, has filed an amicus brief supporting that petition.

This important area of law desperately needs clarification, particularly at a time when compelled-disclosure regimes have proliferated and some courts have distorted the already insufficient Zauderer standard beyond recognition. To remain faithful to the First Amendment and the Court’s jurisprudence on compelled speech and content-based speech regulations, courts should apply strict scrutiny – meaning the government needs a really good reason and can’t achieve its goal any other way – to review laws that force market participants to disparage their own products and participate in policy debates they wish to avoid.

The Supreme Court will decide whether to take up CTIA v. City of Berkeley later this winter or spring.

Who Should Pay for Infrastructure?

A new study by Canadian scholars says that the users of infrastructure should pay for it generally, not taxpayers. Cato’s Peter Van Doren lauded the study by distinguished fiscal experts Richard Bird and Enid Slack, and dropped it on my chair.

Here are some highlights:

As Adam Smith (1776) said long ago, local public works such as roads and bridges should be financed and managed by the appropriate local government and paid for by those who use them. … [A]lthough there are some reasons for higher level governments to provide some local infrastructure projects, Smith was broadly right. No matter how infrastructure is financed, there is no free lunch. In the end, the bill must be paid either by user charges or by taxing someone and, whenever feasible, user charges are better.

… People should pay directly for many services provided by the public sector, particularly such congestible services as roads or water and sewerage provided to easily identifiable users.

One reason is simply because services that users pay for do not need to be paid from distorting taxes that reduce economic welfare.

Another reason is because when user charges for services fully cover the marginal social cost of providing them people buy such services only up to the point at which the value they receive from the last unit they consume is just equal to the price they pay, so that resources are more efficiently allocated.

Moreover, providers who are financed by full cost pricing have incentives to adopt the most efficient and effective ways of providing the service and to supply it only up to the level and quality that people are willing to pay for.

In addition, when services are financed fully by user charges, political decision makers can more readily assess the performance of service managers – and citizens can do the same with respect to the performance of politicians.

While user pays should be the general approach, the scholars go on to discuss some of the practical and political hurdles.

All in all, the paper is a nice introduction to the economics of public infrastructure, and is directly applicable to the current infrastructure debate in the United States.

For more on infrastructure, see www.downsizinggovernment.org/infrastructure-investment.

  

America Is One of the Least “Generous” Countries on Immigration

During his State of the Union speech, President Trump will tout his plan for draconian restrictions on legal immigrants. Supporters, like House Judiciary Committee Chairman Bob Goodlatte (R-VA), justify the plan by claiming that America is “by far the most generous nation in the world for legal immigration.” Not only is “by far” clearly false, but when you consider its wealth, America is already among the least generous to immigrants around the world.

The United States ranks in the bottom third of wealthy countries in terms of net new immigration as a share of total population from 2015 to 2017 as well as total foreign-born residents as a share of total population, according to figures  from the United Nations. Trump’s plan would make America even more closed than it already is.

The United Nations data contains information on the foreign-born populations in all countries (or semi-independent provinces) around the world.* U.S. immigration is decidedly unimpressive compared to all countries. Although America does have the highest total number of foreign-born residents in the world, a fair comparison requires controlling for the size of its current population. After all, a million new people entering India with a population of 1.3 billion would have very different effects than a million new people entering Estonia with a population of 1.3 million.

With this in mind, it is clear that America is nowhere near “the most generous country in the world” on immigration. Of the 232 jurisdictions that the UN includes, America ranks just 64th overall. Focusing on the rate of new immigrants as a share of total population, the United States had only the 49th highest net immigration rate from 2015 to 2017 (inflows minus outflows of foreign residents divided by total population). This places the United States rank in the 72nd and 79th percentiles in the world, respectively.

Ethanol Exploitation

The federal government imposes a mandate to blend corn ethanol and other biofuels into the nation’s gasoline. This “renewable fuel standard” or RFS raises prices at the gas pump. The “10% Ethanol” sticker you see when filling your tank signals that you are being economically exploited by the government in cahoots with corn farmers.

At Downsizing Government, Nicolas Loris discusses how the RFS raises fuel and food prices. The mandate also damages some energy businesses, as the Wall Street Journal is reporting:

Philadelphia Energy Solutions LLC affiliates accounting for more than one-quarter of the fuel-refining capacity on the East Coast filed for bankruptcy protection, blaming the steep cost of complying with a federal environmental regulation.

… The company cited the Clean Air Act’s renewable-fuel-standard program as the primary reason for its financial distress, saying it is a victim of “regulatory compliance costs that specifically penalize independent merchant refiners.” It also blamed adverse economics in the energy sector.

Independent refiners have long complained about the program, which was introduced during President George W. Bush’s administration to boost the amount of ethanol in the country’s gasoline supply. The Renewable Fuel Standard requires companies to either blend ethanol with the gasoline they produce or buy credits. Refiners that don’t purchase the credits have to pay penalties to the government.

The credits are awarded where ethanol and gasoline are blended, which for the most part means facilities owned by integrated oil companies like Chevron Corp. CVX -2.07% and Exxon Mobil Corp. XOM -1.11% and by large retail gas-station chains. The system disadvantages smaller refiners like Philadelphia Energy with few blending facilities.

If it wants to avoid fines, Philadelphia Energy has to purchase blending credits, exposing the company to an “unpredictable, escalating, and unintended compliance burden” that has cost it $832 million since operations began in September 2012, the company said in court papers. Philadelphia Energy said it paid $13 million to comply in 2012, with the figure rising to $231 million by 2016.

The first sentence says a “federal environmental regulation” is to blame. That is ironic because the ethanol mandate, the RFS, is anti-environmental in numerous ways.

Loris concludes that the RFS creates no net green benefit, imposes costs on motorists, harms businesses, and is a “bureaucratic nightmare.” In his State of the Union message tonight, President Trump will discuss his deregulatory successes. He should put RFS repeal on his agenda for 2018.

State Of The Economy

Bloomberg has a good piece on the US economy under President Trump. Headline takeaway: on almost all metrics, the economy has improved or remained largely unchanged since he took office.

From Q4 2016 to Q4 2017:

-       GDP grew by 2.5 percent, the fastest annual increase since Q4 2015, and higher than the post-recession average of 2.2 percent.

-       Real nonresidential investment increased by 6.3 percent, higher than the post-recession average of 4.8 percent and after falling in three of four quarters in 2016.

-       The unemployment rate fell from 4.7 to 4.1 percent, and is now its lowest since 2000.

-       The unemployment rate for black and African-American workers fell to 6.8 percent, the lowest rate in the 45 years of recorded statistics.

-       The 25-54 civilian labor force participation rate crept up from 81.4 percent to 81.9 percent.

-       Labor productivity grew by 1.5 percent, historically below the 2.1 percent post-war annual average, but above the post-crisis 1 percent average.

The only really disappointing indicators for the President have been:

-       A fall in real median weekly earnings (official statistics show a 1.1 percent increase to Q3 2017 but a large fall in Q4, such that there has now been a 1.1 percent decline overall)

-       A widening budget deficit to 3.4 percent of GDP.

(Note: Bloomberg also chalks up an increase in manufacturing jobs as a “win”, but which sectors jobs come in should not concern us in a free economy. Nor should the trade deficit, the outlook for which it reports is moving in the “wrong direction.”)

Expect the President to herald the economic performance in his State of the Union speech tonight then. And with good reason – there’s lots of positive economic news.

Critics will claim most of the above represent cyclical improvements unrelated to policy. But we know from history bad policy can seriously derail growth prospects (especially temporarily). Why else would so many economists have warned of the consequences of a Trump victory?

The Trump administration have avoided major mistakes. There’s good reason to think the President’s direct deregulatory efforts coupled with slowing new regulations to a halt has enhanced business certainty and the productive capacity of the economy. Fears of severe trade shocks have not (yet) materialized. And perhaps most importantly, the administration has recognized the key challenge moving forward: with the labor market nearing full employment, robust growth and higher wages will only come primarily from an enhanced sustainable growth rate driven by productivity improvements.

The tax reform package’s central features - the cut in the corporate tax rate to 21 percent and immediate expensing on equipment - were designed explicitly to enhance investment to achieve this. The cutting of marginal income tax rates for most should likewise both enhance labor supply while also encouraging human capital accumulation at the margin. While I have concerns about other elements of the package, infrastructure reform which speeds up or lower the cost of economic projects could have beneficial supply-side consequences too.

Sure, there are always economic and policy risks and long-term challenges, some of which are more serious than others. A NAFTA unwinding in 2018 could cause a negative supply-side shock. An immigration package which slashes legal migrant numbers could reduce GDP and blow a hole in the public finances. In the longer-term, it would probably reduce GDP per capita too, through dampening specialization and job matching. Faulty expectations about long-term growth and wealth effects from high net worth could lead to a negative adjustment if there are downward asset price movements. And the US’s public finances are still on an unsustainable path.

But all in all the President’s first year has a positive economic story. And whether you agree with their exact prescriptions, the administration’s focus on raising productivity is the right one.

2018: A Year Beginning with Turnover Questions at the FOMC

This year’s Federal Open Market Committee (FOMC), which meets for the first time this week, faces many unknowns, including new faces at the Fed. In fact, by year’s end, the Fed’s rate-setting body will have, at most, only two continuity voters — that is, members who voted during all of 2017 and will vote throughout 2018.

Only twice before in its history has the FOMC had so few continuity voters across two consecutive years: in 1987 and in 2007. On the first occasion, the Fed had to deal with a major stock market crash, while on the second it was confronted by the decline in the subprime market that heralded the 2008 Financial Crisis. These are only two data points to be sure, but the point is that a relatively inexperienced FOMC may find itself having to cope with situations that would pose a challenge even to the Fed’s most seasoned veterans.

Continuity FOMC Voters

This week’s FOMC meeting will be Janet Yellen’s last vote. Yellen will step down from the Federal Reserve Board on February 3, when her term as Chair expires, though she could have remained a Governor until 2024. Jerome “Jay” Powell, Yellen’s colleague on the Board, will succeed her, having been confirmed by the full Senate last Tuesday.