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Is McCain an "Instinctive Regulator"?

Virginia Postrel thinks so.

McCain is an instinctive regulator who considers business a base pursuit. It doesn't help that the senator's personal connections with commerce are largely limited to a highly protected local industry (distributing beer) and outright corruption (the Charles Keating scandal). And he's every bit as moralistic as Hillary Clinton, our would-be national nanny. His first response to something he doesn't like--particularly something commercial he doesn't like--is to ban it. The most extreme, and effective, case of this instinct was his holy war against ultimate fighting, a peculiar cause for a boxing fan and one McCain took up when he was still in his "conservative" stage.

[LvIP]

Connecticut Lawyer (mail):
McCain's comments about mixed martial arts were at the least ill-considered. I hope that he would have a different view now, especially since the sport has since then adopted rules and become licensed (just like boxing) in about 35 states, including Nevada, California and New Jersey.

As for Postrel's broader comments about McCain, she is surely right, but at the end of the day, those of us who favor freer and less regulated markets will fare better fighting those battles with a President McCain than with either of the Democratic alternatives.
3.13.2008 11:42am
Adam J:
Connecticut Lawyer- To me it's not an issue of whether the market is less regulated or more regulated, it's a matter of whether the regulations are smart and effectively deals with market failures.
McCain's regulation of ultimate fighting strikes me as quite scary, because doesn't appear to even motivated by paternalism or moralism (a very poor justification for regulation), but rather favoritism (a completely unacceptable justification for regulation).
3.13.2008 12:17pm
byomtov (mail):
Instinctive regulator? Doesn't look that way to me.

He joined Chuck Schumer to sponsor one bill allowing the re-importation of prescription drugs and another permitting wider sale of generic alternatives. All these measures were fiercely contested by the health care industry and, consequently, by Bush and the GOP leadership.

Why is this "regulation" rather than freeing up the pharmaceutical market? Because the drug companies and the Administration didn't like it?

On the environment, he sponsored with John Kerry a bill with Joe Lieberman imposing a cap-and-trade regime on carbon emissions.

Isn't this a reasonable market-based approach to dealing with an environmental externality?

He was also one of six Republicans to vote against drilling in the Arctic National Wildlife Refuge.

Regulatory? Or just deciding how the taxpayers' property is to be used? Why is it any more or less regulatory than permitting drilling? Does Postrel think the oil companies have an automatic right to drill anywhere, regardless of the wishes of the property's owner(s)?

McCain teamed with Carl Levin on bills closing down tax shelters

Why "regulatory?"


forbidding accounting firms from selling products to the firms they audited

OK. That's a regulation, but it seems sensible, unless you take the theological view that any rule is bad. Libertarians ned to grow up and maybe they'd be taken more seriously.

requiring businesses that gave out stock options as compensation to reveal the cost to their stockholders. These measures were bitterly opposed by big business and faced opposition not only from virtually the whole of the GOP but even from many Democrats as well.

Requiring honest accounting. What an awful thing. But business opposed it, so Postrel thinks it's bad.

McCain voted against the 2001 and 2003 Bush tax cuts.

What has this to do with regulation? Sounds like common sense.

In 2002, for instance, he was asked about the Bush administration's view, with regard to the Enron scandal, that "[t]he company had a duty to inform its shareholders and its employees about things that were going on inside the company. That's not a federal government responsibility." McCain thundered in response, "Well, Theodore Roosevelt would not agree with at least that rhetoric....We have had regulatory agencies always to curb the abuses or potential abuses of the capitalist system."

So McCain, apparently unlike Bush, thinks that the government has an obligation to enforce the laws, and Postrel thinks that makes him an "instinctive regulator?" What nonsense.

Yes. I skipped some items that clearly are regulatory, but surely the issue is whether they make sense. The "regulation bad" religion is pretty silly.
3.13.2008 12:18pm
TRex (mail):
McCain's concept of free markets (and honor) became clear during his staged shopping trip into a Baghdad street market last November where he spouted, "this is just like shopping at home." He did not mention he had Apaches flying overhead, snipers on rooftops, and two hundred troops he had cavalierly placed in harm's way for his photo-op.
3.13.2008 12:26pm
Brett Bellmore:

Why is this "regulation" rather than freeing up the pharmaceutical market?


Because it's a de facto importation of other countries' price control regulations.
3.13.2008 12:54pm
Thorley Winston (mail) (www):
As for Postrel's broader comments about McCain, she is surely right, but at the end of the day, those of us who favor freer and less regulated markets will fare better fighting those battles with a President McCain than with either of the Democratic alternatives.


I agree that McCain is better than either of the likely alternatives (particularly if we still have a Democrat-controlled Congress) but I don't think that Postrel came close to proving her claim that "McCain is an instinctive regulator who considers business a base pursuit." Most of the examples she quoted from Jonathan Chait weren't even examples of economic regulation and the ones that were were rather narrowly tailored towards specific practices like accounting firms selling products to companies they were supposed to be auditing.

You could easily come up with an equally long list of much broader issues where McCain has unabashedly been a supporter of free markets -- his support for free trade, his support for Freedom to Farm while opposing agricultural subsidies, his support for telecommunications deregulation, his support for letting consumers buy health insurance from any State in the nation and not just those in their own State, his support for Association Health Plans, his support for entitlement reform that includes letting workers invest at least a portion of their FICA, his support for school choice, etc.

Frankly if Virginia Postrel's argument was that I and other free market supporters are supposed to turn my back on a candidate who agrees with me on these issues which impact the daily lives of tens of millions of Americans because McCain is against "ultimate fighting" (which was the worst example she could come up with), I'm just not persuaded.
3.13.2008 1:05pm
byomtov (mail):
Because it's a de facto importation of other countries' price control regulations.

You mean to replace our indirect patent-based price regulations? Besides what about the "wider sale of generic alternatives" that Postrel objects to?
3.13.2008 1:08pm
New World Dan (www):
Because it's a de facto importation of other countries' price control regulations.


And pharmaceutical companies also have the option of not selling in those countries. This is definately a case of McCain getting it right. McCain's approach to regulation is rather haphazard and without any real philosophy behind it. That's still a modest improvement over Hillary, whose apprach seems to be a uniform overwhelming bureaucracy.
3.13.2008 1:16pm
Brett Bellmore:

And pharmaceutical companies also have the option of not selling in those countries.


Which option, if they take, they have already been told will result in local firms being authorized to violate their patents. I just love the notion that a regulation isn't a regulation if you have the option of going out of business instead of complying with it.

Face it: The only purpose of reimportation is to extend foreign price controls to the American market, without explicitly admitting to having done so.
3.13.2008 1:29pm
hattio1:
I'm just going to note that Ultimate fighting post-regulation is waaaaaay more popular than it was before. That doesn't make regulation right. But it definitely increased the viability of that business. Yes, yes, we don't know if it would have become popular anyway. But it hadn't yet.
I personally think that the enforcement of weight classes had a lot to do with its success.
3.13.2008 1:31pm
Brett Bellmore:
I mean, seriously, if McCain wants pharmaceutical price controls in the US, he should have the honesty to stand up and say so, not try to implement them under the table. Not just an instinctive regulator, a <i>sneaky</i> instinctive regulator.
3.13.2008 1:35pm
J. F. Thomas (mail):
Which option, if they take, they have already been told will result in local firms being authorized to violate their patents.

This may happen in some poor countries, but certainly not in the countries where re-importation was contemplated from. Besides, free negotiations between two powerful entities is not price control. The Canadian Government negotiating prescription drug prices with manufacturers is much the same as GM or GE doing the same for their employee health plans (or the U.S. government for the military).

Do you only like markets when there is an inequality of bargaining power?
3.13.2008 1:43pm
35WD (mail):
McCain's motives may have been more insidious than a mere desire to regulate. The McCains' beer concession was, and still is, Budweiser. That brand is a major sponsor of professional boxing promotions. MMA is a genuine threat to boxing live gate and pay per view buys. Might as well try to regulate your competition out of business than duke it out in the market place.

We fought the MMA regulatory fight here in Oregon. The Boxing and Wrestling Commission, with the assistance of the A.G.'s office, was our biggest hurdle. The state quit the fight after it dawned on them that they had a statutory right to 6.00% of the gross gate receipts.
3.13.2008 1:43pm
gregh (mail):
Connecticut Lawyer, the opposite is the case. Remember: Only Nixon could go to China. Likewise, only Clinton could reform Welfare. The vast bulk of Americans will trust a Republican President to regulate industry, because if a Republican wants to do it, it must really need doing. The same people will take a good, long, hard look before allowing a Democrat to regulate in the same way and, if they do allow it, it won't be to the same level. Further, if Pres. McCain is working with the Congressional Dems, it's definitionally bi-partisan!
Under McCain look for all kinds of awful things the Dems want, but could never get on their own, to go sailing through.
It's enough to make this Reaganite vote for Hillary come Nov.
3.13.2008 1:46pm
Thorley Winston (mail) (www):

Besides, free negotiations between two powerful entities is not price control. The Canadian Government negotiating prescription drug prices with manufacturers is much the same as GM or GE doing the same for their employee health plans (or the U.S. government for the military).


Except for the fact that neither GE nor GM can use the force of law to prevent you from selling to a competitor and link the protection for your intellectual property to an exclusive sales contract with them, yes they're exactly the same thing.
3.13.2008 1:52pm
New World Dan (www):
Which option, if they take, they have already been told will result in local firms being authorized to violate their patents. I just love the notion that a regulation isn't a regulation if you have the option of going out of business instead of complying with it.


Which would violate more than a few trade agreements. On the other hand, pulling out of those markets entirely would also stop reimportation even if local firms were allowed to violate said patents as importation would now be a domestic patent violation. It's not my job to subsidize Canadian health care. Let 'em play hardball.
3.13.2008 1:52pm
A. Zarkov (mail):
byomtov:

"Why is this "regulation" rather than freeing up the pharmaceutical market? Because the drug companies and the Administration didn't like it?"


You are right this is actually deregulation. But importation of pharmaceuticals from countries where prices are regulated is harmful to the US pharmaceutical industry in a way that will cause fewer new medicines to get developed. Firms will sell to foreign vendors as long as they don't regulate prices below the incremental cost of manufacturing. This means the cost of developing new compounds get amortized over the US market. In effect US consumers are subsidizing foreign consumers. If re-importation gets big enough then the unregulated market becomes too small to amortize development costs.
3.13.2008 1:54pm
New World Dan (www):
While it would be a very bad thing, it would amuse the hell out of me to see the US and Canada get into a trade war/pissing contest.
3.13.2008 1:58pm
JB:
Good point, Gregh.

Divided government is only good as long as the two sides fight eachother's plans, like 1994-2001. If they instead engage in massive horse-trading, it's substantially worse than one side using a majority to get its way while the other cries foul.
3.13.2008 2:11pm
A. Zarkov (mail):
byomtov:

"You mean to replace our indirect patent-based price regulations?"

I don't understand this at all. Just who do you think should pay for the cost of developing new compounds? Something has to provide the capital for pharmaceutical R/D. Without patent protection why would anyone invest in this enterprise.
3.13.2008 2:12pm
A. Zarkov (mail):
US residents can still legally buy re-imported medicines. The Canadian outlets CanadaRx and PetPharm (now merged) sell discounted drugs. They ship from the Bahamas under the exemptions provided by the Caribbean Basin Trade Partnership Act. The discounts are substantial. My cat needs an expensive medicine, and I buy it from PetPharm for half the price of Costco. But it takes 3 weeks to ship, so if you need a compound that needs cooling this won't work.
3.13.2008 2:24pm
Adam J:
A. Zarkov- I don't understand how you get from this "Firms will sell to foreign vendors as long as they don't regulate prices below the incremental cost of manufacturing." to "This means the cost of developing new compounds get amortized over the US market." and then to "In effect US consumers are subsidizing foreign consumers."

I certainly understand the first part- companies will sell so long as they make a profit. However how does that mean that new drug costs are being amortized only in the US market- why wouldn't they be being amortized by all consumers... foreign and local? Presumably by subsidizing you mean U.S. consumers will be paying more than foreign consumers... but why is this bad? I'd gladly pay for a dollar for a foreign drug rather than two dollars for an american drug... even if the foreign drug only costs 50 cents outside the US... the consumer is happy, the only people not happy are the US drug companies and that only because they now have to deal with competition- something I have little sympathy for.
3.13.2008 2:38pm
Connecticut Lawyer (mail):
35WD,

I guess if McCain's opposition to mixed martial arts was an interest in protecting Budweiser, he'll have to rethink that position because Bud Light just announced it will be sponsoring the UFC.

To be fair, if you've ever seen videos of the first couple of years of the UFC, in the days of no rules, no weight classes, they were pretty savage. The sport has evolved a lot since then, and the fighters today are far more highly skilled, as opposed to just brawlers. I think McCain could do his campaign a lot of good, and help himself with the 18-34 demographic, by attending a UFC match. Maybe if they put together a Fedor/Couture fight, he could invite Putin to come as his guest.
3.13.2008 2:38pm
J. F. Thomas (mail):
This means the cost of developing new compounds get amortized over the US market. In effect US consumers are subsidizing foreign consumers. If re-importation gets big enough then the unregulated market becomes too small to amortize development costs.

When the U.S. drug companies actually starts spending more on R&D than they do on marketing or paying out in dividends and products, then I may start to believe that the prices they are "forced" to charge to sell their drugs in other countries is actually affecting their ability to develop new drugs. Until that day comes, you can believe their bullshit if you want, I don't.
3.13.2008 2:39pm
J. F. Thomas (mail):
that should be "profits", not "products"
3.13.2008 2:41pm
Elliot123 (mail):
Let's not forget who wins and loses in the re-import game. The guy with a condition for which there currently is a drug wins because he gets his medicine cheaper. The guy with a condition for which no drug has yet been developed loses because it is more likely none will be developed.
3.13.2008 2:41pm
VincentPaul (mail):
I'll believe that Senator McCain was wrong about ultimate fighting/MMA when the states sanction the use of four ounce gloves for boxing as are sanctioned for use in ultimate fighting/MMA.
3.13.2008 2:47pm
J. F. Thomas (mail):
The guy with a condition for which no drug has yet been developed loses because it is more likely none will be developed.

Again this presumes that the prices charged in the U.S. are actually fair and not inordinately high rather than too low in other countries. Considering the profitability of drug companies and the astounding amount of money they spend on marketing (have you ever seen the kind of swag you can collect at a medical convention?), the claim that prices charged in other countries impede the development of drugs rings hollow.
3.13.2008 2:48pm
byomtov (mail):
Zarkov,

What you say is not without merit, though there is certainly room to discuss the best ways to provide incentives for R&D.

But it has nothing to do with Postrel's point about McCain. Patents are regulations. They interfere with the market. Action that limits the power of patents reduces regulation and makes markets freer. One who supports such actions is not supporting additinal regulation, as Postrel would have it.

Now, you happen to think these regulations are valuable and you support them. Fine. Then you agree with me that some regulations are desirable and we ought to evaluate them on an individual basis.
3.13.2008 2:49pm
JDS:
>> ... cap-and-trade regime on carbon emissions.
> Isn't this a reasonable market-based approach to
> dealing with an environmental externality?

Only if you think CO2 is an external cost. It may be an effect of climate change, not a cause. And how do you price the externalities, anyway?

>> drilling in ... Arctic National Wildlife Refuge.
> ... automatic right to drill anywhere...?

Why single out this remote, hostile place as an exclusion from the broad availability of drilling leases? For many, ANWR is a symbol of the worst of environmentalist politics.

>> forbidding accounting firms from selling products
>> to the firms they audited
> ... it seems sensible, unless you take the
> theological view that any rule is bad...

Maybe stockbrokers should be banned from giving financial advice? Maybe lawyers should be banned from giving business advice? An auditor who helps keep the books will be in a much better position to detect fraud. And an auditor who doesn't can still be bribed...

>> ... stock options as compensation ... reveal the
>> cost to their stockholders.
> Requiring honest accounting. What an awful thing.
> But business opposed it, so Postrel thinks it's bad.

There are two problems - disclosure, which was always required for options grants that were material or affected certain officers; and whether options should be expensed when they're granted.

This isn't a matter of "honest accounting" but of the best ways to report uncertain future payouts. Should you take the earnings hit now - and reduce your taxes - for a transaction that may never occur?

>> McCain voted against the 2001 and 2003 Bush tax cuts.
> What has this to do with regulation? Sounds like
> common sense.

Government revenues have climbed enormously thanks to the Bush tax rate cuts. Revenues may also climb briefly in anticipation of coming tax increases, as people take advantage of the last days of the 15% capital gains tax - but look for them to plummet if that rate climbs, or if the proposed huge increases in marginal tax rates are passed.

* * *

The key question is whether you think government should be bigger and do more, or be smaller and do less. Many readers here wish for less government, and in that matter November's choice will apparently be frustrating.
3.13.2008 2:59pm
Connecticut Lawyer (mail):
Mr. Paul,

I think you are wrong about the relative violence of boxing and MMA.

In boxing, you can be knocked out for a nine-count and still get up and fight. Lots of boxers do keep fighting even though they've suffered concussions. This is the reason so many boxers suffer long-term brain damage.

In MMA, the fight is called as soon as the fighter loses consciousness. Often, it's called even before then if the fighter is unable to defend himself. There may be lots more blood spilled in MMA as a result of the use of the 4-oz gloves, but face cuts aren't serious injuries.

I don't see how you can defend boxing and attack MMA. I'm willing to forgive McCain for doing that a decade ago, when he was presumably ignorant about MMA. It would be very unfortunate if he still adhered to that view.
3.13.2008 3:01pm
Thorley Winston (mail) (www):
I certainly understand the first part- companies will sell so long as they make a profit. However how does that mean that new drug costs are being amortized only in the US market- why wouldn't they be being amortized by all consumers... foreign and local?


That's easy because Canadian price controls are set at a level that allows companies to recover their margin costs but not their fixed costs.

Example: say it costs $10 million to develop a new drug (fixed costs) but it costs $2 to make each dosage (marginal cost). If there are only a million people who can buy the drug and each person gets one dosage, the breakeven price is $12 per dosage ($10 per dosage to recover the fixed cost of development plus $2 per dosage to recover the costs of producing the dosage).

But if Canada only allows the manufacturer to charge $8 per dosage, that's not enough to recoup the full cost of developing the drug (fixed cost) but it is enough to cover the cost of making the dosage (marginal cost). But because they can recoup at least part of their fixed cost while covering the marginal cost, it makes sense to sell in Canada at a lower price and try to make up the rest of the fixed costs by selling at a higher price to the domestic market.

So if we had a market of one million sales, half in the United States and half in Canada, Canadians would be paying $8 ($2 for the marginal cost and $6 for the fixed cost) while Americans would be paying $16 ($2 for the marginal cost and $14 for the fixed cost).

Of course the flip side to this is that by having price controls there are fewer drug manufacturers in Canada so while they're paying less for name brand drugs on the front end, when generics become available (and the threat of withholding patent protection is no longer as much of an issue), they don't have the competition in the generic market that we do in the United States which is why they generally pay more for generics on the back end.
3.13.2008 3:06pm
BGates:
McCain is not always pro-regulation. He wants free movement across the border for people and pharmaceuticals. As far as I can tell, his border policy is based on the desirability of low-wage labor. At the same time, he does to consider business a 'base pursuit', but at least he's consistent - he doesn't want capitalists to make any money, but he doesn't want the work force to make any money either.
3.13.2008 3:09pm
A. Zarkov (mail):
Adam J.

"… why wouldn't they be being amortized by all consumers... foreign and local?"


They are. But Americans pay much more of the development costs.

"… but why is this bad? I'd gladly pay for a dollar for a foreign drug rather than two dollars for an american drug..."


It's good for existing compounds. But what about future development?

J.F. Thomas:

"When the U.S. drug companies actually starts spending more on R&D than they do on marketing or paying out in dividends and products, then I may start to believe that the prices they are "forced" to charge to sell their drugs in other countries is actually affecting their ability to develop new drugs."


What you are saying is US developed drugs could sell everywhere for regulated foreign prices and still provide enough profit to pay for development. In other words, the foreign prices are well above the incremental cost of development. I don't believe that without more evidence. The cost of marketing is irrelevant to the argument unless you think the money is wasted.

Costs must also include the losses from withdrawn products. Look at what happened to Exubera (inhaled insulin). Pfizer took a tremendous hit on that one.
3.13.2008 3:10pm
hattio1:
JDS says (and quotes someone else)

>> drilling in ... Arctic National Wildlife Refuge.
> ... automatic right to drill anywhere...?

Why single out this remote, hostile place as an exclusion from the broad availability of drilling leases? For many, ANWR is a symbol of the worst of environmentalist politics.


Gee I dunno. Maybe because it's the Arctic National WILDLIFE REFUGE and supposed to be singled out from the broad availability of drilling leases? There's a thought for you. Should we start drilling in Yosemite next?

He also says;

>> McCain voted against the 2001 and 2003 Bush tax cuts.
> What has this to do with regulation? Sounds like
> common sense.

Government revenues have climbed enormously thanks to the Bush tax rate cuts. Revenues may also climb briefly in anticipation of coming tax increases, as people take advantage of the last days of the 15% capital gains tax - but look for them to plummet if that rate climbs, or if the proposed huge increases in marginal tax rates are passed.


Citation for government revenues climbing enormously? Is inflation factored in? Anyway, even if they have, the deficit has climbed even higher. And, probably more importantly, the tax rate has nothing to do with regulation or less regulation. Which is why your comment that the central question is bigger or smaller government is inapt. The central question of this article and thread was whether or not John McCain was a regulator.

Connecticut Lawyer says;

I don't see how you can defend boxing and attack MMA. I'm willing to forgive McCain for doing that a decade ago, when he was presumably ignorant about MMA. It would be very unfortunate if he still adhered to that view.


I agree with you...now. Ten years ago, MMA was a VERY different sport.
3.13.2008 3:16pm
byomtov (mail):
And how do you price the externalities, anyway?

That's what the cap-and-trade system is supposed to do.

Maybe stockbrokers should be banned from giving financial advice? [and so on]

Lawyers and stockbrokers do not certify to the public information about their clients. Audiors do. That creates a serious conflict.

Should you take the earnings hit now - and reduce your taxes - for a transaction that may never occur?

I think the tax issue is separate from the GAAP reporting. My answer is that if you have an expense it should appear on the P&L. That happens to be Warren Buffett's opinion also. He said something like,

"If options are not compensation expense what are they? And if compensation expense shouldn't appear on the P&L where should it appear?"

Sounds right to me


Government revenues have climbed enormously thanks to the Bush tax rate cuts.

When you return from the planet Qtrzfl you might want to look at Greg Mankiw's opinion on this.

Mankiw reckons that over the long run (the long run being generous to his argument), cuts on capital taxes generate enough extra growth to pay for half of the lost revenue. ..... that means that the other half of the lost revenue translates into bigger deficits. Mankiw also calculates that the comparable figure for cuts in taxes on wages is 17 percent. ... that means every $1 trillion in tax cuts is going to add $830 billion to the national debt.
3.13.2008 3:19pm
hattio1:
All those against re-importation are forgetting that re-importation will raise prices in foreign countries (you know, basic supply and demand). IOW, given a few years of importation, prices will equalize and foreign markets will be paying their share of development costs. How terrible that will be!!!
3.13.2008 3:19pm
PersonFromPorlock:
Many military members think of themselves as conservative but draw their life's experience from a system which is very, very far from Main Street America.

This is especially true in McCain's case, who as the son and grandson of Navy men would have been born in a federal government hospital, lived in federally provided and policed housing, gone to federally provided schools and used federally provided health care before going on to a federally provided college which emphasized belief in the Navy system and qualified him to perform a highly regulated federal job and, incidentally, to raise his children in the same system.

Wherefore should we be surprised if he gravitates to the federal regulation of everything?
3.13.2008 3:32pm
Adam J:
A. Zarkov- I thought that 20 year monopoly period was what helped drug companies recover developmental costs.

Thorley Winston - Ah, I see, thank you for explaining. Isn't the best solution for these kinds of problems tit-for-tat? We could price control imported drugs from companies with price controls- that could disincentivize Canada from creating the controls so the drug companies remain profitable.
3.13.2008 3:43pm
Adam J:
I meant countries with price controls, not companies.
3.13.2008 3:43pm
A. Zarkov (mail):
"If options are not compensation expense what are they? And if compensation expense shouldn't appear on the P&L where should it appear?"

"Sounds right to me."


It is right. For a discussion of this issue see, Companies Now Record the Cost of Options Compensation ... FALSE.
"The cost of options cannot be ignored just because it is non-cash. There is no such thing as a non-cash expense. Either there is a barter transaction that should be considered two separate cash transactions, or there is a timing difference between the cash transaction and the reporting period. This argument is expanded on a previous webpage."
Both political parties are toadies for industry on this one.

In 1993 and 1994, Lieberman was the key senator in preventing the Financial Accounting Standards Board (FASB) from closing an accounting loophole that allowed companies to avoid recording stock options as an expense. Arthur Levitt, the Chairman of the SEC at the time, has said "There was no question in my mind that campaign contributions played the determinative role in that Senate activity."
Always follow the money. Both parties are corrupt.
3.13.2008 4:11pm
A. Zarkov (mail):
Adam J.

A. Zarkov- I thought that 20 year monopoly period was what helped drug companies recover developmental costs.

It does. Remember companies look at risk adjusted net present value of a project. This discounts future costs (including the cost of capital) and profits. The NPV must be greater than zero. After 20 years the discount factors become very small ( 1/(1+r)^n, n>20 ), so it doesn't much matter if the patent expires after 20 years. If you take away patent protection, you change investment decisions. The project won't get launched, or company has to make enough money before everyone else can catch up. That's very hard to do in the pharmaceutical business because of the long period of development.

Thorley Winston is saying exactly the same thing as I am; only he expressed it much better. I'm afraid I sometimes assume too much specific knowledge about something on the part of the reader. He really did a good job.
3.13.2008 4:28pm
Elliot123 (mail):
"Again this presumes that the prices charged in the U.S. are actually fair and not inordinately high rather than too low in other countries. Considering the profitability of drug companies and the astounding amount of money they spend on marketing (have you ever seen the kind of swag you can collect at a medical convention?), the claim that prices charged in other countries impede the development of drugs rings hollow."

Profit and funds available for research have nothing to do with fairness.

Increased prices for drugs in other countries would make more profit available for the deveelopment of new drugs. Adopting the controlled prices of other countries would make less money available for new drug development.

Drug development is financed with profit. If price falls without a commensurate changes in sales and cost, profit falls, and less is available for development. The drugs people use today were developed with the profits from past drugs.

Regarding marketing -- Do you contend revenue would increase if drug companies curtailed marketing? Decrease? How about profit? Would profit increase or decrease if drug companies curtailed marketing? Will all other performance metrics remain static if marketing is eliminated? If so, why?

If the money spent on marketing would flow to profit if marketing was eliminated, can anyone suggest why drug companies aren't aware of that? This would mean much more money for investors.
3.13.2008 4:45pm
J. F. Thomas (mail):
Regarding marketing -- Do you contend revenue would increase if drug companies curtailed marketing? Decrease? How about profit? Would profit increase or decrease if drug companies curtailed marketing?

Considering that much of the marketing in drugs is done to get consumers or doctors to choose one basically equivalent drug over another, or substitute a newer more expensive, but not more effective drug, for an older, cheaper one, marketing of prescription drugs is a particularly cynical game. Regardless, marketing is of course a cost of doing business and must be absorbed, either by higher drug costs or reduced profits.

Of course I never said drugs can not or should not be marketed or advertised, but both marketing and profits of drug companies exceed R&D budgets by several times.
3.13.2008 4:55pm
J. F. Thomas (mail):
Increased prices for drugs in other countries would make more profit available for the deveelopment of new drugs.

Is there any evidence that this would actually happen or do you just assume it is true?
3.13.2008 4:57pm
eyesay:
"... McCain took up when he was still in his 'conservative' stage."

McCain is still in his conservative stage.

According to the non-subjective analysis of Jeff Lewis and Keith Poole:
* In the 110th Congress, John McCain has the 8th most conservative voting record of 101 senators. (101 because Craig Thomas (R-UT) died and was replaced by John Barrasso.)
* In the 109th Congress, John McCain had the 2nd most conservative voting record of 101 senators. (101 because Jon Corzine (D-NJ) became governor and was replaced by Robert Menendez.)
* In the 108th Congress, John McCain was in a two-way tie with John Ensign (R-NV) for the 4th most conservative voting record of 100 senators.

According to the liberal Americans for Democratic Action:
* In 1997, McCain had a 10% liberal score. There were 6 senators with a score below 10% and 12 senators tied for 10%.

Wake me up when McCain no longer in his conservative stage.
3.13.2008 5:17pm
Elliot123 (mail):
"Of course I never said drugs can not or should not be marketed or advertised, but both marketing and profits of drug companies exceed R&D budgets by several times."

OK. What's the point of passing on this observation? Should they be less? Is there an optimal relationship? If so, what is it?

"Is there any evidence that this would actually happen or do you just assume it is true?"

No need to make any asumptions. If prices moved to the point on the demand curve where profit is maximized, the companies would have increased profit. Profit would also be increased at each point on the way up.

So, I maintain my original point. If Granny wants cheap prices for her medicine, that guy with diabetes, Alzheimers, or skin cancer will never get his drug developed. He can die. Other drugs and other people provided the profits to develop Granny's medicine. But now Granny wants hers, and doesn't care about anyone else.
3.13.2008 5:41pm
byomtov (mail):
Elliot,

Technically it is not true that profits finance the development of new drugs. What finances development is the expectation of profits on the new drug. After, all, if a company has no promising research it's not going to spend a ton of money on development no matter how much profit it makes. And think of how much money has been spent on research by not-yet-profitable biotech companies.

Zarkov has it more or less right that it is the future cash from the project that justifies it. If the company lacks funds it can go to the financial markets. That's what they're for.

Of course, the patents and other conditions governing drug sales affect profit projections, and hence drugmakers' decisions. But a company that has unexpectedly high profits, maybe because a certain product sells more than expected, will not necessarily spend more on research as a result.

What some types of drug marketing may do is make some products profitable when they really are not very valuable medically. (Think Claritin/Clarinex). This may induce drug companies to invest in products that can be heavily marketed, rather than those whose value is based on their effectiveness. Whether this is a big problem or not I don't know. I do think a patent system that perhaps based the term of the patent on a drug's advantages over available treatments might be a good idea.
3.13.2008 6:07pm
J. F. Thomas (mail):
No need to make any asumptions. If prices moved to the point on the demand curve where profit is maximized, the companies would have increased profit. Profit would also be increased at each point on the way up.

I don't know what you are saying here, but my point is that the evidence is that drug companies spend a relatively fixed amount on R&D. Excess profits are not used to increase the R&D budget but rather to enrich shareholders or increase the marketing budgets of existing drugs. Also, an inordinate amount of the R&D budget is actually spent on schemes (like slightly altering the formulation, delivery method, or finding new uses) to extend the patent protection of drugs rather than develop new ones.

More profits certainly does not necessarily more money spent on R&D.
3.13.2008 6:11pm
Elliot123 (mail):
byomtov,

Expectation doesn't finance anything. It provides a reason to invest money. Profit provides the money. Expectation provides the reason.

The alternatve method, which you allude to in the not-yet-profitable companies, is external investment. Those funds come from profits in anything from the lumber to restaurant industry. They then finance research based on expectations.
3.13.2008 6:22pm
A. Zarkov (mail):
bymotov:

"Then you agree with me that some regulations are desirable and we ought to evaluate them on an individual basis."

Absolutely. I have no general objection to regulation. I look at the economy as a large complex non-linear system. Left to itself it can lock up in highly undesirable states. It needs intelligent regulation. However all too often regulation simply panders to the masses who want something for nothing. Or it provides a windfall to some special interest by restricting competition. Businessmen are all for competition except for their own industry where they want regulation to protect their business against new entrants. The financial services industry provides a good example of insufficient regulation. We need more regulation to protect the retail investor. We need more transparency. We need a better system for credit ratings. It should be obvious by now that Moody's, S&P and Fitch are a bunch of crooks that need to be reformed or put out of business.
3.13.2008 6:50pm
Elliot123 (mail):
Putting Moody's, S&P, and Fitch out of business would immediately increase interest costs for everything as less information increased investor risk. That would be pandering to the masses.
3.13.2008 7:30pm
byomtov (mail):
Expectation doesn't finance anything. It provides a reason to invest money. Profit provides the money. Expectation provides the reason.

Profit may provide the money. So may other sources. If you invest part of your paycheck then your wages are providing money, etc. My point is that it is the expectation of future profits, not the existence of past profits, that provides the motive to invest. The attractiveness of a particular project does not, in general, depend on how much money the compnay made last year.
3.13.2008 7:36pm
VincentPaul (mail):
Conn Lawyer,
What I am talking about is that the potential for fighter injury using MMA gloves is greater than it should be. Only an inability of current MMA fighters to throw punches with the power and accuracy of a pro boxer has kept unnecessary injury (of MMA fighters) from already taking place (realize that it is not only those punches which follow a standing count that can cause injury to fighters). Remember what Kermit Washington's (bare knuckle) punch did to Rudy Tomjanovich?
3.13.2008 7:42pm
burke almquist:
Cap and trade for CO2 isn't a market. It's just more market like than other forms of regulation like hard caps or use of technology X to abate emissions. Cap and trade is missing a supply side response (if the value of new permits would exceed their cost then new permits would enter as the price rose),. Put another way, cap and trade has a vertical supply curve.
3.13.2008 7:50pm
Elliot123 (mail):
"My point is that it is the expectation of future profits, not the existence of past profits, that provides the motive to invest."

I agree. One must have both funds and opportunity for investment. However, the level of past profits dictates whether any opportunity can be exploited, which of the available opportunities can be exloited, how much risk can be assumed, and how long a program may be supported before reaching its goal.

The attractiveness of a project to a company is very much a function of its ability to complete the project. Past profits are an important factor in this.

Note that wages don't usually continue in the face of continued loss. Wages are supported by past profit when a loss occurs. When the losses continue, wages stop. Unless, of course, one works for the government.
3.13.2008 8:27pm
Charles Oliver:
There are plenty of MMA fighters capable of striking with the power and accuracy of most boxers. Check out fight science to see the sort of power generated by MMA fighters. Randy Couture's "ground and pound" punches were off the chart compared to the stand up striking of some of the boxers and kickboxers they'd measured in previous episodes.

But MMA remains a far safer sport, at lest in terms of brain injuries, than boxing for a number of reasons. The most important may be the role of the clinch. In boxing, when two fighters get into a clinch, the ref breaks them up to get them back to punching each other. But in MMA, the clinch is a big part of the game, with fighters trying to throw each other and take each other down, as well using punches, elbows and knees, all the while trying to avoid being taken down, thrown, kneed, etc.
3.14.2008 12:28am
hattio1:
Charles Oliver, Vincent Paul, and Conn Lawyer;

Not to get this too off-topic, but as to striking power, especially when standing the difference in the power of the punches has to do with a lot more than just accuracy and effectiveness of delivering punches. In boxing you have to be careful not to get hit back while punching. In MMA, you have to be careful not to get hit, taken down, kicked, kneed, or put in a chokehold or other submission (I realize this is mostly done on the ground, but there are standing submissions). All that has an effect on the power MMA fighters are able to SAFELY* deliver. I haven't seen the studies Charles Oliver refers to, but they don't surprise me. Not only are you crouching over someone in ground and pound, and able to deliver stronger blows, you also have less worry about effective counters.

Safely defined as without getting your ass kicked in the bout.
3.14.2008 1:57pm