It’s time for the BusinessWeek Analysis & Commentary roundup. Having nearly reached page 40 of this week’s edition, I’m ready to provide my critiques of the commentaries, including where I find flaws or reaches within their arguments.
Drug Prices: This week’s editorial chimes in with the argument that high retail prices for precscription drugs are due in large part to the price controls in regulated economies elsewhere in the world. Striking their bleeding heart note, the writers say that Big buyers such as the government and HMOs can often negotiate low prices that rival those found in Canada. To make up for the discounts, though, the industry charges high retail prices. So those who are least able to pay — the uninsured — are often stuck with the biggest bills.
What this strikes me as is not a failure of the drug companies but a failure of government. For those who believes that one of responsibilities of a good government is to provide a minimum of adequate healthcare to all citizens, the government should be providing some relief in these situations. This strikes me as a social policy failure, and is not because other governments have implemented a solution (thought not necessarily the best one) to this issue. Being able to derive a larger amount of profit overseas does not guarantee that companies will suddenly become generous and lower prices elsewhere.
In fact, let’s follow this simple thought experiment. I’m an executive of a pharma company. I can only charge retail rates freely in the U.S., and elsehwere in the world I am restricted in my pricing. My shareholders are expecting me to deliver strong revenue growth each quarter. Suddenly, the regulatory structure changes, and I can charge my own rates in other countries. Do I lower retail prices in the US, knowing that more than 90% of the people don’t pay those rates anyway, or do I maintain my current pricing strategy in the U.S. and raise prices overseas? My apologies, but if you said scenario 1, you’re obviously unaware of the incredible pressure Wall Street exerts on publically traded companies to demonstrate ever increasing sales and more money that will translate in to profits.
The other issue raised is the migration of European pharma to the U.S. By attempting to blame this migration on lower drug prices in Europe, the writers miss an obvious point. U.S. and European companies service both markets. Where a drug is discovered is entirely unrelated to where it will eventually be markted and sold. The real reason is that public investment in the health scienes is higher here with more well-trained, well-educated personnel able to contribute, providing a higher value proposition. Companies are locating R&D in the major research centers in the U.S. because these are some of the best places for health research in the world, due in large part to the people located there. If corporations truly felt it was necessary to locate manufacturing and research in their largest markets, why would Levi’s be closing its last U.S. manufacturing site to move off to China? Because the two are really unrelated, and this is simply a red herring.
On Wesley Clark: I love it when the mass media labels Howard Dean as a liberal. Granted, he wants that label at the moment to carry him through the Democratic Primaries, but we’re talking about a fiscal conservative, small government, relatively pro-gun rights kind of guy. People hold up the whole “civil unions” bill as an example of his so-called liberal tendancies, neglecting the fact that the Vermont State Supreme Court left him little choice.
In any event, my only real comment on the commentary is to ask the question “when is a tax repeal a tax hike?” If I repeal part of a law that hasn’t taken effect yet, like the idiotic elimintation of the estate tax, would that be a tax hike? I’m just curious how the writers of the papers that influence public opinion would answer that question.
On the China job drain: There’s one aspect of this article that I was struck by more than any other. According to this article, Levi’s is moving its last U.S. manufacturing location overseas. According to my sister, Levi’s is slowly closing its own retail outlets, preferring to sell through third-party retailers like, say, Kohl’s. If all the goods are created overseas and sold by other companies, and very little save the corporate headquarters remains in the U.S. under Levi’s command, would Levi’s still be considered an American company? Technically, if it was still “headquartered” here it would be, but if most of its workforce is instead located in other countries and it does nothing but overhead work here, how could it truly be called a U.S. company?
The only aspect of overseas manufacturing, and more and more design, development and support, is that it has the potential to structurally weaken the U.S. I’m far from a closed-borders person (really, really I am), but if the U.S. allows itself to move more and more of its production and those services eligible, there has to be sufficient innovation to provide the same or even more opportunities to those people who are located here. If there is no satisfactory complement to the offshore movement of providing new opportunities, a gradual decline in quality of life will occur as people find themselves unable to afford the living standards they currently enjoy.
Also, one book reviewer found earlier in this issue that the argument that offshoring and paying criminally low wages so necessary is somewhat bunk:
One of the book’s most surprising findings is that employers who use alternative approaches to compete in low-skilled industries often rely on new labor-market institutions. In industries as diverse as hospitals, hotels, and hosiery, companies band together to train workers, set industry skill standards, and help each other learn how to make strategies such as teamwork really work. Often, local government bodies lend crucial support, with seed money for training and coordination with community colleges. There’s a clear role, the book argues, for government to support management choices that help less-skilled workers.