Lowering the Cost of Medicare

I’m coming off a week of enduring “the common cold”, one of the miserable human conditions for which there is no cure.  Modern medicine promises cures for just about everything else; have you, too, been afflicted by those incessant “low T” ads?  Unfortunately, the cures always have a price, often a very large one.  And that price is a too neglected factor in the current Medicare debate.

Long ago, Aristotle, Aquinas and other thinkers concluded that, as a moral necessity, the price of things must reflect their actual worth.  They wrote that the actual price charged for a thing must be its “just price.”  Surely Adam Smith, himself a moral philosopher, knew that as he unveiled his new science of Economics.  His great failure though, and it was great and it was a failure indeed, was to introduce “the invisible hand of the market” to wash away all sin.  That worked in 18^th century Scotland, a classic traditional “small market” economy”, but somehow has lost its cleansing power in our 21^st century age.  Smith’s assumption of buyer and sellers with common moral norms getting together under conditions where each knows fairly well the “just price” that should be charged, and by their decisions help set it, no longer is even close to describing our current economy.  Modern economists see only “all the market will bear” as the criterion for price, and justice has nothing to do with it.

That comes to mind in reading a Washington Post article on the cost of cancer drugs, written by three distinguished oncologists, Hagop Kantarjian, Tito Fojo and Leonard Zwelling.  They ask why 11 of the 12 new cancer drugs approved by the FDA last year each have an estimated annual cost of over $100,000, yet only 3 of the 12 actually improve survival rates, and then only in minimal ways.  They note that the average monthly cost of cancer drugs has more than doubled in the past 5 years (this, in a time of recession!).  They delve in their article into moral issues specific to oncology, such as whether price should be based on survival rates or actual effects on tumors, but raise broader issues also.  For example, the usual justification by drug companies for their charges is “product development costs”, including costs of testing unsuccessful drugs, but it also includes items like education (we all know about those physician “seminars” in the Caribbean and Hawaii included in that) and advertizing.  The internal pricing each company arrives at for those items is arbitrary and varies a lot company to company.  Is it just to bill a dying patient for physician jaunts to Hawaii?  And companies “pay to delay” the entrance of cheaper generic drugs into the market.  Should patients bear the cost of that?

But here’s the really big item.  The VA gets drugs at half the price of Medicare because the VA is allowed to negotiate price but Medicare is prohibited.  As a result, the prices Medicare must pay for are two to four times the prices charged for the same drug in other countries.  Those are not drugs from the cheap fly-by-night outfits the drug companies rail about, but the prices paid to the same U.S. companies that are doing the railing.  Unchaining the market to wave its invisible hand would bring remarkable reductions in the cost of drugs, but of course that’s not all that’s needed.  Medicare negotiating would be an enormous gain for the economy and the patient, but would still leave the patient ignorant and feeble amid the pressures big pharmaceutical companies can exert.  Much stronger investigation and regulation of the claims companies make for efficacy of their drugs is required, along with strong regulation of the cost accounting that goes into setting prices.  In the EU regulators approve drug prices, and costs are substantially lower; in the U.S., such prices are unregulated.  The FDA responsibility should be expanded to include medicine price regulation.

All our politicians speak of the need to reduce the cost of Medicare.  Too many of them speak as though it’s a matter of reducing eligibility and coverage.  In fact, the biggest savings are available without any reduction in service.  In other countries, a moral principle of health care is that no one should unduly profit off the sickness of others.  They provide excellent health care at reasonable prices, guided by that principle.  For the U.S. to address “morally acceptable prices” for medicines would be a major step in that direction.

Tax Havens and Other Pursuits

A few weeks ago, in Getting to the Top Line, I wrote about the ways corporations and the wealthy have of not even getting their gross income reported to IRS, much less having it taxed.  That means that the tax rates argued about so pyrotechnically are not even all that significant to those capable of keeping income off of the Adjusted Gross Income line; if they pay 20 percent of one-tenth of their actual gross, it looks good from a public relations point of view, but is actually trivial.  An article by Larry Summers, former Treasury Secretary and President of Harvard, was the source of some general information I used.  Now Senator Bernie Sanders of Vermont has come forward with some even more revealing specifics.

Sanders reports that “In 2010, Bank of America set up more than 200 subsidiaries in the Cayman Islands (which has a corporate tax rate of 0.0 percent) to avoid paying U.S. taxes. It worked. Not only did Bank of America pay nothing in federal income taxes, but it received a rebate from the IRS worth $1.9 billion that year. They are not alone. In 2010, JP Morgan Chase operated 83 subsidiaries incorporated in offshore tax havens to avoid paying some $4.9 billion in U.S. taxes. That same year Goldman Sachs operated 39 subsidiaries in offshore tax havens to avoid an estimated $3.3 billion in U.S. taxes. Citigroup has paid no federal income taxes for the last four years after receiving a total of $2.5 trillion in financial assistance from the Federal Reserve during the financial bailout.”  Sanders goes on to note, “Pharmaceutical companies like Eli Lilly and Pfizer have fought to make it illegal for the American people to buy cheaper prescription drugs from Canada and Europe. But, during tax season, Eli Lilly and Pfizer shift drug patents and profits to the Netherlands and other offshore tax havens to avoid paying U.S. taxes. “  In short, Sanders concludes, corporations and wealthy individuals avoid over 100 billion dollars annually in U.S. taxes by shifting income to tax havens abroad through use of “shell corporations.” He further states that at the same time taxes are avoided by shifting income to tax havens, the same corporations have shipped 56,000 jobs abroad and closed 2000 American factories.  Recall that Larry Summers also wrote of the large role in tax avoidance played by trusts, multi-million dollar insurance policies, gifts, like-kind exchanges, etc.  Summers notes that only one billion in taxes is realized from the transfer of 1.2 trillion by inheritance each year.  That’s a less than one-tenth of one percent effective tax rate for the “death tax” everyone worries about. 

The net result on the tax side is that federal tax revenue only accounted for 14.8 percent of GDP in 2011, the lowest rate since 1950, and the effective corporate tax rate was 1.8 percent.  Compare that with “socialized” Britain, whose corporate tax rate was 3.6 percent.  In 1945, the last year of another global war, the effective U.S. federal rate was about 21 percent.  Yet taxes have gone down while we fought major wars in Iraq and Afghanistan. The deficit works out to about 10 percent of GDP, while we have reduced the effective tax rate by about 6 percent from its 1945 level.  A billion here, a billion there, and its beginning to add up to a number approaching the federal deficit. 

But the same people worrying so hard about the deficit, death taxes, etc., are expressing grave concern about raising the minimum wage to a point that would put income for a full-time working individual above the poverty level.  All this, while there seems to be a growing arms race on size of yachts, with the latest winner boasting a $1.5 billion yacht that’s the largest in the world.  And GDP data indicates that all growth in GDP goes to those with in the top ten percent, with income for the other 90 percent staying flat.  The picture that’s emerging of the top ten percent is not flattering.

Senator Sanders is sponsoring legislation aimed at reducing the tax avoidance problem, the Corporate Tax Dodging Prevention Act (S.250).  It’s a step forward, and deserves support.  But of course, it covers only part of the problem.  Many other loopholes will remain.  The top line will remain the line that counts.  President Obama, in the State of the Union Address, reminded us that we are all citizens with a share in governing.  We need to stay aware and informed of the big picture of governing, and let our voices be heard at home and in D.C.  Washington is where reform occurs, but those who decide in D.C. are elected locally.

Here Come the Barbarians

I don’t know whether to cheer or despair at the news that the FCC is proposing to free up unlicensed spectrum for a massive program aimed at spreading free ultra-high-speed wifi throughout the country.  For the significance of the program lies not so much in technology per se, but in the major acceleration of social and cultural change sure to result.  When President Obama was first elected, I made a note to myself that one of the greatest impact programs he could sponsor, akin to FDR’s rural electrification program and Eisenhower's Interstate Highway program, would be to promote broadband internet in the rural heartland of America.  So, on one hand I rejoice at the democratization of technology implied in the FCC proposal.  One of the things you’re taught in political sociology is that new technology usually goes first to elites who use it to strengthen their grips on the reins of power. This is the kind of reversal of that approach that has contributed mightily to social change around the globe.  A famous graffiti on a Middle-Eastern wall during the Arab Spring said simply, “Thank you, YouTube.”  The reins of power will now increasingly rest in the hands of the adaptable young.  On the other hand, there’s an old French proverb that the primary task of each generation is to save civilization from the barbarians of the following generation.  So far, we’re not doing very well at that, and a tidal wave of high-speed communication can only accentuate the problem.

The FCC proposal is generally supported by city governments and by technology vendors, with the exception of phone and cable vendors who fear losing business because of it.  It potentially can provide speeds 10 times faster than even our broadband vendors provide now, ushering in a real age of information availability.  Some areas of the world, like Taiwan in particular, are already experiencing it, and sneer at our backward ways.  It is being tested now by Google in the Chelsea area of NYC, and reported to be wildly popular, enabling small businesses to do things they’ve never been able to do before.  It will enable also the spread of innovations like new health care technologies such as remote robotic surgery, and even, it is whispered, future electronic transmission of medicines for assembly via nanotechnology at the patient’s bedside.  I suspect that in one form or another, the FCC proposal will be realized.  But a real spread of broadband technology will also result in changes to the heartland culture like we’ve never seen before.

It’s hard for city people on the east or west coast to appreciate the isolation of rural and exurban areas in the Midwest.  A few years ago, visiting relatives in rural Minnesota, I was surprised at the lack of the broadband internet I had come to take for granted on the east coast.  And that lack translates into information shortages.  Unless you really work at it, available information is mainly the local variety, or national and international information filtered through the local culture into a pre-existing point of view.  The hundreds of information sources I get regularly just don’t exist.  That situation is changing, but not at a rapid pace.  As a consequence, there’s a major culture lag problem in this country, where coastal citizens and heartland citizens have entirely different perceptions of what is happening here and around the world.   The result is the kind of impasse politics we’ve been experiencing, each side standing their ground for an entirely different vision of what the world is and should be. High-tech availability in rural areas will eventually create pressures for resolution of differences into a more common national vision.  That’s the good news.

But those hundreds of different information sources produce thousands of different standards for what is or is not acceptable behavior and what is or is not a valuable part of our culture.  As a result, we experience in a new high-tech culture an “any thing goes” kind of confusion about limits, generating the kind of social turmoil we see in our cities today.  And Beyonce replaces Mozart, at least temporarily.  The popularity of such TV shows as “Downton Abby” reveals a kind of longing for standards of an age we gave up long ago, but the popularity of “Big Bang Theory” and “Colbert” also reveals a moral core to the vision of the new age.  I enjoy all those shows.   We live in an age of transition.  Eventually things will settle down and social norms will reappear.  In the meantime, the barbarians are advancing.  The society of the future will be the result of what we do now.

Addendum to Red Coat Citizens

So, I contradict myself.  That was proud response of Emerson when challenged by a listener about his remarks.  And I myself contradict myself, which I admit both sheepishly, and like Emerson, proudly. His admission was accompanied by a sneer, “A foolish consistency is the hobgoblin of little minds.”  I hope to be less sneeringly proud than he by invoking instead the image of the wise men and the elephant.  It is a contradiction to say that an elephant is like a fan, and then to say the elephant is like a column. But the apparent contradiction comes from not seeing the whole elephant, for the elephant is both like a fan and like a column.

The particular way I contradict myself this time (there are many other times) is that in a prior post I praised permanent worker visas as an important part of immigration reform.  In my “Red Coat” post I pointed out that permanent worker visas could create a class of “semi-citizens” which Jefferson warned us against as contributing to a denial of rights and consequent social turmoil.  I believe that both points are valid.  Immigration reform requires both permanent worker visas and a reasonable path to citizenship.  Some immigrant workers remain non-citizens by choice; if they so choose, that should not limit their participation in the American work force when we so desperately need new workers.  But if immigrants want to become citizens, the path should be there for them to do so.

I hope those of you who enjoy my posts are alert to my contradictions.  Sometimes they are actually signposts pointing the way to a whole elephant that requires a little search to find.  Of course, sometimes they are merely my inconsistencies.

Redcoat Citizens

The town where I live is infused with early American history.  It is reputed to be the spot where the first protest against the Stamp Act occurred, Francis Scott Key (for whom the local baseball team and a shopping mall are named) practiced law, along with his much less esteemed cousin Roger Taney, and is buried here, etc.,etc..  One of the more interesting spots though is a set of buildings, now on the campus of the Maryland School for the Deaf, where Lewis and Clark provisioned for their expedition, back when it was an army depot.  But the buildings get their name, The Hessian Barracks, from their first use, as a prison camp for the Hessian soldiers captured at the Battle of Trenton during the American Revolution.  Those Hessians liked the town so much, and the town liked them, that after the revolution, a third of them preferred to settle permanently here; a substantial part of the old families in town trace their ancestry in part to those Hessians.

They weren’t quite as welcome elsewhere.  Political scientist Elisabeth Cohen, writing in the Washington Post, reports that in 1805, the Supreme Court heard the first challenges to the citizenship of those who had fought on the English side in the Revolution; the Court wisely ruled that even fighting on the wrong side during the Revolution was not an impediment to U.S. citizenship.  Cohen writes that the principle established by the Court was that only three things should matter for citizenship – a reasonable period of residence, a decent knowledge of the workings of American democracy, and a good moral character.  There were not even those restrictions on residence.  Records of entry into the country were not even kept until 1820.  More than one of our early American ancestors was running from the law of the place they came from on their entry into the U.S.  Our founding fathers believed, and explicitly stated, in Congress and elsewhere, that the best qualification for American citizenship was the experience of living here.  Country of origin, life before entry or reasons for coming did not matter.  Agricultural workers, younger sons of nobility, fleers from the German draft and poor house residents were the stuff our country was made of. 

Back then, reasonable residence was defined as five years; when, in a fit of xenophobia, the Congress raised the residence requirement to 14 years, President Jefferson protested so strongly that Congress reversed itself.  Jefferson was equally indignant at the idea of long term residence without the prospect of citizenship.  He wrote that that such a residence without a reasonable prospect of citizenship created “semi-citizens” - an underclass of people, taxed but without representation, that was bound to lead to social turmoil and civil unrest.  In 1801, speaking to the opening session of congress, Jefferson painted such residence without citizenship as denying the asylum and “privileges” for which the founding fathers had fought.

It’s amazing how people pick and choose among Constitutional principles.  Social conservatives  swear allegiance daily to a strict interpretation of the Constitution based on the “original intent” of the founding fathers, then immediately go out and argue against a “path to citizenship” which the founding fathers cherished.  They call people “illegal aliens” when the founders would have repudiated the very idea of such “illegality” as contrary to the basic principles of the country.   The founding fathers’ principles were totally forgotten back in 1920 when national quotas were set for entry. Nowadays we get ever angrier about the presence in our country of those whom the founders would have recognized as kindred spirits and welcomed with open arms.  We seek immigration reforms the founders would have thought heinous, not because they go too far in easing restrictions, but because they are far from enough. Permanent worker visas are a major improvement over what we have, but they still create the kind of "semi-citizens" about which Jefferson warned.  We can do better.

We need to remember both our own country’s needs, for willing workers of all kinds and from everywhere, and to remember the reasons this country was built in the first place.  We build border walls when our founding fathers set out to create open doors.  We claim that all are created equal, then deny equality to millions of those who have lived and worked hard here for years.  Those Hessians, through living here, saw the blessings of liberty, and reached out to acquire them, and they were welcomed.  If we truly seek “the blessings of liberty for ourselves and our posterity”, we need to welcome their modern counterparts also.

The Nature of the European Debt Crisis

For many years, my wife and I have been members of a small foreign policy discussion group, one of thousands across the country. The sponsor, the Foreign Policy Association, a non-partisan foundation established by Woodrow Wilson to promote discussion of foreign policy issues, provides a briefing book each year containing thoughtful analyses of hot current issues.  This year, its analysis of the European Debt Crisis, is the most lucid, and excellent, discussion of the topic I have yet encountered.  The author, Erik Jones, is director of the European Studies Program of the Johns Hopkins School of Advanced International Studies, and is located at Oxford; he is ideally situated to observe the European thrashings about, and it shows.  Jones is an economist, so his analysis suffers from one or two of the natural flaws of his profession, but it addresses the real point of the crisis as well as it can be stated.

Jones begins with a brief review of the evolution of the EU, important because it reveals, as I mentioned in a prior post, how the EU has evolved into a betwixt-and-between organization, too loosely related for a political union and too tightly tied for an economic interests only union.  The result is a union where the members, particularly the rich countries, pay lip service to common principles but ignore them in favor of their own national interests when convenient.  Yet they are tied by a common requirement to maintain stable values for the Euro.  Jones in passing points out that the common belief that the European crisis results from an overload of “welfare state” entitlements is a fiction, since the wealthiest economies in Europe provide more entitlements than the poor ones; German workers have more benefits than do the Greeks. The crisis stems from drastic changes in financial liquidity.

Europe maintained stable relationships with non-European economies under the Maastricht arrangement, but internally underwent an enormous flow of capital from northern Europe to the Mediterranean countries, often through under-the-table loan arrangements. This created huge opportunities for investments and public benefits in countries like Greece and Spain and Portugal; southern Europe was financing its growth with international capital, both from northern Europe and from America.   For a time, all Europe prospered, with productivity and GDP’s rising.  Jones points out that the Greek economy was slowly but steadily improving, and that the “cooked-books” accounting of the Greeks was what everyone, including international investors, knew that they were doing and had always done. But when the international finance crisis erupted in 2007, precipitated by Lehmann Brothers,  international investors experienced a crisis of confidence, precipitated by uncertainty about German-Greek financial relationships (that loose “union” arrangement), and pulled a flood of capital back out of southern Europe to “safer” places.  This starved southern Europe for the capital they had been running on and raised interbank lending rates so high in southern Europe that the collapse began.  National economies were overwhelmed by flows in liquidity.  Thus, in Jones’ analysis, the extremely high international flows of capital, dependent on maintaining investor confidence, were the cause of the crisis, not the actions of individual countries, who were doing what they had been doing all along. And that confidence was shattered by the uncertainties of the structure of the EU itself.

Jones is a gentleman, and thus does not mention the nature of those “international investors”; that is a limitation of his analysis.  Those investors are not retirees counting their dividends and worried about loss of income; they are major international banks and corporations and hedge funds.  They are huge; the 50^th ranking corporation on the Fortune 500 List has annual revenues about equal to the GDP of Sweden.  Any one of the larger banks or corporations by itself could shake the economy of a small country.  David Rothkopf, in Power, Inc., estimates that these days there are only about 15 national economies too large to be overwhelmed by the largest of the corporations.  The corporations are moving about, without regard to national boundaries or national interests, huge capital flows, which mostly consist of financial derivatives.  Rothkopf estimates that at any one time there are $14 in derivatives for each $1 in actual currencies worldwide.  Bloomberg News reported that the loans from Goldman-Sachs that got Greece in trouble were mostly based on one of the most complex of the derivatives.  As Warren Buffett noted, derivatives have become a “weapon of mass destruction.”

Domestic national economies cannot absorb these unregulated international flows of capital without repeats, in ever larger forms and farther places, of the European debt crisis. And the consequences are ever growing forms of human misery.  Unemployment in Greece recently was 25 percent and 27 percent in Spain.  The loss of public services from governments strapped by lack of liquidity makes the misery only worse.  The EU, as I’ve said before, needs to get its act together, “to form a more perfect union”, but that is only the start.  More and more, the private, unregulated investment decisions of corporate managers can shake nations.  International regulation and consequences are urgent.  One small step might be to require that sovereign debt be financed without use of derivatives.  Commonly regulated international financial institutions are needed. The G-7 must get involved.  Europe’s problems extend far beyond Europe; recent concerns from financial analysts have been expressed that many “third world” economies are running on capital inflows from Europe and America, and a drying up of those capital inflows could destroy the economies of nations around the world.  We can no longer ignore each other’s misfortunes.