A new proposal under discussion by the Senate Finance Committee is a perfect example of the folly of trying to centrally design the economy — in this case by a ham-handed attempt at price controls.
The proposal, from Sen. Ron Wyden (D-OR) and under consideration by Chairman Chuck Grassley (R-IA), would change the Medicare Part D prescription drug rebate to penalize drugs whose prices rise faster than the rate of inflation.
It’s ironic the proposal targets Part D, one of the few islands of economic sanity to be found in the health care sector, which, beset by rampant government intervention, suffers from a wide variety of perverse unintended consequences.
Part D is one of the few government health care programs to successfully foster price-based productivity increases. In most parts of the economy, over time, prices go down and quality goes up, due to increases in productivity. The underlying mechanism driving this is competition.
One sign of how successful Part D has been in wielding competition is that in its first decade of existence, it cost over 40% less than what the Congressional Budget Office estimated it would, a historical and underappreciated achievement.
Tacking on feel-good, one-off pricing rules like Wyden’s “faster than inflation” penalty could easily disrupt the market-based dynamics that enabled Part D to flourish in the first place.
It’s just silly to think that something as complex, distributed and organic as a worldwide market for pharmaceutical drugs could be controlled by something as ramshackle as a “faster than inflation” rule.
Consider the variety of pricing mechanisms that exist in well-functioning markets. In retail, there are coupons, package deals, membership plans and other discounts. In the stock market, there is the “continuous auction,” providing ongoing price discovery that can react to new information in a matter of seconds.
Amazon’s server rental business offers clients a tremendous range of pricing options, split by eighteen datacenter regions, dozens of server types, and several tiers of availability.
There is a whole world of financing, from store-offered, no interest payment plans to credit cards to mortgages. Stores employ all manor of psychological pricing tricks, such as charging 99 cents instead of $1. One of the more incredible such tricks, which would be hard to believe without the well-established research backing it up, is that prices that contain fewer syllables (when read out loud) are more attractive than those with more syllables. For instance, $28.16 (five syllables) is better than $27.82 (seven syllables).
The incredible diversity in pricing practices stems from the decentralized nature of the market. You could never ask a single committee, or even a large organization, to come up with this level of creativity and variety on its own. It’s only from the organic interaction between millions of businesses and billions of customers, each expertly seeking their own interests, that it can ever arise.
You might compare Wyden’s “faster than inflation” proposal to the fences in Jurassic Park — “life finds a way,” as Dr. Ian Malcolm tells us, foreshadowing the inability of the park to contain the beasts contained within. Except, at least the 40-foot electric fences were a good faith effort. Wyden’s proposal is more like if they attempted to keep the T-Rex at bay with only the thin walls of the bathroom hut the hate-able lawyer ran and hid inside, shortly before becoming a dinosaur’s dinner.
In other word’s this “faster than inflation” rule is a laughable, pitiful attempt at something that isn’t even achievable by the most expert, determined effort — something like, say, the Soviet Union, which tried, and failed, to put price controls into practice at super power scale.
But that’s not to say it can’t do harm. At the very least, it will increase the cost of participating in the market, both in terms of compliance costs, and in the changed incentives and their inevitable unintended consequences. For example, a company that requires more revenue to survive might raise the prices slightly on all its products, instead of steeply on just one. How this all plays out is impossible to predict. What can be said for certain is the market’s “logic” would now be less about providing the most value for customers at the lowest price, and now more about the political ramifications of pricing decisions.
More specifically, as it relates to the Part D drug market in particular, the rule could crowd out existing rebates negotiated by the plans buying the drugs. Many plans have already secured “price protection rebates” which kick in if prices increase more rapidly than some agreed-upon threshold. In other words, the market has already invented, in a much more sophisticated and dynamic way, the “faster than inflation” rule on its own.
The worst case scenario is more dire. Generally speaking, fostering well-functioning markets in the health care sphere is exceedingly difficult, given the immense government intervention at every level. Part D’s success in doing so is nearly unique. Additional rules that make supply and demand less important to how the market functions could result in it ceasing to function as a market entirely. It certainly would not be the first time the government accidentally killed a market.
Wyden’s proposal exemplifies the folly of centrally-designed price controls. It will harm one of the only well-functioning parts of the federal government’s health care policy. For those reasons, Chairman Grassley and Committee Republicans should cast it in the dustbin of bad socialist ideas.
In the first two months of the new fiscal year, tax revenues are up. But so is the deficit. Why? Because spending continues to outpace revenues. So why do tax cuts keep getting blamed?
The latest monthly budget report from the Congressional Budget Office shows the deficit jumping $102 billion in just the first two months of the new fiscal year.
That sure looks like the deficit is “soaring,” as one news outlet claimed. But as the CBO makes clear, almost all that deficit increase was the result of quirks of the calendar. Depending on where weekends fall, significant sums of spending can get shifted into different months.
A true apples-to-apples comparison, the CBO says, shows that the deficit climbed by just $13 billion. Continue reading
By Michael Barone • National Review
The Republicans have passed their tax bill, without a single Democratic vote, despite low to dismal poll ratings. It’s reminiscent of the passage by Democrats, without a single Republican vote, of Obamacare in March 2010.
Democrats lost 63 seats and their House majority that fall. Republicans hope they won’t follow suit. They argue, accurately, that their bill will lower taxes for almost all taxpayers and that it will stimulate economic growth, which already has risen above the growth in the Obama years.
The effects of Obamacare, in contrast, were harder to model, and some backers’ claims — if you like your insurance, you can keep it — soon were revealed as glaringly untrue. We’ll see whether the greater simplicity of the tax bill makes a difference in political fallout.
One thing in common between the two bills is that voters have seemed congenitally skeptical about the claims of the party in power. Obamacare continued to be unpopular until, presto, Donald Trump took office and Republicans threatened repeal.
by Peter Huessy
The President’s Fiscal Year 2016 Budget makes a defense spending request that exceeds the Budget Control Act (BCA) spending cap for FY16 by $35 billion with a “base” defense spending request of $534 billion, while also asking Congress for an additional $51 billion for what is known as Overseas Contingency Operations(OCO) that are, under law, not subject to the spending caps.
Of the amount requested by the President, for what is known as the “base” defense budget, $209.8 billion is for operations and maintenance (O&M), $107.7 billion is for procurement, and $69.8 billion for research, development, test, and evaluation (RDT&E).The remaining costs (largely personnel) are exempt from any cuts.
For the OCO accounts, $40.2 billion is for O&M, and $7.3 billion is requested for procurement with half of that for the US Army. Continue reading
By Shawn Macomber
In the wake of the International Criminal Court’s controversial decision to allow Palestine join its ranks, Israeli Foreign Minister Avigdor Lieberman vowed to lobby nations friendly to the Jewish state to cut funding to the aspiring transnational entity.
That effort, it appears, is essentially DOA, but the threat such a move, if realized, poses to the Court is hardly trivial, as the following excerpts from a Reuters report makes clear:
Federal tax revenues continue to run at a record pace in fiscal 2014, as the federal government’s total receipts for the fiscal year closed April at $1,735,030,000,000, according to the Monthly Treasury Statement.
Despite this record revenue, the federal government still ran a deficit of $306.411 billion in the first seven months of the fiscal year, which began on Oct. 1, 2013 and will end on Sept. 30, 2014.
In the month of April itself, which usually sees the peak tax revenues for the year, the federal government ran a surplus of $106.853 billion. While taking in $414.237 billion in total receipts during the month, the government spent $307.383 billion.
In fiscal 2013, the federal government also ran a one-month surplus in April, taking in $406.723 billion during the month and spending $293.834 billion, leaving a surplus of $112.889 billion. Continue reading
Dr. Thomas Sowell, the Stanford University based economist, wrote this week that when he was teaching he would ask his students to consider this: “Imagine a government agency with only two tasks: (1) building statues of Benedict Arnold and (2) providing life-saving medications to children. If this agency’s budget were cut, what would it do?” Sowell posits that the agency would naturally cut back on medications for children. He explains that is the only result that would lead to getting the budget cuts restored. And he pointedly explains why the government wouldn’t cut back on the silly statues: “If they cut back on building statues of Benedict Arnold, people might ask why they were building statues of Benedict Arnold in the first place.”
Dr. Sowell is absolutely correct! Years ago, when I served on a local school board I witnessed this almost reflexive response every year the budget was tight. The most absurd things were never offered for cuts. They always threatened to cut the things that would most outrage the public. They talked about cutting bus routes for kids that lived far away from schools. They talked about crowded classrooms. Continue reading
Worse, a veiled liberal threat to correct what they deem a “misallocation of wealth.”
by Scott L. Vanatter
Over the past week liberal House and Senate leaders have spoken openly about how they see America’s spending problem. They don’t see it. They claim that we don’t have a spending problem.
First, Rep. Pelosi (D-CA) relabeled it as a “priorities problem.” Then, Rep. Hoyer (D-MD) redefined it as a “paying-for problem.” Finally, Senator Harkin (D-IA) revealed the usually hidden liberal designs on capital. He turned the equation upside down by describing problem of a lack of funds to pay for what we have spent, not because we do not have a budget, but because we have “misallocation of wealth problem.” Continue reading
“There is great anger that Obama could force higher tax rates on small businesses simply by saying no.”
by Grover Norquist
The 2001 and 2003 “Bush tax cuts” were enacted with an expiration date because 60 votes are required in the Senate to make a tax cut permanent. Other tax cuts such as the “patch” limiting the Alternative Minimum Tax and the Research and Development Tax Credit would lapse every two years giving politicians an opportunity to “sell the same horse” again and again to voters and campaign contributors. Continue reading
“Taxation is forced labor; and if it goes beyond reasonable bounds, it is a yoke of oppression.”
by Scott L. Vanatter
Nearing the end of his presidency, Ronald Reagan laid out a final challenge to the nation, its leaders and citizens. He sought to a.) summarize the principles which made possible his record economic growth, and b.) lay out a clear path to secure economic growth into the future.
The president spoke at an Independence Day celebration at the Jefferson Memorial at a U.S. Chamber of Commerce event on July 3, 1987. Continue reading
America’s national debt is dangerously close to $16 trillion. This is a staggering figure. It is impossible to comprehend in concrete terms. But we are rapidly approaching the point of no return, where economic collapse becomes our fate — just like Greece. This is not a new problem. But it has gotten far, far worse as a result of President Barack Obama’s unrestrained spending. He’s thrown hundreds of billions of taxpayer dollars to unions and other political allies in the name of stimulus. Not surprisingly, the money didn’t generate job growth and now we have a staggering debt which makes job growth even more difficult. This is Obama’s economic legacy. Continue reading