American Elephants

A Simple Clear Rule. Pass It On. by The Elephant's Child

From economist Daniel J. Mitchell, who I frequently refer to because he is so good at explaining.  This is a nice simple, clear statement.  Why doesn’t the White House get it? Government is growing and multiplying like a virulent  cancer, and they just don’t have a clue that their actions are the major brake on the economy.

Barack Obama, we are told does not change his mind. It seems to be so, for he is over at the G -20 meeting trying to get the Europeans to do a big stimulus, just like he did. He really does believe that he has done everything right.  Sigh!

Capitalism May Be Messy, But It’s Way Better Than the Alternative. by The Elephant's Child
November 4, 2011, 7:12 am
Filed under: Capitalism, Economy, Freedom, Health Care | Tags: , ,

The Occupy people have been attacking Capitalism as the evil that has made them take out more student loans than they can afford and then refusing them the high level jobs that they feel their education entitles them to. They seem rather fuzzy on just what Capitalism is, but they are quite sure they don’t like it, along with big banks.

“Capitalism” is simply the name that Karl Marx gave to the natural workings of the free market. Governments are established among men to attempt to mess up the natural workings of the free market, or so it would seem. Economics is the study of the use of scarce resources which have alternative uses.  Or you can’t always have what you want. I want a brand new Mercedes-Benz. I can’t have one. The signal that tells me so is the price. But the price is not just an obstacle that keeps me from getting what I want, it is a signal.  There aren’t nearly enough Mercedes so everyone can have one.  How they get distributed is sorted out by price. It forces me to consider how my available funds should be allocated.

Governments, whose nature is to mess up the natural workings of the free market, having power over the laws in society and wanting to get reelected, often stick their noses where they do not belong. Case in point — there is a major and growing shortage of lifesaving drugs, particularly therapies for cancer.

Shortages, according to the Wall Street Journal, have more than tripled since 2005.  By the end of this year, more than 300 products are apt to be back-ordered, in short supply or unavailable. Some are pain medicines, some are emergency drugs but most are what are called “sterile injectables,” mainstays of chemotherapy programs.  This class has mostly been off-patent for decades, but production is complicated, and demanding. George W. Bush and the Republican majority decided that Medicare was “overpaying” for these cancer drugs, and put a 6% cap on price increases in the 2003 drug bill.  These new price controls took effect in 2005 — when the shortages began.

Central planning always produces scarcity. The drugs that are in short supply currently sell for an average $37.88 a dose, and modest price increases could clear the market. The Food and Drug Administration rules cause pointless delays. It can take up to 2½ years to get FDA approval for a generic, so other companies can’t ramp up production if manufacture is delayed or a company cancels a product line because of these disincentives.

This week the Obama administration confronted the problem, but decided to put its executive order in with its “we can’t wait” campaign against House Republicans. All very nice, but the only fix is — something liberals hate— market prices. When prices rise because a product is scarce, that calls forth more production, which eventually helps the price to drop.  That’s what prices do. They are a signal. It is an imperfect signal, but it beats a bunch of politicians.

The real danger is, of course, to patients who don’t receive the drugs they need. The delay is actually killing people. Rather than allow the market to work, Mr. Obama has ordered the Justice Department to crack down on the grey markets that have sprung up to deliver supplies to doctors and hospitals, with the inevitable markup.  This is further interference in the market which will only further distort the market, and leave more patients without the medicines they need.

Mr. Obama’s executive order requires firms to give advance notice when they believe that a drug may become scarce. This is an incentive for hospitals or market middlemen to buy up remaining supplies. The president blames the scarcity of manufacturers on slim profit margins, which misses the point that the problem is government price controls.  Generic makers are choosing to quit a product line rather than invest money to meet ever higher standards.

The problem with ObamaCare and all socialized medicine schemes is that the goal becomes keeping costs down, for those who are running the system; and for the suppliers the goal becomes how to get sufficient reimbursement from the system. This is why administrators proliferate in, for example, NHS in Britain.  You need more watchdogs to control the costs, and the poor patients get lost in the shuffle.

Capitalism is messy, free markets are imperfect, and life really isn’t fair just like your mother said; but capitalism remains the best system ever devised to allow people to fulfill the opportunity that life offers. Or, if you like eating grass and bark, you could try the Peoples’ Republic of Korea.

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