Prescription Drug Prices: Retaliatory Socialism
By Pierre Lemieux
Yesterday’s Wall Street Journal (“Trump Plans Order to Tie Drug Prices to other Nations’ Costs,” July 5, 2019) reported:
President Trump said Friday he was preparing an executive order that would lower drug prices so that the federal government would pay no more than the costs paid by other countries.
Mr. Trump is quoted as saying:
As you know for years and years, other nations paid less for drugs than we do, sometimes by 60, 70%. We’re going to be, and we’re working on it right now, we’re working on a favored-nations clause, where we pay whatever the lowest nation’s price is.
It’s not clear that he sees a difference between countries, nations, states, and individuals. But let’s ignore this point.
Prices differ between the United States, where the market for drugs is more or less free, and the typical foreign country, where a government health insurance monopoly buys most drugs or the government directly caps drugs prices to shift to manufacturers and hide the real pharmaceutical cost of its health insurance regime. American drug manufacturers (or foreign ones who supply the American market) find it in their interest to price discriminate: since the marginal cost of production of a given drug is very low once it is developed, pharmaceutical companies charge the market price in the US and accept to pay lower prices to foreign demanders, who are akin to monopolistic purchasers. This system works on one condition: that the US government prevent the drug’s reimportation into the United States.
A free-enterprise government in Washington could stop blocking drug reimports at the border. Arbitrage (buying low and selling high) would ensure that new world prices are established that lie between the current American prices and the current foreign prices. But it is not along these lines—or along the lines of modifying costly FDA regulation or, perhaps, the intellectual property regime—that the Trump administration is thinking. A later version of the Journal‘s story reported a comment by a Department of Health and Human Services spokesman suggesting that reimportation was considered. But don’t hold your breath.
In general, the Trump administration thinks in dirigiste terms. The most charitable explanation is that it does not know better. Trump is saying that since other governments in the world are controlling drug prices, the American government should do the same. It is retaliatory socialism—or, more generally if you wish, retaliatory dirigisme. Just as retaliatory protectionism (against overt, obscure, or imagined foreign protectionism) is supposed not to be protectionism, we are asked to believe that retaliatory socialism is not socialism. If “we” just imitate their socialism, it’s not socialism.
In Orwell’s 1984, the three slogans of the Party are shown on the building of the Ministry of Truth:
War is peace
Freedom is slavery
Ignorance is stength
What’s even funnier in Mr. Trump’s plan, assuming he explained it correctly or that he does not change his mind, is that he wants to outsource his price controls to foreign governments, the most socialist of which will dictate pharmaceutical prices in America!
I am not of course claiming that President Sanders or President Warren would do better. No, they would try to do more in the same direction. This is the tragedy of America’s political leadership.
I always wonder why a journalist does not ask Trump, “Mr. President, what do you mean exactly by ‘socialism’? How does free enterprise differ from socialism?”