Clicking on banner ads enables JWR to constantly improve
Jewish World Review July 3, 2001 / 12 Tamuz, 5761

Amity Shlaes

Amity Shlaes
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

America foots the bill for Europe's largesse

The highly profitable US free market for drugs in effect subsidises other countries; price control regiemes -- Richesse oblige is the rallying call that continental Europe has settled on when it comes to combating Aids in Africa. Thus Joschka Fischer, Germany's foreign minister, swears that the United Nations can count on Berlin's "full support" in fighting the disease. Drugs for Africa must be cheaper or free, drug companies' patents waived or rewritten.

Implicit here is a condemnation of any drug company or developed nation that does not keep pace with the giving - especially the wealthy US. Oxfam, the UK-based charity, has said it is time to start standing up to the US and drug companies. Even the Bush administration has shown signs of succumbing to this view, as for example last week, when it dropped a World Trade Organisation case against Brazil's easy patent law.

But it is Europe's political class that is taking the lead here, rejecting as heartless commercialism any concern that it might be wrong to force drug companies and governments to subsidise Africa or give it an economic free ride.

This sanctimony belies a strange truth: when it comes to cutting-edge pharmaceuticals, needy Africa is not the worst free rider in the room. That label belongs to rich-man Europe itself. For while the continent has purchased its share of drugs over the decades, its tight pricing policies have not helped, and have even hurt, drug company profits and the sort of innovative work necessary to combat new diseases.

The US, meanwhile, has served both as the industry's main profit centre and as the global headquarters for research and development. But for European policies, the global rate of drug innovation might have been much greater and there would be a wider range of medicines to combat crises such as Africa's.

This may seem a convoluted line of argument. But tracing it helps to reveal the important link between two areas we do not usually consider to be connected: domestic social policy and humanitarian aid for poorer lands.

This story starts with continental Europe. After the second world war most countries there established one or the other variant of a national health system, including, eventually, some sort of entitlement to prescription drugs. (The UK case is more complicated, so we'll leave it out this time.) These programmes, which made monopsony buyers of governments, did not, at first, all include price controls or curtailments of supply. But prescription drugs are expensive and public budgets limited. After a while national governments clamped down. And they are still clamping. Elisabeth Guigou, France's social affairs minister, warned last month that the world's drugmakers must expect the pressure for lower drug prices to continue and strengthen.

In the US, by contrast, drugs are bought and sold in something closer to a classic market, with patients or their insurance companies purchasing the products. Consumers do not all love this system. Indeed, Congress is currently mulling legislation to create a European-style drug entitlement for senior citizens. But to date, the market tradition has prevailed.

The consequence has been a giant differential in prices, with the US playing the role of pharmacological cash cow. Patients from prosperous America pay high prices for drugs - especially newer ones, which still enjoy maximum patent protection. Europe, also prosperous, pays a third less on behalf of European patients.

The contrast has become particularly dramatic as drug advances have accelerated. Zoloft, the star antidepressant of the 1990s, is sold for 30-40 per cent less in Germany than in the US, trimming profits for its maker, Pfizer. Norvasc, a new drug that fights high blood pressure, costs $1.18 a pill in the US and 88 cents in Germany.

Pharmaceuticals companies tend to argue that this is a case of cross-subsidy - that Europe is a long-run loser for research-based companies and that manufacturers raise prices in the US to compensate for European shortfalls. This is hard to prove. But what is clear is that drug companies forgo profits they might have collected in a less controlled European market - and that the same companies treasure the opportunities they enjoy on the other side of the Atlantic, in what David Stout, GlaxoSmithKline's US head, recently termed the last free market in the world. What is more, the industry has put its money where its mouth is, moving much of its work to the US.

This in turn affects that most crucial area, innovation. Today research- based pharmaceuticals companies working in the US spend about $22bn a year on research and development. In Britain and continental Europe, by contrast, the amount is more like $12bn, according to the European Federation of Pharmaceutical Industry Associations. This despite the fact that Europe, including Britain, boasts both a greater population and a bigger economy than the US. As a result the majority of the hot new drug products are generated in US-based labs. The Washington-based Pharmaceutical Research and Manufacturers of America reports that of the 17 anti-retroviral drugs used in Aids treatments, 13 were made in laboratories in the US. In other words, the American form of prosperity - the private sector sort - has done the best job of developing the help that Africa says it needs most now.

All this suggests two things. One is that the US lawmakers backing prescription drug entitlements might ask themselves whether they are destroying more than they are creating. The other is that it is time for Europe to take a fresh look at the consequences of its domestic social programmes - and to acknowledge that there is more than one kind of generosity, including a generosity of the free market.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


06/26/01: America the litigious, land of the lawyer's fee
06/20/01: Five reasons for gloom about global growth 06/18/01: Show pity for Alice in Tax Wonderland
06/13/01: America must take a French lesson in trade
06/11/01: Time to dream the impossible dream for Iraq
06/07/01: Whatever happened to simple?
06/04/01: When the relationship between companies becomes as close as a marriage, the eventual break-up is often very painful
06/01/01: Loving and hating the Bush tax bill
05/30/01: Will Grisham soon be unemployed? In America's courts these days, there's no room left over for legal fiction
05/22/01: Republicans sample the rhetoric of confidence
05/16/01: Boeing has been promised $60m to site its headquarters in Illinois. The deal looks a poor one for taxpayers
05/14/01: Adam Smith in love
05/09/01: Those rotten Russian capitalists
05/07/01: Why tax havens provide shelter for everyone
05/04/01: Middle classes pay for get-the-rich folly
05/01/01: Money can't buy happiness? Think again.
04/26/01: Calling America's rogues and entrepreneurs
04/19/01: High earners right to feel lonely at the top
04/11/01: The right must learn the comfort of strangers
04/04/01: When domestic law arrives by the back door
03/30/01: A Lexus tax cut suits the jalopy driver
03/27/01: The unchallenged dominance of King Dollar
03/20/01: Natural selection of an intellectual aristocracy
03/16/01: The hidden danger of a regulatory recession
03/14/01: Is the American condition that boring? Why so many Oscar nominated movies aren't set in America
03/07/01: Trampling on the theory of path dependence
03/05/01: Fighting the good fight
03/01/01: It is time for Fannie and Freddie to grow up
02/27/01: IT's important
02/22/01: The guilty conscience of America's millionaires
02/14/01: The benefits of helping the 'rich'
02/09/01: The Danger and Promise of the Bush Schools Plan
02/05/01: Crack and Compassion
01/31/01: Debt is good
01/29/01: Clueless
01/24/01: A gloomy end for a half-hearted undertaking
01/17/01: The challenge of an ally with its own mind
01/15/01: An unexpected American family portrait
01/10/01: A fitting legacy for America's beloved dictator
01/08/01: The trick of tax 'convenience'
01/03/01: Time to stop blaming Greenspan over taxes
12/11/00: So smart they're dumb
12/06/00: How economic bad news came good for Bush
12/04/00: The Boies factor
11/30/00: "The inevitable demands for recounts erupted like acne…"
11/28/00: Fair play and the rules of the electoral game
11/23/00: The shining prospect beyond a cloudy election
11/21/00: Try the Cleveland model
11/16/00: A surprising winner emerges in the US election
11/09/00: Those powerful expats
11/07/00: What's right for America versus what works
11/02/00: Time to turn off big government's autopilot
10/30/00: Canada beating America in financial sensibility
10/26/00: When progressiveness leads to backwardness
10/24/00: The most accurate poll
10/19/00: The Middle East tells us the hawks were right
10/17/00: The split personalities of America's super rich
10/10/00: 'Equity Rights' or Wake up and Smell the Starbucks
10/04/00: Trapped in the basement of global capitalism
09/21/00: The final act of a grand presidential tragedy
09/21/00: Europeans strike back at the fuel tax monster. Should Americans follow?
09/18/00: First steps to success
09/13/00: America rejects the human rights transplant
09/07/00: Minimum wage, maximum cost
09/05/00: Prudent Al Gore plans some serious spending
08/31/00: A revolution fails to bring power to the people
08/28/00: A reali$tic poll
08/21/00: "I Goofed"
08/16/00: Part of the union, but not part of the party
08/09/00: Silicon Alley Secrets
08/02/00: Radical Republicans warm up for Philadelphia
07/31/00: I'll Cry if I Want To
07/27/00: Cold warrior of the new world
07/25/00: The Estate Tax will drop dead
07/18/00: Shooting down the anti-missile defence myths
07/14/00: A convenient punchbag for America's leaders
07/07/00: How to destroy the pharmaceutical industry
07/05/00: Patriots and bleeding hearts
06/30/00: Candidates beware: New Washington consensus on robust growth stands the old wisdom on its head
06/28/00: White America's flight to educational quality
06/26/00: How Hillary inspired the feminist infobabes

© 2001, Financial Times