Thomas Sowell

A successful political crusade is incomplete without a villain. To play St. George, you need a dragon. The crusade for government control of medical care has made the pharmaceutical industry its villain.

First, there are the "unconscionable" profits of the firms producing medications. Since there is no definition of unconscionable profits, this gives the politicians great flexibility. And, because there are a number of different ways of computing profit rates, that gives them even more flexibility.

A couple of years ago, during the Anthrax scare, there were loud denunciations of Bayer, the manufacturer of the leading drug for treating Anthrax, by liberal Senators like Ted Kennedy and Chuck Schumer. They claimed that Bayer was making too much profit on that drug and should lower the price during a national emergency.

Just for the record, it would have cost 50 dollars to use the drug in question for the time it was needed, after which you could switch to other and less expensive drugs. Also for the record, Bayer operated at a loss during that quarter. When even losses are considered to be unconscionable profits, you can see how flexible these terms are in the hands of political demagogues.

No doubt Bayer was making money on that one drug but pharmaceutical drugs are a risky business, with many money-losing ventures that have to be covered by the profits on those drugs that do make money.

Ask yourself: If you had some money saved for your retirement and someone suggested that you invest it in the pharmaceutical industry, would all the denunciations of the industry by politicians, and threats to crack down with legislation, make you more willing or less willing to risk your money there?

Put differently, how high a rate of return would you require before putting your money into most industries, as compared to how high a rate of return you would require before being willing to invest in the pharmaceutical industry? With liberals breathing fire about "unconscionable profits" and threatening punitive legislation, the pharmaceutical industry would probably have to offer you a higher rate of return before you would risk putting your money there.

You might have to make an "unconscionable" rate of return to make the risk worth taking.

You can see the same process at work in some Third World countries, where local demagogues blame these countries' poverty on "exploitation" by foreign investors and threaten to put a stop to it. Whether or not these demagogues actually follow through, such talk can cause foreign investors to stay away.

Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

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