GAO Chief Warns Economic Disaster Looms

In the October 30, 2006 article "GAO Chief Warns Economic Disaster Looms," Associated Press national writer Matt Crenson reports that the chief accountant for the U.S. government believes current fiscal policy is unsustainable.

AUSTIN, Texas (AP) -- David M. Walker sure talks like he's running for office. "This is about the future of our country, our kids and grandkids," the comptroller general of the United States warns a packed hall at Austin's historic Driskill Hotel. "We the people have to rise up to make sure things get changed."

But Walker doesn't want, or need, your vote this November. He already has a job as head of the Government Accountability Office, an investigative arm of Congress that audits and evaluates the performance of the federal government.

Basically, that makes Walker the nation's accountant-in-chief. And the accountant-in-chief's professional opinion is that the American public needs to tell Washington it's time to steer the nation off the path to financial ruin.

From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terror. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the reefs of economic disaster if nothing is done to correct it.

There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

"There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has just heard Walker's pitch. She suggests recruiting a trusted celebrity - maybe Oprah - to sell fiscal responsibility to the American people.

Walker doesn't want to make balancing the federal government's books sexy - he just wants to make it politically palatable. He has committed to touring the nation through the 2008 elections, talking to anybody who will listen about the fiscal black hole Washington has dug itself, the "demographic tsunami" that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.


"He can speak forthrightly and independently because his job is not in jeopardy if he tells the truth," said Isabel V. Sawhill, a senior fellow in economic studies at the Brookings Institution.

Walker can talk in public about the nation's impending fiscal crisis because he has one of the most secure jobs in Washington. As comptroller general of the United States - basically, the government's chief accountant - he is serving a 15-year term that runs through 2013.

This year Walker has spoken to the Union League Club of Chicago and the Rotary Club of Atlanta, the Sons of the American Revolution and the World Future Society. But the backbone of his campaign has been the Fiscal Wake-up Tour, a traveling roadshow of economists and budget analysts who share Walker's concern for the nation's budgetary future.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects. When pollsters ask Americans to name the most important problem facing America today - as a CBS News/New York Times poll of 1,131 Americans did in September - issues such as the war in Iraq, terrorism, jobs and the economy are most frequently mentioned. The deficit doesn't even crack the top 10.

Yet on the rare occasions that pollsters ask directly about the deficit, at least some people appear to recognize it as a problem. In a survey of 807 Americans last year by the Pew Center for the People and the Press, 42 percent of respondents said reducing the deficit should be a top priority; another 38 percent said it was important but a lower priority.

So the majority of the public appears to agree with Walker that the deficit is a serious problem, but only when they're made to think about it. Walker's challenge is to get people not just to think about it, but to pressure politicians to make the hard choices that are needed to keep the situation from spiraling out of control.

To show that the looming fiscal crisis is not a partisan issue, he brings along economists and budget analysts from across the political spectrum. In Austin, he's accompanied by Diane Lim Rogers, a liberal economist from the Brookings Institution, and Alison Acosta Fraser, director of the Roe Institute for Economic Policy Studies at the Heritage Foundation, a conservative think tank.

"We all agree on what the choices are and what the numbers are," Fraser says.

Their basic message is this: If the United States government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation. That's almost as much as the total net worth of every person in America - Bill Gates, Warren Buffett and those Google guys included.

A hole that big could paralyze the U.S. economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

People who remember Ross Perot's rants in the 1992 presidential election may think of the federal debt as a problem of the past. But it never really went away after Perot made it an issue, it only took a breather. The federal government actually produced a surplus for a few years during the 1990s, thanks to a booming economy and fiscal restraint imposed by laws that were passed early in the decade. And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

But that's about to change, thanks to the country's three big entitlement programs - Social Security, Medicaid and especially Medicare. Medicaid and Medicare have grown progressively more expensive as the cost of health care has dramatically outpaced inflation over the past 30 years, a trend that is expected to continue for at least another decade or two.

And with the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically due to demographic pressures. People are also living longer, which makes any program that provides benefits to retirees more expensive.

Medicare already costs four times as much as it did in 1970, measured as a percentage of the nation's gross domestic product. It currently comprises 13 percent of federal spending; by 2030, the Congressional Budget Office projects it will consume nearly a quarter of the budget.

Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania have an even scarier way of looking at Medicare. Their method calculates the program's long-term fiscal shortfall - the annual difference between its dedicated revenues and costs - over time.

By 2030 they calculate Medicare will be about $5 trillion in the hole, measured in 2004 dollars. By 2080, the fiscal imbalance will have risen to $25 trillion. And when you project the gap out to an infinite time horizon, it reaches $60 trillion.

Medicare so dominates the nation's fiscal future that some economists believe health care reform, rather than budget measures, is the best way to attack the problem.

"Obviously health care is a mess," says Dean Baker, a liberal economist at the Center for Economic and Policy Research, a Washington think tank. "No one's been willing to touch it, but that's what I see as front and center."

Social Security is a much less serious problem. The program currently pays for itself with a 12.4 percent payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

Calculations by Boston University economist Lawrence Kotlikoff indicate that closing those gaps - $8 trillion for Social Security, many times that for Medicare - and paying off the existing deficit would require either an immediate doubling of personal and corporate income taxes, a two-thirds cut in Social Security and Medicare benefits, or some combination of the two.

Why is America so fiscally unprepared for the next century? Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders - primarily the central banks of China, Japan and other big U.S. trading partners - have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-percent credit card.

In her part of the fiscal wake-up tour presentation, Rogers tries to explain why that's a bad thing. For one thing, even when rates are low a bigger deficit means a greater portion of each tax dollar goes to interest payments rather than useful programs. And because foreigners now hold so much of the federal government's debt, those interest payments increasingly go overseas rather than to U.S. investors.
More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

Macroeconomic meltdown is probably preventable, says Anjan Thakor, a professor of finance at Washington University in St. Louis. But to keep it at bay, he said, the government is essentially going to have to renegotiate some of the promises it has made to its citizens, probably by some combination of tax increases and benefit cuts.

But there's no way to avoid what Rogers considers the worst result of racking up a big deficit - the outrage of making our children and grandchildren repay the debts of their elders.

"It's an unfair burden for future generations," she says.

You'd think young people would be riled up over this issue, since they're the ones who will foot the bill when they're out in the working world. But students take more interest in issues like the Iraq war and gay marriage than the federal government's finances, says Emma Vernon, a member of the University of Texas Young Democrats.

"It's not something that can fire people up," she says.

The current political climate doesn't help. Washington tends to keep its fiscal house in better order when one party controls Congress and the other is in the White House, says Sawhill.

"It's kind of a paradoxical result. Your commonsense logic would tell you if one party is in control of everything they should be able to take action," Sawhill says.

But the last six years of Republican rule have produced tax cuts, record spending increases and a Medicare prescription drug plan that has been widely criticized as fiscally unsound. When President Clinton faced a Republican Congress during the 1990s, spending limits and other legislative tools helped produce a surplus.

So maybe a solution is at hand.

"We're likely to have at least partially divided government again," Sawhill said, referring to predictions that the Democrats will capture the House, and possibly the Senate, in next month's elections.

But Walker isn't optimistic that the government will be able to tackle its fiscal challenges so soon.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."

David M. Walker is a certified public accountant. He has a B.S. degree in accounting from Jacksonville University. His complete biography can be found on Wikipedia.

Happiness remains elusive, despite material excesses

In a July 2006 Fort Worth Star-Telegram article "Trivial Pursuit: Happiness remains elusive, despite material excesses," Tim Madigan reports on research that suggests money does not provide happiness:

In 1776, when Thomas Jefferson wrote the Declaration of Independence, he listed the pursuit of happiness as an inalienable right, immediately after life and liberty. It is a little-known historical fact that Jefferson, John Adams and company also expected that the pursuit of happiness would someday include buying a Lexus and Hummer to share a three-car garage, a McMansion, a plasma television or three, and cosmetic surgery, from head to toe. With all that stuff, the Founding Fathers secretly theorized, Americans would be "really" happy.

It seems the Founding Fathers were wrong.

Not that the average American would want to trade places with folks in Darfur or Haiti or even Mexico, for it is truly hard to be happy when your children are starving. For the past half century, however, we in the United States have enjoyed a spasm of income growth, purchasing power and luxury unprecedented in human history, yet without the corresponding increase in feelings of content. Instead, for the past 50 years, we have lived on a happiness flatline, what prominent British economist Richard Layard calls a "plateau of happiness," a real and troubling disconnect between what we have and how we feel. (If it's any consolation, the Japanese are even less grateful, he says.)

It is that disconnect, that relative discontent, that has helped to inspire the recent groundswell of interest among social scientists, journalists and psychologists. Layard's criticalled acclaimed book, Happiness: Lessons From a New Science, was recently published in paperback, among the slew of titles on the topic to hit the bookstores in the past few years. (Another, Stumbling on Happiness, by Harvard psychologist Daniel Gilbert, has recently been inching its way up the bestseller lists.) "Positive Psychology" (the study of what makes people happy vs. what makes them depressed) is the hottest new trend in that field, while leading national journals have regularly weighed in on happiness and its associated conundrums.

Boiled down, the issues seem to be thus: Why haven’t we gotten happier as we’ve gotten richer? And if money can’t buy happiness, as our mothers always said, exactly where and how do we find it?

They are crucial questions, certainly, worthy of our finest minds, and they lead inevitably to, you’ll never guess – the Buddhist kingdom of Bhutan. We meet the Bhutanese midway through Layard’s book, an isolated Himalayan people whose king, in 1998, decided the country’s objective would be Gross National Happiness. A laudable thing all around. The problem is, the king allowed television into his country for the first time the very next year.

“And so the Bhutanese could see the usual mixture of football, violence, sexual betrayal, consumer advertising, wrestling and the like,” Layard writes. “They lapped it up, but the impact on their society provides a remarkable natural experiment in how technological change can affect attitudes and behavior … Quite soon everyone noticed a sharp increase in family breakup, crime and drug-taking.”

In recent years, the Bhutanese government has been trying to get television, or at least the most odious programs, banned from the country. Good luck with that. But the misfortune of the king and his people is truly a story for our time. In most any intelligent discussion of what’s wrong with our society; of what stands between us and our bliss, television takes a terrible beating.

For starters, there is the steady diet of violence and soulless sex, dishonesty, betrayal and intrigue – that electronic smorgasbord from which we and our children continuously feast. Not that violence and soulless sex don’t happen in real life, but not nearly as frequently as television would make it seem. And now the data are clear: The more television we watch, the more desensitized, violent and debased we become.

“I don’t think television does much good,” Layard said in a recent telephone interview from his office in London. “It sort of elevates the glamour and attachment to success, and a lot of the people who are successful on television are not that nice. And advertising makes you feel that you need things you don’t really need. We all know one of the secrets of happiness is to be satisfied with what you have. I have done some research in the United States that shows the longer you watch television, the less happy you are.”

One simple solution: less tube, of course. Layard also suggests a greater investment in the things that really do make us happy – family and friends, meaningful work that we enjoy, community involvement, less getting and more giving.

“I think there will probably be some sort of spiritual revival or a revival of a greater sense of solidarity with other people,” says Layard. “These things go in swings and roundabouts. This has been one of the most ferociously individualistic periods, and I think we’ll start to see some backlash against that. The fact that people are reading these books shows that they’re disenchanted with the idea that the pursuit of private gain is going to make everybody have an enjoyable and meaningful life.”

Bowling is a team sport

Or maybe bowling’s the problem. Or maybe not bowling, per se, but renting a pair of shoes and a ball, and then tossing gutter balls all by yourself. Or maybe … OK. Let’t back up.

Six years ago, Harvard government professor Robert Putnam published a book called Bowling Alone, which Putnam summarized in a recent Time magazine essay.

"I argued that the fabric of American communities has frayed badly since the mid-1960s," Putnam wrote. "I traced plummeting memberships in PTAs, unions and clubs of all sorts, long-term declines in blood donations, card games and charity; and drops of 40 to 60 percent in dinner parties, civic meetings, family suppers, picnics, and yes, league bowling."

Putman's alarming conclusions in Bowling Alone were met pretty much like Al Gore's warnings about global warming, with silence or skepticism. But then, just last month, the American Sociological Review published a study in which 1,467 Americans were asked to describe all the people with whom they had recently discussed important matters. In a similar 1984 survey, we listed just three such close friends. Twenty years later, according to the study, that number had dropped to two.

Putnam tries not to gloat but now says the debate about the depths of our social isolation is over. We're lonely as heck, and as a result, "our children fail to thrive. Crime rises. Politics coarsens. Generosity shrivels. Death comes sooner," he wrote.

Like Layard, Putnam says television is largely to blame for this state of affairs.

"Television is not all bad in terms of social connectedness," Putnam said in a recent interview. "Watching the news is good for civic health. But most Americans don't watch the news. They watch Friends instead of having friends. Entertainment television is lethal for social connection because we watch alone. It's not that we enjoy television so much. It's just that it's so easy. You don't need to coordinate. You don't need to call. Click, and it's there."

More culprits

But what about urban sprawl? Putnam says every 10 minutes of commuting time cuts social connection by 10 percent. What about our failure to account for the most drastic changes in the American Work force since the Industrial Revolution?

"Between 1960 and now, we've had a third of the American workers move from the kitchen to the office, but there's been no change at all in the structure of the workplace, in the way we design workdays and careers," Putnam said. "We're still operating with this Industrial Age image of how work and family are supposed to fit together. "We assume everybody works 9 to 5 and everybody has a wife at home, when almost no one has a wife at home. We need to make it possible for both men and women to reconcile their professional obligations with family and community obligations."

It would also help, Putnam says, if Americans finally take heed of our mothers.

"It's amazing what little effect material possessions have on happiness," Putnam says. "The data, the evidence, is hands-down. Money can buy you happiness, but not very much, and only if you're an Indian peasant. Nobody is going to be happier a year from now if they become a lot wealthier, but connections are very powerful. Family connections. Spouses. Friends."

Talk about a little-known historical fact.

This article also appeared in the July 30, 2006 edition of the Wisconsin State Journal.

Tax Burdens - Country Comparisons

In the May 22, 2006 Forbes article "Overall Tax Burden and Government Spending," Jack Anderson reports the U.S. tax burden is relatively low compared to other Organisation for Economic Co-operation and Development (OECD) countries:

After examining the Forbes Global Misery and Reforn Index, you now can look at all taxes at all levels of national and local government and total government spending, The Overall Tax Burden and Government Spending Table , which measures total tax burden in OECD countries as a percentage of gross domestic product, (“GDP”). This table uses the most recent official numbers available which are for 2004 and thus there is a time lag, but this gives us a good picture of what is happening. This Table is done to make sure that a reduction in the top marginal rate shown in the Misery & Reform Index is not lost through a change in the tax base, deductions or the progressiveness of rates or in the creation of new or hidden taxes at national, regional or local levels. This Table generally follows the Misery & Reform Index ranking with six of the top ten OECD countries in the Misery and Reform Index are also at the top of the Overall Tax Burden and Government Spending Table.

More specifically, this Table shows as does the Index that globally the tax bite dropped slightly from the prior year, with sixteen countries reducing total burden, six remaining constant and eight increasing tax burden. Despite this reduced overall taxation burden , it continues to remain in all of the countries above the levels of taxation of 1965 and only nine countries have decreased total taxation since1980 as a percentage of GDP. Of course, in absolute amounts, the government coffers have grown with their economies to historically unprecedented colossal amounts. The only surprise is there are not more dramatic tax revolutions as there have been historically. The confusing statements about the falling power and shrinking size of governments and the rising power of global corporations, at least in terms of what governments consume in taxes from the GDP of the country’s entrepreneurs and in absolute terms, is misplaced. Specifically, the nine exceptional countries, almost half now released from the burden of communism, that have decreased the amount of taxes in terms of the percentage of the GDP consumed by their government since 1980 are as follows: Belgium, Czech Republic, Hungary, Ireland, Japan, Netherlands, Poland, Slovakia and USA.

We also again include the Overall Government Spending results by each of the governments. Many governments are continuing the trend to reduce taxes, but the harder task of reducing spending is still to be accomplished. Only one-half of the countries reduced spending from the prior year. The solution to deficits is not to reverse the trend in tax reform, at least for those on the top of the Table and Index, but to control spending growth while the economic growth increase the absolute amount of tax revenue.

Comparing the Overall Tax Burden to the Overall Government Spending shows that all countries are spending more than they are taxing. This overall trend is not just a Keynesian cyclical exception. This difference in burden and spending is only partially covered by the increasing “budget deficit”. This difference is also partially covered by additional “revenues” that governments do not consider to be “taxes” including user fees and service charges, “profits” from government owned companies and monopolies and the sale of state assets, such as privatizations of state owned companies or sale of its real estate or its gold reserves. Thus the Overall Tax Burden is understated and hidden from taxpayers, but not from Forbes readers. Also note that the budget deficit that is covered by government borrowings require future taxes to repay the debt and currently service the interest payments (now among the top two or three expenditures of too many governments and these increased government borrowings also indirectly increase the interest rate paid the entrepreneur as an additional “tax”). The reality is the appearance of progress in tax burden in the analysis is partly masked and false due to government misreporting.

While the Misery & Reform Index charts the marginal tax cost on a growing business and its top executive, it is also important to look at the total taxes imposed by a country at all levels, national and local, as compared to its GDP to measure the overall burden.

Importantly, we also look in this table at Overall Government Spending at all levels of government, which in all cases is greater than the Overall Tax Burden. The resulting deficits are covered by debt, hidden taxes, profits from state owned monopolies and the privatization and sale of government assets. This allows the reader to be aware of the broader base of current and future total taxation issues. This is the latest official data from the OECD and is for 2004. It takes governments a year to count their colossal tax revenues and expenditures.

Tax Misery & Reform Index: Which countries are the best and worst for entrepreneurs and businesses?

Source: http://members.forbes.com/global/2006/0522/032.html

Click the image above to enlarge it.

In the May 22, 2006 Forbes article "Tax Misery & Reform Index," Jack Anderson explains that the tax burden in the United States is low compared to most other countries in the world.

Asia continues to look attractive in our annual ranking of tax burden. And even China's bum score may be deceiving.

Our 2006 Tax Misery & Reform Index offers a global view of the top marginal rates of taxation--the ones that typically most affect a successful entrepreneur. The news is good as the rates generally continue to decrease around the world.

The Misery scores--a sum of six tax rates--are lower in 16 of the locations this year, with France decreasing the most (although still in the top position). There was no change in 28 locations, and only 8 increased Tax Misery (7 of them just slightly). Overall, the original European Union-15 and China have the highest levels of Tax Misery--China because of its extraordinary social security and pension rates. The lowest levels generally continue to be in the rest of Asia, the Middle East, Russia and the U.S. (Keep in mind that countries at the bottom of our chart are the most tax-friendly to entrepreneurs and wage earners, while those at the top are the harshest.)

China's "miserable" score comes with a big qualifier. Social taxes tend to have income caps that spare the highest earners, and special tax holidays for foreign investors and expatriates keep the "effective" rate of taxation (as opposed to the top "marginal" rate) closer to the other Asian countries. But a specific measurement of net take-home pay (after income and social taxes) for a top executive reveals that only one other Asian country, Japan, leaves the executive with less than China does. And the Chinese taxman's work is never done: A new levy on the 45 billion pairs of disposable wooden chopsticks used annually will push conservation as well as increase revenues.

Almost half of the countries on the bright side of global taxation are Asian, including Hong Kong and Taiwan. Singapore continues to lower levies, and Korea codified its new low 17% flat tax (but only for expatriates), which is less than half the top 39% local rate in the Misery Index. India remains at the low end, despite this year's five-point upturn. Japan, although reducing its Misery score, has been hardening its tax treatment of expatriates and remains, with China, the tax worry of the Asian region. Indeed, Japan is not likely to be improving its score in the short run, if expectations of higher consumption taxes to close a massive budget deficit prove out. The nation oughtn't take current glimmers of economic growth for granted.

Not surprisingly, eight of the top ten countries on our list are European. France, though still at the top of the Misery Index, also showed the most reform this year (with a reduction of eight points) by reducing taxes under besieged Prime Minister Dominique de Villepin. A top individual progressive tax rate of 40% is down from 48%. A high earner is now charged this on his incremental salary and investment income, as well as an 11% flat tax on all pay.

Germany, despite a record of reform since 2000, went substantially in the other direction this year. The reforms that were anticipated under former chancellor Gerhard Schröder were not realized. Instead, taxes were increased in 2006 by the new coalition government of Chancellor Angela Merkel. (Our index records planned tax moves, ahead of their full enactment--so we must adjust when implementation falls short.)

We show Germany from the perspective of Berlin--where state and local taxes are a significant factor. (Same in the U.S.--note the difference between New York and Texas.) A top-earning Berlin entrepreneur is now looking at 14 additional points of Misery.

As with China, you have to consider special provisions for multinationals and expatriates. Here France has also been making concessions, but elsewhere in Europe this flexibility is being limited. This only makes seemingly high-tax China, which gives the foreign direct investor a ten-year tax holiday, more of a magnet for international capital.

Jack Anderson is an international tax attorney in the U.S. and EU, and a member of the French bar, the U.S. Tax Court and the California and New York bars. He is also a CPA, M.B.A. and partner in an international law firm in Paris. E-mail: jack.anderson@wanadoo.fr

Immigration's Effect on Economy is Murky

Immigration's Effect on Economy is Murky
Thursday , March 30, 2006
By Greg Simmons
Fox News

WASHINGTON — As the Senate works on a bill to impose the broadest reforms on immigration in 20 years, the debate continues to percolate over the impact on the U.S. economy by the presence and contributions of illegal immigrants.

Messages are mixed on the strength of the American economy, and the role of immigration is one of the main arguments being made on both sides of the debate over whether to tighten the flow of illegal immigrants or to make it easier for them to enter the country to prop up low-paying industries.

Wednesday, the Senate began debate on immigration reform after the Judiciary Committee forwarded a bill Monday that would increase spending on border security as well as create a guest-worker program favored by pro-immigration groups and President Bush. The committee measure differs from a House bill sponsored by Rep. James Sensenbrenner, R-Wis., that does not give leniency to those already in the country illegally and would create further restrictions, including stiffer penalties on employers and the illegal aliens themselves.

Determining the impact of illegal workers on employment rates, GDP and health care costs, among other numbers, is tricky because of the nature of their being undocumented. Government and private industries can't track numbers ­­— productivity, purchasing patterns or wages, for instance — like they would for legal sectors of the economy, because the underground market is just that.

The limitation automatically puts those interested in the finding out the economic impact of illegals at a disadvantage.

"There's no simple answer. It's very complex," said Michele Waslin, director of immigration policy research for the immigrant friendly National Council of La Raza.

Waslin's group and others seeking to expand the rights of immigrants to the United States say based on their findings, the economic balance falls in favor of an immigrant-friendly society.

Waslin cites as supporting evidence employment rates among immigrants — 94 percent among undocumented male workers, according to the Pew Hispanic Center; Social Security Administration statistics — more than $500 billion in unclaimed revenues attributed to payments from illegal workers; and government spending on immigration enforcement activities — $4.9 billion in 2002, according to the Migration Policy Institute, up from $1 billion in 1985.

"We're spending more and more money with fewer results," Waslin said of border security spending.

Waslin added that the United States has for some time been shifting to a higher-tech, better-educated society that isn't producing janitors, farm workers and other low-wage, low-education employees, even though the demand for those positions is strong. Regardless of whether Americans want to do the jobs, they aren't, and the jobs still need to be filled, she said.

"Americans aren't going to take the jobs at the current wage and work conditions being offered," Waslin said.

But Jack Martin, special projects director for the Federation for American Immigration Reform, and others say the economic balance tilts negatively as a result of immigration.

According to a Pew Hispanic Center study released in March, illegal immigrants entered the country last year at an estimated rate of about 1,300 per day, and an estimated 11.5 million to 12 million illegals live inside the United States. Pew estimates that illegal immigrants account for nearly 5 percent of the U.S. labor force, or about 7.2 million workers.

Martin said with a calculated 500,000 illegals entering the borders each year, the U.S. economy, and the country as a whole, can't sustain itself. He cited growth rates published by the Census Bureau that put the country doubling in size in the next 70 years.

Citing a "fiscal drain" of billions of dollars in education and urgent health care, among other services, the country will be choked in traffic and sprawl. To give an example of the negative impact, Martin said he's looked at the costs of illegal immigration to education, health care and prison systems in the Southwest and California. Californians, for instance, are paying about $1,000 per household to cover the costs generated by supporting an illegal immigrant population, he said.

Immigration in its current form "distorts our economy and it's having significant effects on the way that our society will be in the in the future if we don't get control over it," Martin said.

That's not the picture offered by Brent Wilkes, executive director of the League of United Latin American Citizens, who said immigrants, legal and illegal, pay property and sales taxes, spend their money here and are helping to revitalize communities that were depressed 20 years ago.

Wilkes cites a study by University of California-Los Angeles professor Raul Hinojosa, which says the total economic contribution of illegal immigrants from what they produce and what they spend is about $800 billion. Losing that by cutting off the flow of immigrants entirely and sending back the ones who are here illegally would be a tremendous blow to the gross domestic product, he said.

"If you get rid of $800 billion in economic activity, that's a big hit on the U.S. economy," Wilkes said.

Martin countered that immigrants, legal and illegal, aren't spending as much money in the United States as their native-born counterparts would be. He cited widely distributed statistics that $15 billion or more is sent home to Mexico every year in the form of remittances, or cash and wire transfers to family members.

Martin said he's also fearful that the current wave of immigration is actually chipping away at the underpinnings of society, an expense that is incalculable in dollar terms.

Waving off any idea that he's against cultural intrusion — he said he's lived in Latin America and speaks multiple languages — Martin said he has seen signs of a growing class divide in the United States, signs that are more often associated with developing countries. For instance, gated communities, increased wage discrepancies and more barriers to class mobility.

"That's the sort of big picture-type trend that we have to be concerned about," Martin said

The small picture, too, is a concern, said Mark Krikorian, executive director of the Center for Immigration Studies. Although he concedes that definite benefits for some specific sectors of the economy come from the illegal workforce, the overall costs to American citizens outweighs the benefits of illegal immigration.

"There's no question that illegal immigration, that unskilled immigration of all kinds, is a losing proposition," Krikorian said.

Krikorian's group just released a study this week that says illegal immigration is most harming the unskilled sector of the labor force. Krikorian said it shows current U.S. immigration policy isn't looking out for its own citizens.

A study of Census Bureau data revealed that while U.S. unemployment is under 5 percent, unemployment among high school dropouts is 14 percent and among those with only a high school education is about 7 percent, he said.

Krikorian said that shows that despite the claims otherwise, for non-immigrants "there isn't full employment in the low-skilled labor market."

Krikorian said that until immigration policy changes, the problem boils down to a simple point — low-wage citizen workers are being crowded out of low-pay jobs by illegal immigrants.

"These are crummy jobs and ... they're getting crummier," Krikorian said.

The Ludwig von Mises Institute

The Ludwig von Mises Institute "was founded in 1982 as the research and educational center of classical liberalism, libertarian political theory, and the Austrian School of economics. It serves as the world's leading provider of educational materials, conferences, media, and literature in support of the tradition of thought represented by Ludwig von Mises and the school of thought he enlivened and carried forward during the 20th century, which has now blossomed into a massive international movement of students, professors, professionals, and people in all walks of life. It seeks a radical shift in the intellectual climate as the foundation for a renewal of the free and prosperous commonwealth."

Liberty and Economics - a 38-minute YouTube video from the Ludwig von MIses Institute that espouses the virtues of free markets and capitalism.

Research Dispels Bush Claims That Tax Cuts Create Jobs

In the November 18, 2005 OneWorld.net article "Research Dispels Bush Claims That Tax Cuts Create Jobs," Haider Rizvi explains:

Changes in tax policy suggest no evidence of their impact on job creation or destruction, according to the 22-page study released Tuesday by United for a Fair Economy (UFE), an independent group that tracks the growing economic divide between the nation's haves and have-nots.

Since 1950, significant tax increases and decreases have both been followed by job losses and job gains, say the researchers.

Based on statistical analysis of changes in tax polices and rates of job growth in the past 60 years, the report points out that tax reduction does, however, disproportionately lead to economic disparity between the rich and poor.

Cost of Katrina relief splits Republican ranks

In the September 20, 2005 Christian Science Monitor article "Cost of Katrina relief splits Republican ranks," Gail Russell Chaddock reports on the conflicts between Republican philosphy and reality.

President Bush's call to spend "whatever it takes" to rebuild the Gulf Coast set off alarm bells among some in his conservative base - and stepped up a growing debate among Republicans at both ends of Pennsylvania Avenue on how to fix the battered region in ways that promote conservative values.

From vouchers for education and Medicaid to the creation of a giant "opportunity zone" where Katrina struck, the Bush reconstruction effort - which he called "one of the largest reconstruction efforts the world has ever seen" - is reviving prospects for policy initiatives that GOP leaders say could make or break their party's future.

At the same time, fiscal conservatives, often outside of leadership, are calling for deep cuts in existing spending to pay the costs of reconstruction. They, too, see this as a fight for the soul of the Republican Party.

"It's too early to tell. It could wind up being the New Deal on steroids," says Mike Franc, vice president for governmental affairs at the Heritage Foundation, a conservative think tank.

For a president who campaigned on Ronald Reagan's legacy of limited government, the vast scope of needs in the region pose a special
challenge. While President Roosevelt's New Deal and President Johnson's War on
Poverty offer templates for a federal response, Republicans have campaigned for
decades to roll them back.

"If people can agree that the last 40 years didn't help win the War on Poverty in New Orleans and the Gulf - and even hurt it - then the debate shifts into not replicating the last 40 years," says Mr. Franc.

But if the congressional committees bog down and can't agree on a package of reforms that can be financed without breaking the bank, "the default could be going with what we already have," he adds.

In recent weeks, Republican leaders have tasked every committee in Congress to come up quickly with new ideas that meet needs in the region.

These range from a vast package of tax breaks to revive business and housing in the Gulf, to Education Smart cards, which give families the option of paying for education wherever it is available and suits their needs, including private and parochial schools.

But to move such a plan, Republicans will need coherence in their own ranks, especially agreement across their caucus on how to pay for it. For fiscal conservatives, the biggest issue in the Gulf cleanup is its price tag, expected to exceed $200 billion. Congress has already appropriated $62 billion in emergency spending..

"Congress must ensure that a catastrophe of nature does not become a catastrophe of debt for our children and grandchildren," says Rep. Mike Pence(R) of Indiana, who chairs the Republican Study Group, a top conservative caucus.

The Heritage Foundation estimates that such levels of spending could bump budget deficits past $500 billion in 2008 to $873 billion in 2015.

In response, some conservative lawmakers are calling on their leaders to find offsets for new spending, including delaying implementing the new Medicare drug benefit, rolling back pork projects in recently passed Highway and Energy bills, and even
deferring a vote on the permanent extension of Bush tax cuts. Last week, 11 House Republicans voted against a $52 billion hurricane relief bill in protest
against the failure to identify offsets.

In a comment to reporters last week, House majority leader Tom DeLay said that after 11 years of a Republican majority, there wasn't much fat to cut in the federal budget.

The comment alarmed many conservative activists outside
government who see the big spending ways of the Bush administration as a betrayal of small- government ideals.

"I have to pretty strongly disagree with the majority leader," says former GOP Rep. Pat Toomey, now head of the Club for Growth, an antitax group that backs Republican
candidates.

"Whatever money gets spent on this reconstruction effort really needs to be offset by reductions somewhere else," he adds. "It's not the role of the federal government to be rebuilding houses and strip malls...."

At a closed leadership meeting on Thursday, House GOP leaders tried to bridge divisions in their caucus by promising strong accountability on where new federal dollars are going "Whatever is expended by Congress, we want to make sure it is funded appropriately and that states and local communities, as well as the private sector, share the burden," said a House leadership aide.

While Republicans have stood by the president as he expanded the role of government in local schools and the war on terrorism, the new wave of post-Katrina spending could break that consensus at a time when the Bush's job rating is at record lows.

The bid to work conservative programs, such as education vouchers, into Gulf aid could help bridge those gaps.

"It's window dressing for the benefit of social conservatives," says Ross Baker, a
political scientist at Rutgers University in New Brunswick, N.J.. "The president may feel that whatever support he will lose among fiscal conservatives, he will win from conservatives proud of him for bootlegging vouchers in the relief plan."

Source: http://news.yahoo.com/s/csm/20050920/ts_csm/afiscal_1

Police Officers Advocate Legalized Regulation of all Drugs

Law Enforcement Against Prohibition (LEAP) is an organization dedicated to the legalization and regulation of all drugs. According to the advocacy group's website:

Founded on March 16, 2002, LEAP is made up of current and former members of the law enforcement and criminal justice communities who are speaking out about the failures of our existing drug policies. Those policies have failed, and continue to fail, to effectively address the problems of drug abuse, especially the problems of juvenile drug use, the problems of addiction, and the problems of crime caused by the existence of a criminal black market in drugs.

Although those who speak publicly for LEAP are people from the law enforcement and criminal justice communities, a large number of our supporting members do not have such experience. You don't have to have law enforcement experience to join us.

By continuing to fight the so-called "War on Drugs", the US government has worsened these problems of society instead of alleviating them. A system of regulation and control of these substances (by the government, replacing the current system of control by the black market) would be a less harmful, less costly, more ethical and more effective public policy.

Fox News responds to charges of bias

In the September 1, 2004 USA Today article "Fox newspeople say allegations of bias unfounded," Mark Memmott provides responses from Fox New reporters to allegations that the network has a conservative bias.

NEW YORK — The pundits were merciless.

President Bush's twins daughters, Barbara and Jenna, "came off, frankly, as ditzes" when they spoke to the Republican National Convention, one commentator said.

Laura Bush's speech "did not help" the president's campaign, said another.

The first lady and her daughters "had no place up there" on the convention stage, said a third.

It wasn't the liberal Air America radio network doing that skewering Tuesday night at the Republican convention.

The setting was Fox News Channel's skybox inside Madison Square Garden. The show was Special Report, moderated by Brit Hume. Morton Kondracke, executive editor of Roll Call, dissed the twins. William Kristol, editor of The Weekly Standard, gave Laura Bush's speech a low rating. Fred Barnes, executive editor of The Weekly Standard, thought the women shouldn't have been addressing delegates because "we're not electing a family."

All three are known for their conservative or independent political views. Their comments couldn't have been more opposite what conventional wisdom would predict a Fox News panel would say.

Fox News, its critics say, is a cheering squad for Republicans and the Bush administration. The network is the most visible American arm of Rupert Murdoch's News Corp. global media empire, which also includes the New York Post.

Fox's critics are counting the number of minutes the network devotes to speeches at this week's Republican convention compared with its coverage of the Democratic convention in July. The first two nights here: 2 hours and 9 minutes. The first two nights at the Democratic convention: 1 hour and 46 minutes. One reason for the difference: former New York City mayor Rudy Giuliani went overtime Monday.

A documentary released this summer, Outfoxed, shows former Fox staffers accusing their old bosses of ordering them to slant the news in favor of conservatives. And Tuesday outside Fox News' studios in Manhattan, protesters held a "Shut Up!" rally to express their anger at what they see as the network's conservative bias.

The people at Fox News see things differently. While the hosts who are paid to give their opinions make no attempts to hide their politics, the reporters and anchors on the news programs say they're traditional journalists who don't buy into attempts to spin the news:

• "The only marching order I've had is to do the best news show I can, and there's never been a single eyebrow raised (from management) about what we've done," says Chris Wallace, who joined Fox in 2003 after 15 years with ABC. He hosts Fox News Sunday with Chris Wallace.

• "The only time in my career that anyone ever told me I had to say something was when I was with a different organization," says senior White House correspondent Jim Angle, who worked at ABC for three years and National Public Radio for nine years before joining Fox in 1996.

• "I swear I'm not biased, and I know that no one (at Fox) has ever told me what to say," Fox Report anchor Shepard Smith says.

Bill O'Reilly, host of The O'Reilly Factor, is the lightning rod who catches many of the charges hurled at Fox News. He dismisses allegations that he sometimes makes up things to support his opinions and that Fox News is too conservative.

"If Fox News is a conservative channel — and I'm going to use the word 'if' — so what?" O'Reilly said Tuesday night as he removed his makeup following a broadcast of The O'Reilly Factor from inside Fox's skybox in Madison Square Garden. "You've got 50 other media that are blatantly left. Now, I don't think Fox is a conservative channel. I think it's a traditional channel. There's a difference. We are willing to hear points of view that you'll never hear on ABC, CBS or NBC."

Some critics say Fox and other cable networks overplayed the story of the veterans who accuse Sen. John Kerry of lying about his war record — and gave too much attention to the Swift Boat Veterans for Truth group even after some of its claims had been contradicted.

But Hume, who's been with Fox News since its beginning in 1996, said Fox took the story seriously because "you had Vietnam veterans, on the record, who were there and who were making serious allegations. How can you not do that story?"

Tom Rosenstiel, director of Columbia University's Project for Excellence in Journalism, warns of the "Foxification" of cable news. He says Fox News' ratings success — it attracted more convention viewers Tuesday than MSNBC and CNN combined — is pushing the other cable channels to be more like it by cutting back on news and adding more conservative opinion.

Even some who say Fox News gives them a fair shot at expressing their liberal opinions question the network's objectivity. A lion of the Democrats' liberal wing, Rep. Charles Rangel of New York, was on the Hannity & Colmes show Tuesday. Afterward, he made no effort to hide his feelings. "I go on Fox because a lot of Democrats won't," Rangel said. "Listen to me, Fox is not conservative. They're an extension of the Republican Party. Do they give me a fair shot when I'm on? Yes, because they need me. I'm red meat for their listeners."

The Truth About Drug Companies

The New York Review of Books
Volume 51, Number 12 · July 15, 2004
The Truth About the Drug Companies

By Marcia Angell
1.

Every day Americans are subjected to a barrage of advertising by the pharmaceutical industry. Mixed in with the pitches for a particular drug—usually featuring beautiful people enjoying themselves in the great outdoors—is a more general message. Boiled down to its essentials, it is this: "Yes, prescription drugs are expensive, but that shows how valuable they are. Besides, our research and development costs are enormous, and we need to cover them somehow. As 'research-based' companies, we turn out a steady stream of innovative medicines that lengthen life, enhance its quality, and avert more expensive medical care. You are the beneficiaries of this ongoing achievement of the American free enterprise system, so be grateful, quit whining, and pay up." More prosaically, what the industry is saying is that you get what you pay for.

Is any of this true? Well, the first part certainly is. Prescription drug costs are indeed high—and rising fast. Americans now spend a staggering $200 billion a year on prescription drugs, and that figure is growing at a rate of about 12 percent a year (down from a high of 18 percent in 1999).[1] Drugs are the fastest-growing part of the health care bill—which itself is rising at an alarming rate. The increase in drug spending reflects, in almost equal parts, the facts that people are taking a lot more drugs than they used to, that those drugs are more likely to be expensive new ones instead of older, cheaper ones, and that the prices of the most heavily prescribed drugs are routinely jacked up, sometimes several times a year.


Before its patent ran out, for example, the price of Schering-Plough's top-selling allergy pill, Claritin, was raised thirteen times over five years, for a cumulative increase of more than 50 percent—over four times the rate of general inflation.[2] As a spokeswoman for one company explained, "Price increases are not uncommon in the industry and this allows us to be able to invest in R&D."[3] In 2002, the average price of the fifty drugs most used by senior citizens was nearly $1,500 for a year's supply. (Pricing varies greatly, but this refers to what the companies call the average wholesale price, which is usually pretty close to what an individual without insurance pays at the pharmacy.)

aying for prescription drugs is no longer a problem just for poor people. As the economy continues to struggle, health insurance is shrinking. Employers are requiring workers to pay more of the costs themselves, and many businesses are dropping health benefits altogether. Since prescription drug costs are rising so fast, payers are particularly eager to get out from under them by shifting costs to individuals. The result is that more people have to pay a greater fraction of their drug bills out of pocket. And that packs a wallop.

Many of them simply can't do it. They trade off drugs against home heating or food. Some people try to string out their drugs by taking them less often than prescribed, or sharing them with a spouse. Others, too embarrassed to admit that they can't afford to pay for drugs, leave their doctors' offices with prescriptions in hand but don't have them filled. Not only do these patients go without needed treatment but their doctors sometimes wrongly conclude that the drugs they prescribed haven't worked and prescribe yet others—thus compounding the problem.

The people hurting most are the elderly. When Medicare was enacted in 1965, people took far fewer prescription drugs and they were cheap. For that reason, no one thought it necessary to include an outpatient prescription drug benefit in the program. In those days, senior citizens could generally afford to buy whatever drugs they needed out of pocket. Approximately half to two thirds of the elderly have supplementary insurance that partly covers prescription drugs, but that percentage is dropping as employers and insurers decide it is a losing proposition for them. At the end of 2003, Congress passed a Medicare reform bill that included a prescription drug benefit scheduled to begin in 2006, but as we shall see later, its benefits are inadequate to begin with and will quickly be overtaken by rising prices and administrative costs.

For obvious reasons, the elderly tend to need more prescription drugs than younger people—mainly for chronic conditions like arthritis, diabetes, high blood pressure, and elevated cholesterol. In 2001, nearly one in four seniors reported that they skipped doses or did not fill prescriptions because of the cost. (That fraction is almost certainly higher now.) Sadly, the frailest are the least likely to have supplementary insurance. At an average cost of $1,500 a year for each drug, someone without supplementary insurance who takes six different prescription drugs—and this is not rare—would have to spend $9,000 out of pocket. Not many among the old and frail have such deep pockets.

Furthermore, in one of the more perverse of the pharmaceutical industry's practices, prices are much higher for precisely the people who most need the drugs and can least afford them. The industry charges Medicare recipients without supplementary insurance much more than it does favored customers, such as large HMOs or the Veterans Affairs (VA) system. Because the latter buy in bulk, they can bargain for steep discounts or rebates. People without insurance have no bargaining power; and so they pay the highest prices.

n the past two years, we have started to see, for the first time, the beginnings of public resistance to rapacious pricing and other dubious practices of the pharmaceutical industry. It is mainly because of this resistance that drug companies are now blanketing us with public relations messages. And the magic words, repeated over and over like an incantation, are research, innovation, and American. Research. Innovation. American. It makes a great story.

But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companies—dwarfed by their vast expenditures on marketing and administration, and smaller even than profits. In fact, year after year, for over two decades, this industry has been far and away the most profitable in the United States. (In 2003, for the first time, the industry lost its first-place position, coming in third, behind "mining, crude oil production," and "commercial banks.") The prices drug companies charge have little relationship to the costs of making the drugs and could be cut dramatically without coming anywhere close to threatening R&D.

Second, the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of "new" drugs are not new at all but merely variations of older drugs already on the market. These are called "me-too" drugs. The idea is to grab a share of an established, lucrative market by producing something very similar to a top-selling drug. For instance, we now have six statins (Mevacor, Lipitor, Zocor, Pravachol, Lescol, and the newest, Crestor) on the market to lower cholesterol, all variants of the first. As Dr. Sharon Levine, associate executive director of the Kaiser Permanente Medical Group, put it,

If I'm a manufacturer and I can change one molecule and get another twenty years of patent rights, and convince physicians to prescribe and consumers to demand the next form of Prilosec, or weekly Prozac instead of daily Prozac, just as my patent expires, then why would I be spending money on a lot less certain endeavor, which is looking for brand-new drugs?[4]
Third, the industry is hardly a model of American free enterprise. To be sure, it is free to decide which drugs to develop (me-too drugs instead of innovative ones, for instance), and it is free to price them as high as the traffic will bear, but it is utterly dependent on government-granted monopolies—in the form of patents and Food and Drug Administration (FDA)–approved exclusive marketing rights. If it is not particularly innovative in discovering new drugs, it is highly innovative—and aggressive—in dreaming up ways to extend its monopoly rights.

And there is nothing peculiarly American about this industry. It is the very essence of a global enterprise. Roughly half of the largest drug companies are based in Europe. (The exact count shifts because of mergers.) In 2002, the top ten were the American companies Pfizer, Merck, Johnson & Johnson, Bristol-Myers Squibb, and Wyeth (formerly American Home Products); the British companies GlaxoSmithKline and AstraZeneca; the Swiss companies Novartis and Roche; and the French company Aventis (which in 2004 merged with another French company, Sanafi Synthelabo, putting it in third place).[5] All are much alike in their operations. All price their drugs much higher here than in other markets.

Since the United States is the major profit center, it is simply good public relations for drug companies to pass themselves off as American, whether they are or not. It is true, however, that some of the European companies are now locating their R&D operations in the United States. They claim the reason for this is that we don't regulate prices, as does much of the rest of the world. But more likely it is that they want to feed on the unparalleled research output of American universities and the NIH. In other words, it's not private enterprise that draws them here but the very opposite—our publicly sponsored research enterprise.

ver the past two decades the pharmaceutical industry has moved very far from its original high purpose of discovering and producing useful new drugs. Now primarily a marketing machine to sell drugs of dubious benefit, this industry uses its wealth and power to co-opt every institution that might stand in its way, including the US Congress, the FDA, academic medical centers, and the medical profession itself. (Most of its marketing efforts are focused on influencing doctors, since they must write the prescriptions.)

If prescription drugs were like ordinary consumer goods, all this might not matter very much. But drugs are different. People depend on them for their health and even their lives. In the words of Senator Debbie Stabenow (D-Mich.), "It's not like buying a car or tennis shoes or peanut butter." People need to know that there are some checks and balances on this industry, so that its quest for profits doesn't push every other consideration aside. But there aren't such checks and balances.

2.

What does the eight-hundred-pound gorilla do? Anything it wants to.
What's true of the eight-hundred-pound gorilla is true of the colossus that is the pharmaceutical industry. It is used to doing pretty much what it wants to do. The watershed year was 1980. Before then, it was a good business, but afterward, it was a stupendous one. From 1960 to 1980, prescription drug sales were fairly static as a percent of US gross domestic product, but from 1980 to 2000, they tripled. They now stand at more than $200 billion a year.[6] Of the many events that contributed to the industry's great and good fortune, none had to do with the quality of the drugs the companies were selling.

The claim that drugs are a $200 billion industry is an understatement. According to government sources, that is roughly how much Americans spent on prescription drugs in 2002. That figure refers to direct consumer purchases at drugstores and mail-order pharmacies (whether paid for out of pocket or not), and it includes the nearly 25 percent markup for wholesalers, pharmacists, and other middlemen and retailers. But it does not include the large amounts spent for drugs administered in hospitals, nursing homes, or doctors' offices (as is the case for many cancer drugs). In most analyses, they are allocated to costs for those facilities.

Drug company revenues (or sales) are a little different, at least as they are reported in summaries of corporate annual reports. They usually refer to a company's worldwide sales, including those to health facilities. But they do not include the revenues of middlemen and retailers.

Perhaps the most quoted source of statistics on the pharmaceutical industry, IMS Health, estimated total worldwide sales for prescription drugs to be about $400 billion in 2002. About half were in the United States. So the $200 billion colossus is really a $400 billion megacolossus.

he election of Ronald Reagan in 1980 was perhaps the fundamental element in the rapid rise of big pharma—the collective name for the largest drug companies. With the Reagan administration came a strong pro-business shift not only in government policies but in society at large. And with the shift, the public attitude toward great wealth changed. Before then, there was something faintly disreputable about really big fortunes. You could choose to do well or you could choose to do good, but most people who had any choice in the matter thought it difficult to do both. That belief was particularly strong among scientists and other intellectuals. They could choose to live a comfortable but not luxurious life in academia, hoping to do exciting cutting-edge research, or they could "sell out" to industry and do less important but more remunerative work. Starting in the Reagan years and continuing through the 1990s, Americans changed their tune. It became not only reputable to be wealthy, but something close to virtuous. There were "winners" and there were "losers," and the winners were rich and deserved to be. The gap between the rich and poor, which had been narrowing since World War II, suddenly began to widen again, until today it is a chasm.

The pharmaceutical industry and its CEOs quickly joined the ranks of the winners as a result of a number of business-friendly government actions. I won't enumerate all of them, but two are especially important. Beginning in 1980, Congress enacted a series of laws designed to speed the translation of tax-supported basic research into useful new products—a process sometimes referred to as "technology transfer." The goal was also to improve the position of American-owned high-tech businesses in world markets.

The most important of these laws is known as the Bayh-Dole Act, after its chief sponsors, Senator Birch Bayh (D-Ind.) and Senator Robert Dole (R-Kans.). Bayh-Dole enabled universities and small businesses to patent discoveries emanating from research sponsored by the National Institutes of Health, the major distributor of tax dollars for medical research, and then to grant exclusive licenses to drug companies. Until then, taxpayer-financed discoveries were in the public domain, available to any company that wanted to use them. But now universities, where most NIH-sponsored work is carried out, can patent and license their discoveries, and charge royalties. Similar legislation permitted the NIH itself to enter into deals with drug companies that would directly transfer NIH discoveries to industry.

Bayh-Dole gave a tremendous boost to the nascent biotechnology industry, as well as to big pharma. Small biotech companies, many of them founded by university researchers to exploit their discoveries, proliferated rapidly. They now ring the major academic research institutions and often carry out the initial phases of drug development, hoping for lucrative deals with big drug companies that can market the new drugs. Usually both academic researchers and their institutions own equity in the biotechnology companies they are involved with. Thus, when a patent held by a university or a small biotech company is eventually licensed to a big drug company, all parties cash in on the public investment in research.

hese laws mean that drug companies no longer have to rely on their own research for new drugs, and few of the large ones do. Increasingly, they rely on academia, small biotech startup companies, and the NIH for that.[7] At least a third of drugs marketed by the major drug companies are now licensed from universities or small biotech companies, and these tend to be the most innovative ones.[8] While Bayh-Dole was clearly a bonanza for big pharma and the biotech industry, whether its enactment was a net benefit to the public is arguable.

The Reagan years and Bayh-Dole also transformed the ethos of medical schools and teaching hospitals. These nonprofit institutions started to see themselves as "partners" of industry, and they became just as enthusiastic as any entrepreneur about the opportunities to parlay their discoveries into financial gain. Faculty researchers were encouraged to obtain patents on their work (which were assigned to their universities), and they shared in the royalties. Many medical schools and teaching hospitals set up "technology transfer" offices to help in this activity and capitalize on faculty discoveries. As the entrepreneurial spirit grew during the 1990s, medical school faculty entered into other lucrative financial arrangements with drug companies, as did their parent institutions.

One of the results has been a growing pro-industry bias in medical research—exactly where such bias doesn't belong. Faculty members who had earlier contented themselves with what was once referred to as a "threadbare but genteel" lifestyle began to ask themselves, in the words of my grandmother, "If you're so smart, why aren't you rich?" Medical schools and teaching hospitals, for their part, put more resources into searching for commercial opportunities.

Starting in 1984, with legislation known as the Hatch-Waxman Act, Congress passed another series of laws that were just as big a bonanza for the pharmaceutical industry. These laws extended monopoly rights for brand-name drugs. Exclusivity is the lifeblood of the industry because it means that no other company may sell the same drug for a set period. After exclusive marketing rights expire, copies (called generic drugs) enter the market, and the price usually falls to as little as 20 percent of what it was.[9] There are two forms of monopoly rights—patents granted by the US Patent and Trade Office (USPTO) and exclusivity granted by the FDA. While related, they operate somewhat independently, almost as backups for each other. Hatch-Waxman, named for Senator Orrin Hatch (R-Utah) and Representative Henry Waxman (D-Calif.), was meant mainly to stimulate the foundering generic industry by short-circuiting some of the FDA requirements for bringing generic drugs to market. While successful in doing that, Hatch-Waxman also lengthened the patent life for brand-name drugs. Since then, industry lawyers have manipulated some of its provisions to extend patents far longer than the lawmakers intended.

In the 1990s, Congress enacted other laws that further increased the patent life of brand-name drugs. Drug companies now employ small armies of lawyers to milk these laws for all they're worth—and they're worth a lot. The result is that the effective patent life of brand-name drugs increased from about eight years in 1980 to about fourteen years in 2000.[10] For a blockbuster—usually defined as a drug with sales of over a billion dollars a year (like Lipitor or Celebrex or Zoloft)—those six years of additional exclusivity are golden. They can add billions of dollars to sales—enough to buy a lot of lawyers and have plenty of change left over. No wonder big pharma will do almost anything to protect exclusive marketing rights, despite the fact that doing so flies in the face of all its rhetoric about the free market.

s their profits skyrocketed during the 1980s and 1990s, so did the political power of drug companies. By 1990, the industry had assumed its present contours as a business with unprecedented control over its own fortunes. For example, if it didn't like something about the FDA, the federal agency that is supposed to regulate the industry, it could change it through direct pressure or through its friends in Congress. The top ten drug companies (which included European companies) had profits of nearly 25 percent of sales in 1990, and except for a dip at the time of President Bill Clinton's health care reform proposal, profits as a percentage of sales remained about the same for the next decade. (Of course, in absolute terms, as sales mounted, so did profits.) In 2001, the ten American drug companies in the Fortune 500 list (not quite the same as the top ten worldwide, but their profit margins are much the same) ranked far above all other American industries in average net return, whether as a percentage of sales (18.5 percent), of assets (16.3 percent), or of shareholders' equity (33.2 percent). These are astonishing margins. For comparison, the median net return for all other industries in the Fortune 500 was only 3.3 percent of sales. Commercial banking, itself no slouch as an aggressive industry with many friends in high places, was a distant second, at 13.5 percent of sales.[11]

In 2002, as the economic downturn continued, big pharma showed only a slight drop in profits—from 18.5 to 17.0 percent of sales. The most startling fact about 2002 is that the combined profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion).[12] In 2003 profits of the Fortune 500 drug companies dropped to 14.3 percent of sales, still well above the median for all industries of 4.6 percent for that year. When I say this is a profitable industry, I mean really profitable. It is difficult to conceive of how awash in money big pharma is.

Drug industry expenditures for research and development, while large, were consistently far less than profits. For the top ten companies, they amounted to only 11 percent of sales in 1990, rising slightly to 14 percent in 2000. The biggest single item in the budget is neither R&D nor even profits but something usually called "marketing and administration"—a name that varies slightly from company to company. In 1990, a staggering 36 percent of sales revenues went into this category, and that proportion remained about the same for over a decade.[13] Note that this is two and a half times the expenditures for R&D.

These figures are drawn from the industry's own annual reports to the Securities and Exchange Commission (SEC) and to stockholders, but what actually goes into these categories is not at all clear, because drug companies hold that information very close to their chests. It is likely, for instance, that R&D includes many activities most people would consider marketing, but no one can know for sure. For its part, "marketing and administration" is a gigantic black box that probably includes what the industry calls "education," as well as advertising and promotion, legal costs, and executive salaries—which are whopping. According to a report by the non-profit group Families USA, the for-mer chairman and CEO of Bristol-Myers Squibb, Charles A. Heimbold Jr., made $74,890,918 in 2001, not counting his $76,095,611 worth of unexercised stock options. The chairman of Wyeth made $40,521,011, exclusive of his $40,629,459 in stock options. And so on.[14]

3.

If 1980 was a watershed year for the pharmaceutical industry, 2000 may very well turn out to have been another one—the year things began to go wrong. As the booming economy of the late 1990s turned sour, many successful businesses found themselves in trouble. And as tax revenues dropped, state governments also found themselves in trouble. In one respect, the pharmaceutical industry is well protected against the downturn, since it has so much wealth and power. But in another respect, it is peculiarly vulnerable, since it depends on employer-sponsored insurance and state-run Medicaid programs for much of its revenues. When employers and states are in trouble, so is big pharma.

And sure enough, in just the past couple of years, employers and the private health insurers with whom they contract have started to push back against drug costs. Most big managed care plans now bargain for steep price discounts. Most have also instituted three-tiered coverage for prescription drugs—full coverage for generic drugs, partial coverage for useful brand-name drugs, and no coverage for expensive drugs that offer no added benefit over cheaper ones. These lists of preferred drugs are called formularies, and they are an increasingly important method for containing drug costs. Big pharma is feeling the effects of these measures, although not surprisingly, it has become adept at manipulating the system—mainly by inducing doctors or health plans to put expensive, brand-name drugs on formularies.

State governments, too, are looking for ways to cut their drug costs. Some state legislatures are drafting measures that would permit them to regulate prescription drug prices for state employees, Medicaid recipients, and the uninsured. Like managed care plans, they are creating formularies of preferred drugs. The industry is fighting these efforts—mainly with its legions of lobbyists and lawyers. It fought the state of Maine all the way to the US Supreme Court, which in 2003 upheld Maine's right to bargain with drug companies for lower prices, while leaving open the details. But that war has just begun, and it promises to go on for years and get very ugly.

Recently the public has shown signs of being fed up. The fact that Americans pay much more for prescription drugs than Europeans and Canadians is now widely known. An estimated one to two million Americans buy their medicines from Canadian drugstores over the Internet, despite the fact that in 1987, in response to heavy industry lobbying, a compliant Congress had made it illegal for anyone other than manufacturers to import prescription drugs from other countries.[15] In addition, there is a brisk traffic in bus trips for people in border states, particularly the elderly, to travel to Canada or Mexico to buy prescription drugs. Their resentment is palpable, and they constitute a powerful voter block—a fact not lost on Congress or state legislatures.

The industry faces other, less familiar problems. It happens that, by chance, some of the top-selling drugs—with combined sales of around $35 billion a year—are scheduled to go off patent within a few years of one another.[16] This drop over the cliff began in 2001, with the expiration of Eli Lilly's patent on its blockbuster antidepressant Prozac. In the same year, AstraZeneca lost its patent on Prilosec, the original "purple pill" for heartburn, which at its peak brought in a stunning $6 billion a year. Bristol-Myers Squibb lost its best-selling diabetes drug, Glucophage. The unusual cluster of expirations will continue for another couple of years. While it represents a huge loss to the industry as a whole, for some companies it's a disaster. Schering-Plough's blockbuster allergy drug, Claritin, brought in fully a third of that company's revenues before its patent expired in 2002.[17] Claritin is now sold over the counter for much less than its prescription price. So far, the company has been unable to make up for the loss by trying to switch Claritin users to Clarinex—a drug that is virtually identical but has the advantage of still being on patent.

Even worse is the fact that there are very few drugs in the pipeline ready to take the place of blockbusters going off patent. In fact, that is the biggest problem facing the industry today, and its darkest secret. All the public relations about innovation is meant to obscure precisely this fact. The stream of new drugs has slowed to a trickle, and few of them are innovative in any sense of that word. Instead, the great majority are variations of oldies but goodies—"me-too" drugs.

Of the seventy-eight drugs approved by the FDA in 2002, only seventeen contained new active ingredients, and only seven of these were classified by the FDA as improvements over older drugs. The other seventy-one drugs approved that year were variations of old drugs or deemed no better than drugs already on the market. In other words, they were me-too drugs. Seven of seventy-eight is not much of a yield. Furthermore, of those seven, not one came from a major US drug company.[18]

or the first time, in just a few short years, the gigantic pharmaceutical industry is finding itself in serious difficulty. It is facing, as one industry spokesman put it, "a perfect storm." To be sure, profits are still beyond anything most other industries could hope for, but they have recently fallen, and for some companies they fell a lot. And that is what matters to investors. Wall Street doesn't care how high profits are today, only how high they will be tomorrow. For some companies, stock prices have plummeted. Nevertheless, the industry keeps promising a bright new day. It bases its reassurances on the notion that the mapping of the human genome and the accompanying burst in genetic research will yield a cornucopia of important new drugs. Left unsaid is the fact that big pharma is depending on government, universities, and small biotech companies for that innovation. While there is no doubt that genetic discoveries will lead to treatments, the fact remains that it will probably be years before the basic research pays off with new drugs. In the meantime, the once-solid foundations of the big pharma colossus are shaking.

The hints of trouble and the public's growing resentment over high prices are producing the first cracks in the industry's formerly firm support in Washington. In 2000, Congress passed legislation that would have closed some of the loopholes in Hatch-Waxman and also permitted American pharmacies, as well as individuals, to import drugs from certain countries where prices are lower. In particular, they could buy back FDA-approved drugs from Canada that had been exported there. It sounds silly to "reimport" drugs that are marketed in the United States, but even with the added transaction costs, doing so is cheaper than buying them here. But the bill required the secretary of health and human services to certify that the practice would not pose any "added risk" to the public, and secretaries in both the Clinton and Bush administrations, under pressure from the industry, refused to do that.

The industry is also being hit with a tidal wave of government investigations and civil and criminal lawsuits. The litany of charges includes illegally overcharging Medicaid and Medicare, paying kickbacks to doctors, engaging in anticompetitive practices, colluding with generic companies to keep generic drugs off the market, illegally promoting drugs for unapproved uses, engaging in misleading direct-to-consumer advertising, and, of course, covering up evidence. Some of the settlements have been huge. TAP Pharmaceuticals, for instance, paid $875 million to settle civil and criminal charges of Medicaid and Medicare fraud in the marketing of its prostate cancer drug, Lupron.[19] All of these efforts could be summed up as increasingly desperate marketing and patent games, activities that always skirted the edge of legality but now are sometimes well on the other side.

How is the pharmaceutical industry responding to its difficulties? One could hope drug companies would decide to make some changes—trim their prices, or at least make them more equitable, and put more of their money into trying to discover genuinely innovative drugs, instead of just talking about it. But that is not what is happening. Instead, drug companies are doing more of what got them into this situation. They are marketing their me-too drugs even more relentlessly. They are pushing even harder to extend their monopolies on top-selling drugs. And they are pouring more money into lobbying and political campaigns. As for innovation, they are still waiting for Godot.

The news is not all bad for the industry. The Medicare prescription drug benefit enacted in 2003, and scheduled to go into effect in 2006, promises a windfall for big pharma since it forbids the government from negotiating prices. The immediate jump in pharmaceutical stock prices after the bill passed indicated that the industry and investors were well aware of the windfall. But at best, this legislation will be only a temporary boost for the industry. As costs rise, Congress will have to reconsider its industry-friendly decision to allow drug companies to set their own prices, no questions asked.

his is an industry that in some ways is like the Wizard of Oz—still full of bluster but now being exposed as something far different from its image. Instead of being an engine of innovation, it is a vast marketing machine. Instead of being a free market success story, it lives off government-funded research and monopoly rights. Yet this industry occupies an essential role in the American health care system, and it performs a valuable function, if not in discovering important new drugs at least in developing them and bringing them to market. But big pharma is extravagantly rewarded for its relatively modest functions. We get nowhere near our money's worth. The United States can no longer afford it in its present form.

Clearly, the pharmaceutical industry is due for fundamental reform. Reform will have to extend beyond the industry to the agencies and institutions it has co-opted, including the FDA and the medical profession and its teaching centers. In my forthcoming book, The Truth About the Drug Companies, I discuss the major reforms that will be necessary.

For example, we need to get the industry to focus on discovering truly innovative drugs instead of turning out me-too drugs (and spending billions of dollars to promote them as though they were miracles). The me-too business is made possible by the fact that the FDA usually approves a drug only if it is better than a placebo. It needn't be better than an older drug already on the market to treat the same condition; in fact, it may be worse. There is no way of knowing, since companies generally do not test their new drugs against older ones for the same conditions at equivalent doses. (For obvious reasons, they would rather not find the answer.) They should be required to do so.

The me-too market would collapse virtually overnight if the FDA made approval of new drugs contingent on their being better in some important way than older drugs already on the market. Probably very few new drugs could meet that test. By default, then, drug companies would have to concentrate on finding truly innovative drugs, and we would finally find out whether this much-vaunted industry is turning out better drugs. A welcome by-product of this reform is that it would also reduce the incessant and enormously expensive marketing necessary to jockey for position in the me-too market. Genuinely important new drugs do not need much promotion (imagine having to advertise a cure for cancer).

A second important reform would be to require drug companies to open their books. Drug companies reveal very little about the most crucial aspects of their business. We know next to nothing about how much they spend to bring each drug to market or what they spend it on. (We know that it is not $802 million, as some industry apologists have recently claimed.) Nor do we know what their gigantic "marketing and administration" budgets cover. We don't even know the prices they charge their various customers. Perhaps most important, we do not know the results of the clinical trials they sponsor—only those they choose to make public, which tend to be the most favorable findings. (The FDA is not allowed to reveal the results it has.) The industry claims all of this is "proprietary" information. Yet, unlike other businesses, drug companies are dependent on the public for a host of special favors—including the rights to NIH-funded research, long periods of market monopoly, and multiple tax breaks that almost guarantee a profit. Because of these special favors and the importance of its products to public health, as well as the fact that the government is a major purchaser of its products, the pharmaceutical industry should be regarded much as a public utility.

These are just two of many reforms I advocate in my book. Some of the others have to do with breaking the dependence of the medical profession on the industry and with the inappropriate control drug companies have over the evaluation of their own products. The sort of thoroughgoing changes required will take government action, which in turn will require strong public pressure. It will be tough. Drug companies have the largest lobby in Washington, and they give copiously to political campaigns. Legislators are now so beholden to the pharmaceutical industry that it will be exceedingly difficult to break its lock on them.

But the one thing legislators need more than campaign contributions is votes. That is why citizens should know what is really going on. Contrary to the industry's public relations, they don't get what they pay for. The fact is that this industry is taking us for a ride, and there will be no real reform without an aroused and determined public to make it happen.

Notes
[1] There are several sources of statistics on the size and growth of the industry. One is IMS Health (www.imshealth .com), a private company that collects and sells information on the global pharmaceutical industry. See www .imshealth.com/ims/portal/front/articleC/0,2777,6599_3665_41336931,00. html for the $200 billion figure. For further sources on this and other matters, see my book The Truth About the Drug Companies: How They Deceive Us and What to Do About It (to be published in August by Random House), from which this article is drawn.

[2] For a full picture of the special burden of rising drug prices on senior citizens, see Families USA, "Out-of-Bounds: Rising Prescription Drug Prices for Seniors" (www.familiesusa .org/site/PageServer?pagename=Publications_Reports).

[3] Sarah Lueck, "Drug Prices Far Outpace Inflation," The Wall Street Journal, July 10, 2003, p. D2.

[4] On ABC Special with Peter Jennings, "Bitter Medicine: Pills, Profit, and the Public Health," May 29, 2002.

[5] For the top ten companies and their recent mergers as of 2003, see www .oligopolywatch.com/2003/05/25.html.

[6] These figures come from the US Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group, Baltimore, Maryland. They were summarized in Cynthia Smith, "Retail Prescription Drug Spending in the National Health Accounts," Health Affairs, January– February 2004, p. 160.

[7] For excellent summaries of public contributions to drug company research, see Public Citizen Congress Watch, "Rx R&D Myths: The Case Against the Drug Industry's R&D 'Scare Card,'" July 2001 (www.citizen.org); and NIHCM, "Changing Patterns of Pharmaceutical Innovation," May 2002 (www.nihcm.org).

[8] This is probably an underestimate. One source that indicates it is at least this is CenterWatch, www.centerwatch .com, a private company owned by Thomson Medical Economics, which provides information to the clinical trial industry. See An Industry in Evolution, third edition, edited by Mary Jo Lamberti (CenterWatch, 2001), p. 22.

[9] Families USA, "Out-of-Bounds: Rising Prescription Drug Prices for Seniors."

[10] Public Citizen Congress Watch, "Rx R&D Myths."

[11] "The Fortune 500," Fortune, April 15, 2002, p. F26.

[12] Public Citizen Congress Watch, "Drug Industry Profits: Hefty Pharmaceutical Company Margins Dwarf Other Industries," June 2003 (www.citizen .org/documents/Pharma_Report.pdf). The data are drawn mainly from the Fortune 500 list in Fortune, April 7, 2003, and drug company annual reports.

[13] Henry J. Kaiser Family Foundation, "Prescription Drug Trends," November 2001 (www.kff.org).

[14] FamiliesUSA, "Profiting from Pain: Where Prescription Drug Dollars Go," July 2002 (www.familiesusa. org /site/DocServer/PReport.pdf?docID= 249).

[15] Patricia Barry, "More Americans Go North for Drugs," AARP Bulletin, April 2003, p. 3.

[16] Chandrani Ghosh and Andrew Tanzer, "Patent Play," Forbes, September 17, 2001, p. 141.

[17] Gardiner Harris, "Schering-Plough Is Hurt by Plummeting Pill Costs," The New York Times, July 8, 2003, p. C1.

[18] For key information about the numbers and kinds of drugs approved each year, see the Web site of the US Food and Drug Administration (FDA), www .fda.gov/cder/rdmt/pstable.htm.

[19] Alice Dembner, "Drug Firm to Pay $875M Fine for Fraud," The Boston Globe, October 4, 2001, p. A13.

Letters
December 16, 2004: Lawrence Sincich, The Drug Companies and the Universities