Posts tagged with: subsidies

In today’s NYT: “Oxfam Suggests Benefit in Africa if U.S. Cuts Cotton Subsidies.”

“Eliminating billions of dollars in federal subsidies to American cotton growers each year would reduce American cotton production and exports, raise world prices by about 10 percent and modestly improve the incomes of millions of poor cotton farmers in Africa, according to a new study by Oxfam, the aid group.”

About how many other industries could a similar thing be said? It’s also good to see that some of these multinational aid groups sometimes focus on liberalizing trade, rather than simply on direct government-to-government compensatory aid packages. Apparently Oxfam “has long campaigned for reductions in rich country agricultural subsides as a means to fight rural poverty in the developing world.”

One reason Oxfam is critical of bilateral free trade agreements is that they “do not address the adverse impacts of rich-country subsidies on poor countries through dumping, or the plethora of non-tariff barriers that continue to impede access to rich-country markets.” Their claim is that the bargaining power of individual developing nations is reduced under such agreements, so that the developing nation ends up giving up concessions to the wealthier nation, while the latter does no such thing. Reducing tariffs without addressing subsidies and other “non-tariff barriers” works to undermine the interests of developing nations.

The NYT piece ends on a bit of a pessimistic note, and no doubt the elimination of subsidies alone will not be enough to combat the grinding poverty that is so prevalent in the developing world. But it would do a lot to level the playing field and give resources and products from the developing world a fighting chance in the global market.

“Subsidy reform alone will not resolve all the challenges facing the cotton sector,” Oxfam said. “But it could significantly ease the burden on poor cotton farmers struggling to support their families.”

Blog author: jballor
posted by on Wednesday, January 24, 2007

Last night the President spoke of “the challenge of entitlements” and said that “Social Security and Medicare and Medicaid are commitments of conscience — and so it is our duty to keep them permanently sound.”

“With enough good sense and good will, you and I can fix Medicare and Medicaid — and save Social Security,” he averred. The ability of the federal government to negotiate drug prices has been an aspect of the recent debate over Medicare that was brought to the fore in the recent “100 hours” legislative agenda.

A number of conservative commentators have come out against this idea, including Acton’s own Rev. Jerry Zandstra and Benjamin Zycher of the Manhattan Institute (HT: The Reform Club). These are just two voices in a chorus of criticism rising against federal negotiation (I use them just because they are the ones with which I’m most familiar. I don’t mean to pick on anyone in particular).

Both of their arguments seem to me to boil down to this: the government is an effective negotiator and the result of negotiation will be that drug companies will have less money coming in and therefore spending on research and development will suffer.

Zandstra says of successful negotiation, “if, in doing so, you dry up research and development dollars so you aren’t developing drugs to treat cancer and Alzheimer’s and other diseases — if you take the profit motivation away — have you done good? No, you really haven’t.”

Zycher writes, “Federal price negotiations will cause sharp price reductions, but this will yield less research and development investment in new and improved medicines over time.”

These claims fail at a number of points in my opinion. Zycher and Zandstra are probably right on the mere claim that federal negotiation of drug prices will produce a drop in pharma income. But that isn’t the datum that is most relevant to the policy discussion.

Once government has decided to tax us and spend our money on a particular program, I think it is government’s responsibility to spend that money as well as it can, to be good stewards of efficient and productive use of those funds. This is true regardless of whether or not the program itself is one that government should be undertaking. The question of whether the government should be doing or pursuing a particular program or agenda is a different one than whether the government should pursue these programs efficiently and well.

So, given that Medicare is an entitlement to which our government has committed itself, it seems to me that the government is responsble for administering it as cost-effectively as possible. The government needs to make our tax dollars stretch as far as they can. This should include negotiating lower prices paid for prescription drugs, regardless of the effect it might have on drug company profits or research budgets.

It is a separate question whether drug companies need federal support to achieve the current or higher levels of funding for research and development. But let’s assume for the sake of argument that pharma companies do need federal support to find new drugs for “Alzheimer’s and other diseases.” If that’s the case, then the argument for subsidizing pharmaceutical research should be parsed out from the question of drug price negotiation.

Refusing to allow the feds to negotiate prescription drug prices effectively creates a subsidy for drug companies…something I would think that Zandstra and Zycher would be against, at least in principle. But maybe not.

Drug companies are in fact struggling, it seems. Pfizer, for instance, is shutting down operations at three Michigan sites and laying of 2400 workers, as part of a broader layoff of 10% of its workforce. And perhaps the estimated “loss of about five million life-years each year” is sufficient reason to support government subsidy of drug research.

But if conservatives are in favor of government subsidies for drug companies, they need to make that argument stand on its own and separate it from the question of price negotiation. Government subsidy of drug R&D should be a separate question, complete with its own line-item and its own policy analysis.

These kinds of stories make me sick, and they are all too common. In today’s Washington Post, a lengthy article examines the Livestock Compensation Program, which ran from 2002-2003, and cost over $1.2 billion.

In “No Drought Required For Federal Drought Aid,” Gilbert M. Gaul, Dan Morgan and Sarah Cohen report that over half of that money, “$635 million went to ranchers and dairy farmers in areas where there was moderate drought or none at all, according to an analysis of government records by The Washington Post. None of the ranchers were required to prove they suffered an actual loss. The government simply sent each of them a check based on the number of cattle they owned.”

Texas rancher Nico de Boer says, “The livestock program was a joke. We had no losses,” de Boer said. “I don’t know what Congress is thinking sometimes.” On the $40,000 he received, de Boer continues, “If there is money available, you might as well take it. You would be a fool not to.”

But the story doesn’t just stop there. The moral ambiguity of simply taking the money that is offered to you is eventually replaced by the incentives to actively seek out and campaign for more funds, effectively defrauding the government.

Under the original terms of the plan, “a rancher had to be in a county that was suffering from a drought and declared a disaster by the agriculture secretary in 2001 or 2002. More than 2,000 counties had such declarations at the time, including many with only modest dry spells.” But once the pork started flowing out of Washington, everyone wanted to get a spot at the trough.

Increasing pressure from lobbyists and special interests eventually made even the original flimsy requirements too onerous. Speaking of 2002, “There was pressure that year to grow emergency declarations for drought,” recalled Hunt Shipman, a former top USDA official who now works as a lobbyist in Washington.

The results? “Under Congress’s new version of the program in 2003, livestock owners could qualify as a result of any type of weather-related disaster declaration by the secretary of agriculture. Or they could become eligible if their county was included in a presidential disaster declaration. Under the new rules, the time period covered also was extended, to Feb. 20, 2003. One rule remained the same: Livestock owners still did not have to prove a loss.”

And under that new situation, “With the rules relaxed by Congress, federal agriculture officials pushed their local offices to find disasters that would make more livestock owners eligible, records and interviews show. It didn’t matter if it was a cold snap or a storm that was two years old.”

There’s not much else to say, I think, besides recognizing the truth that “the love of money is a root of all kinds of evil” (1 Timothy 6:10 NIV).