In the recent debate on trade policy, most reputable economists favored fast track trade authority and the approval of Trans-Pacific Partnership, which is likely to be the first trade deal to be covered by the new fast-track rules. Their argument was simple: The reduction of tariffs and other trade barriers will increase efficiency and economic growth. This is the standard argument for free trade.
Given this general view within the economics profession why TPP is good policy, it is striking that so few economists have been outspoken in opposition to the reauthorization of the Export-Import Bank, a government agency that aids U.S. exports through loan and insurance guarantees. On June 30, Congress did not reauthorize the bank, which meant that it could not extend new credit, though it could still manage its existing portfolio of loans. Republican Senators led a vote to reauthorize the bank in the Senate, and now the issue has moved to the House. The whole point of the Ex-Im Bank, of course, is to have the government subsidize selected companies by giving them access to credit at below-market interest rates. This is totally at odds with free trade. It means the government is allocating credit rather than markets. It would be expected to lead to the same type of economic distortions as tariffs and quotas.
The arguments put forward in support of the Ex-Im Bank should have been especially painful to economists, since they are exactly the same arguments made in support of protectionist trade measures. For example, proponents of the Ex-Im Bank routinely talk about the number of jobs supported by the bank’s loans, implying that all of these jobs would somehow disappear without subsidized loans from the Ex-Im Bank.
This would be comparable to adding up all the jobs in the U.S. auto industry and arguing that these jobs would be lost if we eliminated trade barriers to imports. This is wrong first because the vast majority of the jobs would still be there without the subsidized loans or trade barriers, and second, jobs lost in one sector will be replaced by jobs gained elsewhere. This is the textbook free-trade story.
The other argument that should have vexed economists was the claim that we make a profit on the Ex-Im Bank. This is true. The government is the lowest cost borrower in the country because no one questions its creditworthiness. This means the government can always profit by lending at interest rates that are between the market rate for its borrowers and its own borrowing rate.
No economist would argue that this “profit” means that such loans are good policy or carry no cost. It means that the government is effectively diverting capital away from some companies and toward the ones it has favored with below-market interest rate loans. Invariable these are huge companies such as Boeing and General Electric, who always account for the vast majority of Ex-Im lending. This is only good policy if we think that the government is likely to do a better job than the market in allocating credit.
The Ex-Im Bank is ultimately not that big a deal. There is simply not that much money involved. But the silence of most economists on this issue, or worse, their willingness to ignore their principles and actually argue for the bank, speaks to the corruption in the profession. After all, on economics alone the Ex-Im Bank should not be a close call. It involves exactly the sort of government intervention that most economists argue against vociferously in other contexts.
This isn’t the only context where most economists seem happy to ignore basic economics. Another is patent protection for prescription drugs. The economics of this issue are straightforward: It is a government imposed monopoly that allows drug companies to charge prices that are several thousand percent above the free-market price. Drugs that would sell for $10 a prescription as generics can instead sell for hundreds or even thousands of dollars because of patent monopolies.
These monopolies have all the bad effects that economists predict when the government interferes in a market, except in the case of drugs it isn’t just money. It is also a matter of people’s health and lives.
At the most basic level, there are many people who don’t have insurance coverage and can’t afford to pay hundreds or thousands of dollars per prescription. These are people who would have benefited enormously if the drugs were sold at their free-market price. This is the classic gains-from-trade story, that the economy benefits from having goods sold at their cost of production plus a normal profit, except the gains are far larger than in the usual story. We spend close to $400 billion a year on drugs that would probably sell for about $40 billion in a free market.
In addition to this massive loss to consumers, we also have the corruption that results when the government props up prices above their free-market level. Drug companies have an enormous incentive to mislead the public about the safety and effectiveness of their drugs, which they do on a regular basis. As a result, people get inferior treatment, and often suffer severe side effects or even death.
Patent monopolies also divert resources to less productive areas, as companies will often try to innovate around a competitor’s patent, producing a copycat drug, in order to share in the rents, rather than develop a drug for a condition for which no treatment exists. Drug companies also keep much of their research secret in order to avoid giving competitors an advantage, thereby slowing progress.
Patent-supported drug research would be a necessary evil if it was the only way to finance drug research, but it isn’t. We already spend $30 billion a year supporting basic biomedical research through the National Institutes of Health. We could have more public funding to replace patent-supported research by the drug industry. It’s also unnecessary to do an abrupt switch to a different system. The clinical-testing portion of drug development could be paid for through public funds even as the drug development portion continued to rely on patent protection.
But we will never move from the current corrupt system to a better one until people are prepared to point out the problems in the current system. If economists were true to what they argue in other contexts, they would be leading the charge to eliminate the antiquated patent system. But, they seem willing to put principles aside to benefit powerful interests in the case of the Ex-Im Bank, so why shouldn’t economists look the other way when good economics would jeopardize the interests of the big drug companies?