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Home Publications Blogs Beat the Press Tyler Cowen Recognizes Public Goods Problem of Pandemics: More Money for Drug Companies

Tyler Cowen Recognizes Public Goods Problem of Pandemics: More Money for Drug Companies

Sunday, 05 May 2013 06:52

Showing the sort of creativity that we have come to expect from economists, Tyler Cowen used his NYT column today to call for giving more money to the pharmaceutical industry as a way to deal with the risks of pandemics. Cowen moves from the true statement that research and development into prescription drugs and public health more generally has a substantial public good character, to the idea that we need to give pharmaceutical companies more money in order to get them to do the research.

In discussing the issue of protecting the public against pandemics Cowen tells readers:

"If anything, the American government — or, better yet, a consortium of governments — should pay more for pandemic remedies than what market-based auctions [of patent rights] would yield. That’s because, if a major pandemic does arise, other countries may not respect intellectual property rights as they scramble to copy a drug or vaccine for domestic distribution. To encourage innovations, policy makers need to bolster the expectation of rewards."

For reasons that Cowen never bothers to mention, he excludes the possibility that patents may not be the best way to finance research. The patent system does provide an incentive to innovate but it also provides an enormous incentive to misrepresent research results and deceive the public and regulators about the quality and safety of drugs. We see this happening all the time, exactly as economic theory predicts. (Think of Vioxx.) The result is considerable damage to public health and an enormous economic waste as money is paid to pharmaceutical industry for drugs that are ineffective or possibly even harmful.

Patents also give an incentive for duplicative research. If a company has a major breakthrough drug that produces high profits then its competitors have a substantial incentive to try to duplicate this drug in a way that circumvents the patent. In a regime where patents provide a monopoly, the availability of potential substitutes will have the benefit of bringing the price down, however if the drug were already selling at its free market price, without a patent monopoly, no one would look to waste resources developing a second drug that essentially does the same thing as the first drug.

Patent financed research also slows progress by encouraging secrecy. Science advances best when results are shared as widely as possible. Companies that are relying on patent financing will only make the bare minimum of their research available to the larger scientific community, providing the information needed to secure patents. They have enormous incentive to withhold any additional information that could provide benefits to competitors.

Patent financing also distorts research toward finding patentable treatments for diseases. If a disease can be best controlled through diet, exercise, or controlling pollutants, patents will provide zero incentive to carry out research in the proper direction. Instead resources will be wasted on trying to develop a patentable drug.


There are alternative routes to supporting research. We already spend $30 billion a year on biomedical research through the National Institutes of Health. Even the pharmaceutical industry argues that this money is extremely well spent. There is no obvious reason that funding could not be doubled or even tripled with the idea of replacing the patent financed research currently undertaken by the drug industry.

The funding could be channeled through the private sector, even through the existing drug companies. The difference would be that all research findings would be made publicly available as soon as practical and all patents would be placed in the public domain. 

The model for this sort of funding would be the defense industry. In spite of many incidents of over-payment and outright fraud, public funding in this sector has not prevented the United States from having by far the most powerful military in the world.

Furthermore, a public contractor system in the pharmaceutical sector would have the enormous advantage that everything would have to be made fully public as a condition of getting funding. While there are legitimate grounds for secrecy in the research of weapons systems, there are no legitimate grounds for keeping medical research secret.

Of course this route would likely damage pharmaceutical industry revenue and profits. The patent system allows drug companies to charge hundreds or even thousands of dollars for prescriptions that would sell for $5-$10 in a free market. These monopolies are equivalent to imposing a tax of $250 billion a year or $3.0 trillion over the next decade on the American people. Needless to say, they would be very unhappy about losing this taxing power in exchange for the nickels and dimes they would get paid for carrying through this research.

This might be why economists almost never discuss the topic. Instead we get endless harangues about the need to spend less on Social Security and Medicare as in Cowen's piece today.


Note: "Public heath" was changed to "public goods" in the title.

Comments (13)Add Comment
Creativity is way too nice of a word for it
written by Jennifer, May 05, 2013 8:06
Really, what utter nonsense. It absolutely can be argued that the US is not really prepared for a pandemic-this is more an issue of organization of regulating bodies then treatment. (If you want to know what could happen if we had a deadly pandemic the book The Hot Zone has some interesting insights). It was not an accident that the US was caught "flat-footed" on AIDS, there was deliberate neglect because of the populations involved and the disease itself was complex and unique. If AIDS had been a problem with say, white children, things would have moved faster I am sure.
Recently, I have noticed an interesting trend among the right-wing smart set, they are very much in favor of (federal) biomedical research but remain committed to the patent system/pharmaceutical industry. Apparently the government can be trusted to doing the basic science but can't run clinical trials?
As Dean points out much of the problem is from the patent system itself which encourages all kinds of bad practices. But my favorite part is when Cowen encourages the government to "pay lucrative prices for the patents". Isn't this happening already? The pharmaceutical companies are some of the largest, most profitable companies in the world. You have to wonder just how much money Tyler Cowen thinks they are entitled to?
written by liberal, May 05, 2013 8:10
The funding could be channeled through the private sector, even through the existing drug companies.

This is a much more general problem. The federal government spents lots of money on generic software. The government should cease doing that and instead pay companies to produce software which the government will then own.
Priorities Please
written by Last Mover, May 05, 2013 8:33
Let's see, Vioxx kills the equivalent of something like all the passengers on a medium size airliner crashing every day for several years and it barely gets on the radar of mainstream media.

Yet some deadly exotic biological bug that could catch on and spread out of control gets played up like the Antrax terrorist scare and deserves to be funded at levels even higher than that available from patents because it's a "market failure" according to Tyler Cowen.

Uh huh. Since airline crashes are so spectacular why not convert all deaths from patent market failure into a uniform measure like equivalent number of airliner crashes so Tyler Cowen can get the message out.
Defense spending as a model?
written by pjm, May 05, 2013 8:52
I agree in principle you could fund biomedical research that way, but the defense industry's history of corrupting the procurement process is so profound and pervasive it rivals any of the corruption effect found in the patent system. Seeing that process repeat itself with Pharma is a nauseating prospect. Maybe the added research and patents would be worth it, but let's go for the NIH/academic route first.

And Dean, I know you know better than making an argument from order statistics. Whether or not the US has the best military, the relevant question is how much better and how much did we pay for the added "better".
Another Example of We Want More, Again
written by James, May 05, 2013 9:40
When elitists such as folks already have plenty want more, their lobbysits, hacks will demand gov't pay them more than market-based - all bc they said so. E.g., we need to pay the Goldman Sach's execs more to retain their talents.

In this latest example, we need to pay them more than market bc it's in your own good. BELIEVE US.

However, anytime union employees or manfufacture workers trying to negotiate any type of contract, those lazy workers are demanding MORE than market-based bc they have the union protection. The union make the workers so f... lazy.

Paying the pharma more doesn't stymie innovation? Doesn't make them fat cats? Tell them go to job training school then.
written by AlanInAz, May 05, 2013 9:50
Although Merck is certainly guilty of deceptive and fraudulent activities, the drug Vioxx is not uniquely bad among pain medications. Most NSAIDs share similar cardiovascular risks that were not understood during the Vioxx scandal.
Money Not The Best Incentive For Health
written by Robert Salzberg, May 05, 2013 10:49
The profit motive distorts research towards controlling the symptoms instead of curing disease.

It's way more profitable to sell drugs for a lifetime instead of a one shot vaccine.

Drug companies don't want to invest research in cures that if found, would be cruel and inhumane to withhold because of cost.
Abolish the patent system
written by David, May 05, 2013 10:54
Both theoretically and empirically, the political economy of government operated patent systems indicates that weak legislation will generally evolve into a strong protection and that the political demand for stronger patent protection comes from old and stagnant industries and firms, not from new and innovative ones. Hence the best solution is to abolish patents entirely through strong constitutional measures and to find other legislative instruments, less open to lobbying and rent-seeking, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it. ...

The full argument is presented in the following paper published by the St. Louis Fed: http://research.stlouisfed.org...12-035.pdf

On a different tack, liberal says
The government should ... pay companies to produce software which the government will then own.
No, they should release it into the public domain (unless there are valid national security concerns). For example, the success of Microsoft is, to me, one of the the largest market failures on the planet and an extreme failure of the patent system to foster innovation and efficiency. Gates et al. played the system well, but that was one of the clunkiest softwares out there. And we still get clunky software at medical offices, stores, etc. thanks to the success of its very shortsighted structural paradigm. The billions of hours lost (to customers and employees) due to software failures that ultimately arose from a flawed commitment to an undeserving but patented technology should be counted against the patent system.

Cowen's solution is to throw more good money after bad, because if things get really bad, why, we'll have to admit we were wrong all along about the patent system.
written by freebird, May 05, 2013 11:24
Do I smell moral hazard here? Seems to me that a "bolstered expectation of rewards" will be music to the ears of biohackers who could probably expect a windfall of support from the megapharmas in an arrangement that parallels how our "defense industry" evolved after WWII. The incentives introduced by Prof Cowen's scheme I think make the odds of pandemic much higher. Wasn't this the lesson from the Cold War?
Enlighten Yourself
written by keenan, May 05, 2013 2:19
For anyone interested in a fuller analysis of this issue by Dean Baker himself, I recommend this video (Seminar #10):



In fact, all 10 seminars are worth watching -- and serve as a good primer to the general CEPR view of the world. The seminars used to be easier to find, before the CEPR website got overloaded with information. :)

Frequency, Preparation, and...
written by NWsteve, May 05, 2013 2:28
thank you Dr. Baker for "expanding" the discussion introduced by Prof. Cowen's column in today's NYT...
the entire concept regarding the best-practices-going-forward with respect to patent usage (and abuses) needs as wide a forum as we can muster...

however, there seems to be at least a few questions that present themselves "upfront" from Cowen's presentation:
the 20th Century had 3 pandemics according to the US government and the WHO..
pandemics, almost by definition, cannot be "pre-prepared": they occur spontaneously
and almost without warning..

what agency/mechanism does Cowen suggest that we employ? the CDC? at what budgetary level? how do we measure results? by what didn't happen? how will the various committees be chosen/selected? etc etc

and what role must we assign to the WHO in order to achieve world-wide-responses?
how does our recent and current do-nothing congress tackle this UN agenda?

does BIGPHARMA participate in any way now? or, because pandemics are Public Health issues, there just aren't enough predictable profits for them to expend the necessary resources?

thus, is Cowen trying to get BIGPHARMA more revenue? attempting to streamline BIG event responses? suggesting changes to the patent system? or?

shouldn't we also consider expanded tsunami warning systems? increased utilization of earthquake-damage-reduction? volcanic evacuation procedures? rising ocean level mitigation? avoidance of violent conflicts, particularly world-wide-wars?

just curious as to why "pandemics", as infrequent as they are, were the trigger..
"insoluble moral question."
written by John Parks, May 05, 2013 5:21
If Tyler Cowen says that he is concerned about future pandemics then I will tentatively accept that as his motive for writing such an article. He should simply get back on his anxiety meds and refrain from writing.

Cowen's suggestion that the unrewarded salvation of life is an "insoluble moral question" is more concerning. He should spend some quality time playing with some 4 and 5 year olds to properly understand the difference between right and wrong
written by liberal, May 06, 2013 6:07
David wrote,
No, they should release it into the public domain (unless there are valid national security concerns).

Agreed. I intended to make that implicit in my admittedly telegraphic comment.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.