Conrad Theodore Seitz

The New York Times online has published an opinion piece by Joe Nocera that reveals how the drug development system works.  Vertex, the company that has brought Kalydeco to market, says that they have spent $6.5 billion on drug development so far, and Kalydeco is the only drug they have to show for it so far.  They do have another drug in development that may target a much larger percentage of patients with cystic fibrosis, and their research has led to a better understanding of the disease.

At any rate, for $300,000 a year and 2,000 patients, you are getting $600 million a year.  In ten years, you will have made back most of your investment.  Of course, your 2,000 patients will continue to need your drug for the rest of their lives, which will be greatly extended by the drug itself.

If Vertex develops another drug which comes to market, which seems increasingly likely, the initial investment will get further return and perhaps the drug’s costs will decline. Or so one might think, if one were a reasonable person.  But drug prices aren’t reasonable, and there doesn’t seem to be much pushback from insurers.  It appears that Vertex, and many other drug developers, are sitting on a gold mine.

The risks are high: only ten percent of drugs developed are brought to market.  The costs, reflecting so many failures, are said to exceed 6 billion dollars per drug.

Medicaid has balked at paying for Kalydeco in one state so far; they are likely to cave in, however, according to Joe Nocera’s opinion piece.  Since a lot of cystic fibrosis patients are on Medicaid, this is going to be a federal government problem that really could use an efficient solution.  Like this one, from the comments:

“I’m a veteran drug rep, and I can tell you that the only way Americans can avoid paying these sorts of prices for drugs is to nationalize drug development. Obviously, this would be paid for by a federal tax, but it would dramatically reduce the cost of drugs because profit would be removed from the equation.

In addition, a government-run drug development program would save billions of dollars in wasted pharmaceutical research, because we would focus on develop much-needed drugs–such as antibiotics–and we would not waste money developing me-toos (for example, new statins or SSRIs) and patent-extenders (drugs in which a very minor change was made, in order to extend the patent).”

That’s right, nationalize drug development.  The federal government pays so much for drugs, through the Veteran’s Administration, Medicare, and Medicaid, that it makes sense to create a federal system to develop drugs.  The potential benefits would be really dramatic.  Small government advocates will swoon at this advice, but Medicare has been such a success that we feel comfortable advocating national drugs as well.

Here is a link to the NYT opinion piece: http://www.nytimes.com/2014/07/19/opinion/joe-nocera-cystic-fibrosis-drug-price.html

My previous post mentioned a debt load of $200 trillion for the entire globe, as against a global GDP of $60 trillion a year.   Here are some more figures:

“M2 money stock has soared from about $8.4 trillion in July 2009 to $11.4 trillion now. In one year alone, from July 2013 it soared from $10.7 trillion to the present $11.4 trillion. So, there has been a vast growth of the money supply but there has been no rampant inflation. Real wages haven’t gone up enough to provide consumers with sufficient spending power to cause inflation; in fact, real wages may have declined from the 2007 level.”

It appears that there has actually been some deflation because there seems to be plenty of money on hand: $2 trillion in assets held by US companies that are not being invested.

Another voice from the trenches with numbers:

“This “inflation is coming, inflation is coming” crowd is the same one that predicted major doom-and-gloom when President Bill Clinton raised taxes in 1993. They still have to admit they were terribly wrong about that one despite the U.S. going through its only two-term recession-free presidency, as well as being the one that created the most jobs since WWII. What they did instead was, they simply subsumed President Clinton’s economic record under President Reagan’s, even though President George H.W. Bush served a term in between!

Mr. Krugman’s right, in that, many conservatives have been so worried about the Fed’s post-Great Recession monetary policy “debasing the dollar” that they have been promoting investments in gold for the past five years. It’s not been a pleasant experience, since gold prices peaked over $1800/ounce in May 2011 and have since tumbled to a little over $1300/ounce in July 2014.

But we have had an economic expansion, albeit modest, for over five years now and as job growth picks up steam, as it has in the first half of this year – inflation will start creeping in, especially if personal incomes also start to rise. At which point of time, the inflation addicts will surely say, “See, told you so” even though they had been crying wolf about it for over five years!”

So the price of gold has peaked and there has been a lot of selling to bring the price down to $1300 an ounce.  Remember 2001?  The price of gold was about $300 an ounce then.  The price peaked over $600 an ounce in 1980, then fell to $300-400 in the 1980s and ’90s before bottoming out at around $280 in 1999.  Actually, the price gradually increased throughout the 2000 decade before peaking at $1900 an ounce in 2011; in 2013, the price began to collapse and has bottomed out around $1200 in December 2013 before rebounding a bit to $1300 now.  The drop from peak to trough was an almost 1/3 loss in value, surely a serious crash.

What happened to gold during the global economic meltdown?  The price rose from $650 in January 2007 to a peak of $1000 in March-April 2008.  It dipped to $800 in January 2009 before peaking again over $1200 in December 2009.

What do these gyrations in the price of gold mean?  Well, the price goes up when people buy, and the usual reason for buying is a hedge against difficult economic times– although that reason hasn’t withstood practical testing.  We could argue that the bull market was caused by doomsday predictions and was limited by the number of people who had the fear and how much they had to spend.  The market appears to have peaked, and naturally dropped back a bit, almost a boom and bust like the price of housing in the last decade.

A final comment:

“While the M2 money stock has increased on the order of 37% from 2009 (about $8.4 trillion in 2009 to about $11.4 trillion), the velocity of the M2 supply has been decreasing steadily. As late as 2006, the money velocity ratio (basically the number of times a dollar is used to buy something that is included in GDP) was 2.0. It is presently 1.5, an historic low, and appears to be continuing to decline. With money not “turning over” in the economy, it seems to me that we are unlikely to see significant and sustained economic growth – or inflation. It is difficult for me to understand how investment professionals can overlook this and be surprised at the lack of inflation, but then again I’m not an economist and don’t possess the deep and profound understanding of economics that Mssrs Kudlow and Santelli do.

The question that I can’t seem to find an answer to is: If the load of currency printed by the Fed and injected into the economy isn’t turning over, where is it going? It can’t all be to bank reserves, which indeed are high, but it has to be somewhere. I would think that there has to be some relationship of this low velocity/high reserve situation to our present lackluster economy. It also appears to me that the inflation that isn’t occurring should be our primary concern.”

Despite the increase in money supply, there seems to be little inflation because wages have not risen and spending has not risen.  There is hidden inflation in the cost of food, among other things.  There is definitely inflation at the grocery store but it is partially hidden by smaller portion sizes and decreasing quality of goods.  The increase in food prices is likely due to population pressure but it seems to be impossible to accurately measure.

A few figures, from an article already three years old: the global “gross domestic product” is $60 trillion per year, a large figure indeed.  However, a total of $200 trillion in debt (bonds and notes and the like) is outstanding, the interest on which is more than $10 trillion a year, even with interest rates “artificially suppressed.”

These figures are not numbers that will change greatly from year to year, though some remarkable changes are likely to occur.  The point of the indebtedness to GDP ratios is just that the debt is expensive, and to some people, unsustainable.

Another point is that the top 1% hold most of that debt and are receiving payments year by year on it, literally living off their investments.  Much of the money they receive is in excess of what they can spend and automatically rolls over into more debt/savings.  This top group is not that which earns the highest income year to year but what group already has the most money stashed away in their net worth, that is the most wealthy.  They hold the investments that result in this debt and are paid the “rent.”

The article to which I originally referred in 2011 pressed the point of view that the global debt is unsustainable and should be treated by a global bankruptcy or “bank holiday.”  His argument is just that the payments on this debt are dragging down the economic activity of the debtor nations.  I don’t know how urgent his arguments are because the emergency situation he describes has persisted for several years without a resolution.

A more reasonable issue is that the economic strength to be obtained for government through taxation must rely on those most able to afford being taxed.  This implies a progressive tax system, that is, one in which taxes increase as a percentage of income in relation to increased incomes.  To some extent, current federal income taxes are progressive, but there are many current taxes which are not progressive in which the burden falls most on those with the smallest incomes.  The fact that certain types of income are taxed at a much lower rate than ordinary income would not be retrogressive except that virtually all those who earn that certain type of income (that on long term investments) are already rich.

Therefore, the current tax system favors the rich, even though they still wind up paying the majority of taxes because income inequality is so dramatic.  This system would seem to not make sense since it disfavors such a large percentage of the electorate: wouldn’t it be voted down if it were so unfavorable to such a large majority?  The only explanation that makes sense is that the people don’t realize how much they are being disfavored (or to use another equally appropriate word, exploited)…

If ballooning wealth inequality continues, then it is likely that social systems will be so strained that some aspects of society will break down.  Civil war could occur.  If civil unrest is extensive, it may result in destruction of much wealth and reduction in the inequality that currently obtains.  Some economists argue that this occurred in World War II since so much wealth was destroyed (blown up or burned up) in the course of the war; in addition, governments demanded large contributions from their wealthy citizens to run their wars.  Do we need another WW II to reduce wealth inequality now?.