The U.S. House and Senate have approved bills to legalize the reimportation of U.S.-manufactured prescription drugs from Canada and elsewhere. Here’s a case of Congress doing something right for the wrong reason.
It’s right because the U.S. government has no business telling the American people what they may and may not buy from people living outside the country. That’s called freedom, something earlier Americans actually understood and valued.
But the motivation for the congressional action demonstrates a shameful ignorance of economic liberty, economic theory, and government intervention. According to the “findings” of H.R. 2427, “Americans unjustly pay up to 1000 percent more to fill their prescriptions than consumers in other countries.” Unjustly? How do the authors figure that? Their response would be that since drug prices are lower in, say, Canada, only injustice can explain why prices are higher in the United States.
But that isn’t the whole story. Drug companies own the drugs. They spend lots of money developing them. So they have the right to sell them at whatever price they wish. That’s also called freedom.
There is a qualification to be made in this matter. Patent laws prohibit independent developers of existing drugs, or something similar, to compete with patent-holders. That’s protectionist government intervention. If members of Congress really wanted cheaper drugs, they’d repeal the patent laws and all the other interventions that make drugs artificially expensive, such as the Food and Drug Administration (FDA) and subsidies that increase demand. (Without patents, entrepreneurs would earn profits figuring out ways to protect “intellectual property.”)
But with an exception or two, members of Congress aren’t interested in freedom. They are interested in votes, which is why their only “solution” is reimportation.
There’s a simple reason that some, though not all, drugs are cheaper in Canada. The Canadian government sets maximum drug prices, which is what many members of Congress would like to do here. Anyone familiar with basic economics knows that price ceilings discourage suppliers from bringing products to market. This would be especially true with pharmaceuticals, which are so expensive to develop. Why would anyone make that investment if the law deliberately kept prices below what the market would set? The result would be a halt in the creation of life-saving drugs.
If that’s so, why do American companies export drugs to the price-controlled Canadian market? They do so because the government there sets prices enough above marginal cost to make exports worthwhile. In America the companies can freely set prices (inflated by patents) and recover the immense development costs. Then they can produce additional pills and sell them for a bit more than it costs to produce them. The slight profit in Canada is sufficient only because America does not have price controls.
Note the irony. If America had Canadian-style price controls, neither Americans nor Canadians would be getting cheap modern drugs. Canada exploits our freer market.
Here’s another irony. The House bill’s “findings” also state, “Allowing open pharmaceutical markets could save American consumers at least $635 billion of their own money each year.” But if Canada had an open market, there would be no H.R. 2427. The market would set prices in both places, perhaps lower than current U.S. prices because development costs would be spread over more people.
Economics isn’t everything, of course. Morality is important too. The people who invent and market drugs are not our slaves. They have the same right to freedom as the rest of us. If they all decided to quit and go fishing, we would have no right to stop them