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Reimporting Drugs Is OK, But It Misses the Point

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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 — even if it meant doing without life-saving drugs. And if they have no obligation to make drugs for us, they surely have no obligation to give them away or sell them at prices set by pandering politicians — who couldn’t invent a life-saving drug, well, if their lives depended on it.

But we need those drugs, don’t we? Yes, we do — which is precisely why we should respect the freedom of those who make them possible. Scrap the patents, government subsidies, prescriptions, and the FDA. But stop looking to Canada with envy. When Canadian socialized medicine threatens the health of Canadians they come here. Where will we go when if we adopt their system?

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.