May 27, 2021
Yes, it is spring. The flowers are blooming, the birds are singing, and the deficit hawks are whining. The proximate cause is President Biden’s new budget, which will push the ratio of government debt to GDP to its highest level ever.
The question is whether this should bother anyone who has a life? The projections show that the debt to GDP ratio will rise to 117 percent of GDP in 2031. If that sounds scary, consider that Greece’s debt to GDP ratio is over 180 percent. And, the bond vigilantes don’t seem to be too bothered by this. The interest rate on long-term Greek debt is 0.8 percent, compared to the 1.6 percent on U.S. Treasury bonds.
Of course, if we really want to go big we can look at Japan, where the debt to GDP ratio is approaching 250 percent of GDP. It is paying 0.08 percent interest on its long-term debt.
But let’s get to the issue at hand, how patent monopolies are like government debt. At the most basic level, we have to understand that patent (and copyright) monopolies are a way the government pays for things it wants. Instead of using government funds to pay drug companies to develop new drugs and vaccines, we reward them with a patent monopoly. (Actually, in some cases, like Moderna, we do both. We pay them and give them a patent monopoly.)
In the government’s accounting, we treat patent monopolies and spending very differently. The grant of a patent monopoly does not appear in the government’s budget, so we can award these monopolies as an alternative to direct spending if we want the deficit to appear smaller.
We sometimes have literally gone this route of using a patent monopoly, or an equivalent grant of exclusivity, as a substitute to direct spending. In the case of prescription drugs, in order to get drug companies to do pediatric trials, the government will award a company a six-month period of exclusivity, beyond any patent duration, in order to pay for the trial.
The government could just pay the money directly for the pediatric trial, but this would be a direct expenditure that adds to the deficit. If instead it adds six months to a patent, the company is paid by being able to charge higher drug prices for this period. In effect, the government is allowing the company to tax patients to cover the cost of the trial.
This is the same story with outstanding patents raising the cost of prescription drugs far above the free market level. By my calculations, we will pay roughly $400 billion (1.8 percent of GDP) more this year for prescription drugs because of government-granted patent monopolies and related protections. If we add in all rents from patents and copyrights the annual amount could easily top $1 trillion.
Anyone who is really concerned about the burden that government debt places on our children must also include the rents that companies will collect from patent and copyright monopolies. These rents are in effect privately imposed taxes that the government allows companies to collect.
The idea of selling the ability to tax is not new. Centuries ago, it was common for governments to do tax farming, which effectively meant that it sold the right to impose a certain tax for a set period of time.
Suppose the government sold off the right to collect the estate tax for the next two decades for $1 trillion. The deficit hawks could all be very happy because our debt would now be $1 trillion lower, but anyone capable of logical thought would see that this has not relieved the burden of the debt on our children one iota.
It is the same story with patent rents. The annual payments that our children will make in the form of higher prices, on everything from prescription drugs and medical equipment to software and video games, dwarfs the interest burden on the debt. But for some totally inexplicable reason, the deficit hawks only focus on the government debt and never mention patent rents.
I leave the explanation for that one to greater minds than mine.