October 03, 2021
Reporters and politicians have been screaming about our debt and deficits in recent weeks, as the Democrats try to steer their public investment package through the senators from Arizona and West Virginia. The infuriating part of this story is that the whining about debt and deficits, and the reporting on it, literally makes no sense. This is because those involved refuse to do any serious thinking on these issues.
Starting with debt, the ostensible concern is that a large government debt will be a burden on our children. The story goes that in 10 or 20 years, we will be facing a high-interest burden, which will require either higher taxes or less spending in other areas.
The projections for interest payments don’t support this story. Our interest payments are currently around 1.0 percent of GDP, net of money refunded to the Treasury by the Fed. That is projected to rise to somewhat over 2.0 percent of GDP in a decade.
Our interest burden was over 3.0 percent of GDP in the early 1990s. That burden did not prevent us from having a very prosperous decade, especially in the second half.[1]
The more important part of this story is that the conventional calculations of the debt leave out the higher prices that we will pay for items like prescription drugs and computer software because of government-granted patent and copyright monopolies. This is a huge burden, which is many times larger than the debt burden, but policy types and reporters refuse to ever talk about it for some reason.
This is a simple and logical point. The government can pay for things by writing checks. It typically does this with things like roads, bridges, and teachers’ salaries. It can also pay for things by giving out patent or copyright monopolies.
When the government gives out these monopolies, it is telling innovators or creative workers to develop a new product or write a new book, and you will be given a monopoly for a period of time. This government-granted monopoly will allow you to charge a price that is far above the free market price.
This point has nothing to do with whether you think patents are a good way to support innovation or copyrights are the best way to support creative work, it is a logical point. If the government will threaten to arrest anyone who produces the Moderna vaccine, Moderna gets to charge a much higher price than if everyone in the world can produce the vaccine.[2]
This brings us back to my question: how can someone who claims to be concerned about the burden of the government debt on our children, ignore the burden, in the form of higher prices, created by government-granted patent and copyright monopolies? If the government were to put a tax on prescription drugs to help cover its debt service, we would all recognize this tax as a burden on households.
Yet somehow, we are supposed to believe that if the government gives out a patent monopoly that allows a drug company to charge a price that is far higher than the free market price, that is not a burden. That makes zero sense.
And this burden is very large. By my calculations, the higher cost due to patent monopolies and related protections comes to more than $400 billion (1.8 percent of GDP) in the case of prescription drugs alone. If we add in the higher costs that we pay for medical equipment, computers, software, and a variety of other items, the burden likely comes to more than $1 trillion a year, or 4.5 percent of GDP.
This is more than four times the burden of the debt, but the folks who complain about the debt burden on our kids never talk about it. This is simply not honest. If we are genuinely concerned about the burdens the government is imposing on our children, then we don’t get to selectively pick which burdens we will talk about.
The Deficit and Patent and Copyright Monopolies
There is a similar story with the deficit and these monopolies. And again, it is a matter of logic, not whether we think they are good mechanisms for supporting innovation and creative work. (I talk about alternatives in chapter 5 of Rigged [it’s free].)
Patent and copyright monopolies are intended to motivate people to innovate and do creative work. This means that they increase spending and GDP. The concern over large deficits is that the government is over-stimulating the economy, that it is demanding so many goods and services that the economy can’t meet both the demand from the private sector and the government.
If this is a concern, why should we not also be concerned about the increased demand created by government-granted patent and copyright monopolies? According to the National Income and Product Accounts (Table 5.6.5, Line 9), the pharmaceutical industry spent $105.7 billion on research in 2020. This has the same impact on demand in the economy as if the government spent another $105.7 billion on research.
How can we be concerned about the inflationary impact of government spending, but not the patent-induced spending by the industry? That makes zero sense.
Is an Honest Budget Debate Possible?
The point here is that we need to have honest discussions about debt and deficit concerns. The current discussions are not remotely honest because they refuse to take full accounting of the mechanisms the government uses to pay for goods and services. Others can debate whether this is due to laziness or deliberate dishonesty, but the media’s reporting on debt and deficits is not serving the public.
[1] The burden would be considerably lower if we adjusted for inflation, but we will leave that one alone for now.
[2] The government doesn’t directly threaten to arrest someone for infringing on a patent or copyright. Typically, the holder of the monopoly would go to court seeking damages and an injunction ordering the person to stop the infringement. If the person ignores the injunction and continues infringing, they could go to jail for ignoring an injunction.
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