The law allows pharmaceutical companies to pay doctors for prescribing their drugs. Over a five-month period in 2013, doctors received some $380 million in speaking and consulting fees from drug companies and device makers. Some doctors pocketed over half a million dollars each, and others received millions of dollars in royalties from products they had a hand in developing. Doctors claim these payments have no effect on what they prescribe. But why would pharmaceutical companies shell out all this money if it did not provide them a healthy return on their investment?
Drug companies pay the makers of generic drugs to delay their cheaper versions. These so-called pay-for-delay agreements, perfectly legal, generate huge profits both for the original manufacturers and for the generics—profits that come from consumers, from health insurers, and from government agencies paying higher prices than would otherwise be the case. The tactic costs Americans an estimated $3.5 billion a year. Europe doesn’t allow these sorts of payoffs. The major American drugmakers and generics have fought off any attempts to stop them.
The drug companies claim they need these additional profits to pay for researching and developing new drugs. Perhaps this is so. But that argument neglects the billions of dollars drug companies spend annually for advertising and marketing—often tens of millions of dollars to promote a single drug. They also spend hundreds of millions every year lobbying. In 2013, their lobbying tab came to $225 million, which was more than the lobbying expenditures of America’s military contractors. In addition, Big Pharma spends heavily on political campaigns. In 2012 it shelled out more than $36 million, making it one of the biggest political contributors of all American industries.1
The average American is unaware of this system—the patenting of drugs from nature, the renewal of patents based on insignificant changes, the aggressive marketing of prescription drugs, bans on purchases from foreign pharmacies, payments to doctors to prescribe specific drugs, and pay-for-delay—as well as the laws and administrative decisions that undergird all of it. Yet, as I said, because of this system, Americans pay more for drugs, per person, than citizens of any other nation on earth. The critical question is not whether government should play a role. Without government, patents would not exist, and pharmaceutical companies would have no incentive to produce new drugs. The issue is how government organizes the market. So long as big drugmakers have a disproportionate say in those decisions, the rest of us pay through the nose.
The story with copyrights—applied to works of art and music—is similar. So is the underlying dilemma of how much of a property right to give creators so they have adequate inducement to toil away, while not denying society inexpensive or free access to works that cost little or nothing to reproduce. But here again, the creators (usually in the form of large corporations or trusts that have come to own the copyrights) consistently want more—and have always gotten it. The result has been more money for them and higher cost and less access for the rest of us. And as their profits have increased, so has their political clout for the next round.
When the nation was founded, copyrights covered only “maps, charts, and books” and gave the author the exclusive right to publish for fourteen years, which could be renewed once, for a maximum term of twenty-eight years. In 1831, the maximum was increased to forty-two years. In 1909, Congress again extended the maximum, this time to fifty-six years, where it remained for the next half century. Then, beginning in 1962, Congress extended the maximum eleven more times. In 1976, Congress extended it to the life of the author plus an additional fifty years. The creator did not even have to seek renewal. If the creation emerged from a corporation, the copyright lasted seventy-five years. (This change operated retroactively, so any work still under corporate copyright in 1978, when the new law took effect, was eligible for an additional nineteen years of protection.)
In 1998, Congress added twenty years on top of all this—to ninety-five years from the first publication, in the case of corporate owners. The Copyright Term Extension Act of 1998 was also known around Washington as the Mickey Mouse Protection Act because it was basically about Mickey. Walt Disney had created Mickey in 1928, so under the prevailing seventy-five-year corporate limit Mickey would move into the public domain in 2003. Pluto, Goofy, and the rest would become public shortly thereafter. That would mean big revenue losses for the Disney Corporation. Accordingly, Disney lobbied Congress intensively to extend copyright protection for another twenty years, as did Time Warner, which held copyrights on many twentieth-century films and musical scores, along with the heirs of dead songwriters George and Ira Gershwin. They got what they wanted. Most of those old copyrights are now scheduled to expire in 2023. It seems a safe bet that before that year, copyrights will be extended yet again. Moreover, copyrights now cover almost all creative works, including computer programs, and give owners (now, usually large corporations) rights over all derivative work that might be generated by the original.
As a result, much of the creative output of the last century—not just Mickey Mouse and other Disney characters but many of the icons of the twentieth century, including Superman and Dick Tracy; a treasure trove of movies, among them Gone with the Wind and Casablanca; the last century’s great outpouring of music, including George Gershwin’s “Rhapsody in Blue” and Bob Dylan’s “Blowin’ in the Wind”; and masterpieces of literature, such as the works of Faulkner and Hemingway—have been locked away for an additional two decades. Here again, the result is higher corporate profits, higher costs to consumers, and less access for everyone. The reason more printed books are available on Amazon.com from the 1880s than from the 1980s, for example, is that anyone is free to republish books from the earlier era.
This reorganization of the market will not spur more creativity from Walt Disney or the brothers Gershwin, since they are no longer with us. It is doubtful the reorganization will even give added incentive to writers and artists now alive, who will have to be dead for seventy years, rather than fifty, before their works move into the public domain. Ironically, many of Disney’s original creations drew heavily on characters and stories that had become classics, such as Aladdin, the Little Mermaid, and Snow White, because they had long been in the public domain. But the public domain is now far smaller.
Meanwhile, the large corporate owners of copyrights aggressively fight in court to extend their ownership to anything that might be considered derivative of their long-extended copyrights, adding to their bottom lines and their economic clout but presenting insurmountable barriers for individual creators, including computer programmers, who might have an idea that turns out to be too close to one already owned. As a result, big players continue to win while the rest of us lose, because they can pour so much money into these market-defining decisions.
In sum, property—the most basic building block of the market economy—turns on political decisions about what can be owned and under what circumstances. Due to the increasing wealth and political influence of large corporations, as well as the subtlety and complexity of the contours of intellectual property, these political decisions have tended to enlarge and entrench that wealth and power. The winners are adept at playing this game. The rest of us, lacking such influence and unaware of its consequences, often lose out. As we bicker over whether we prefer the “free market” to government, the game continues and the winnings accumulate.
* * *
1 The amount of money industry spends directly on political contributions, although substantially more than industry spent before the 1980s in real terms, is still typically small compared to what it spends on lobbying, litigating, and otherwise seeking to influence policymakers. And all such expenditures, together, are far smaller than the gains they expect from such tactics. This is because businesses spend only what they need to spend to achieve their desired ends. And due to the decline of countervailing power, which I will discuss later, they can get what they want at bargain-basement prices.
5
The New Monopoly
The sec
ond building block of a market economy follows directly from the first. Businessmen and -women need some degree of market power in order to be induced to take the risks of starting new businesses. If any rival could swiftly and effortlessly take away any other business’s competitive advantage, there would be no reason for any business to invest in the first place. The question of how much market power is desirable therefore poses a trade-off similar to that presented by rules about property, including intellectual property. Substantial market power provides strong incentives to invest and innovate but also raises consumer prices. Such power can also translate into political power, distorting markets further in favor of those who possess it. What’s the “best” trade-off? Such decisions typically are buried within antitrust or antimonopoly laws, as enforced by administrative agencies and interpreted by prosecutors and courts.
Here again, the underlying issue has nothing to do with a hypothetical choice between the “free market” and government. Decisions must be made about whether a particular company or group of companies has “excessive” market power. The important question is how such decisions are made and influenced. Many of the corporations that have gained dominance over large swaths of the economy in recent years have done so by extending their domains of intellectual property; expanding their ownership of natural monopolies, where economies of scale are critical; merging with or acquiring other companies in the same market; gaining control over networks and platforms that become industry standards; or using licensing agreements to enlarge their dominance and control. Such economic power has simultaneously increased their influence over government decisions about whether such practices should be allowed.
All this has hobbled smaller businesses. Contrary to the conventional view of an American economy bubbling with innovative small companies, the reality is quite different. Intellectual property, network effects, natural monopolies, expensive R&D, fleets of lawyers to litigate against potential rivals, and armies of lobbyists have created formidable barriers to new entrants. This is one major reason the rate at which new businesses have formed in the United States has slowed markedly in recent years. Between 1978 and 2011, as the new giants gained control, that rate was halved, according to a Brookings Institution study released in May 2014. The decline transcends the business cycle; neither the expansions of the late 1990s and early 2000s, nor the recessions of 2001 and 2008–09, seem to have had any effect on the downward trend. And that trend has been immune to which party has occupied the White House or controlled Congress (see figure 1).
The continued dominance of the new giants is by no means assured. A new entrant with a far better idea could nibble away at one of the giant’s markets, although the giant would probably buy the new entrant before incurring any substantial damage. An aggressive enforcer of antitrust laws could win a court victory that forced the giant to relinquish market share, although the giant’s army of litigators would probably halt any such assault, and its legislative allies would discourage the assault to begin with. The more likely threat to one of the giants comes from another giant seeking to expropriate its market.
The positions of the new giants are remarkably strong because they have perfected ways to use their profits to entrench their economic and political power. They herald the “free market” as they busily shape it to their advantage. They are the kingpins of the new economy, and average Americans are paying the price.
FIGURE 1. THE U.S. ECONOMY HAS BECOME LESS ENTREPRENEURIAL OVER TIME
Firm Entry and Exit Rates in the United States, 1978–2011
Source: U.S. Census Bureau, Business Dynamics Statistics (BDS).
Consider that by 2014, the United States had some of the highest broadband prices among advanced nations, and the slowest speeds. The average peak Internet connection speed in America was nearly 40 percent slower than that of Hong Kong or South Korea. And many lower-income Americans had no high-speed access at all in their homes because they couldn’t afford it. The costs are so high and the service so bad because the vast majority of Americans have to rely on their local cable monopoly in order to connect. Cable companies have tubes in the ground that are slower than fiber-optic cable. When it comes to fiber connections, the United States is behind Sweden, Estonia, South Korea, Hong Kong, Japan, and most other developed countries, putting us twenty-eighth worldwide in terms of speed of Internet access and twenty-third in terms of cost.
For example, 100 percent of the inhabitants of Stockholm, Sweden, have high-speed service in their homes that costs no more than twenty-eight dollars a month. Stockholm built fiber lines and leased them out to private operators. That resulted in intense competition among operators, low prices, and universal coverage. The project quickly recouped its costs and by 2014 was bringing millions of dollars of revenue to the city.
What’s stopping American cities from doing the same? Cable operators with deep pockets and lots of political influence. They exemplify the new monopolists. They pay millions of dollars a year to cities in video franchise fees in order to retain their monopoly, and millions more to lobbyists and lawyers to ensure cities don’t stray. They have successfully pushed twenty states to enact laws prohibiting cities from laying fiber cables. In 2011, John Malone, chairman of Liberty Global, the largest cable company in the world, admitted that when it comes to high-capacity data connections in the United States, “Cable’s pretty much a monopoly now.” Indeed, by 2014 more than 80 percent of Americans had no choice but to rely on one single cable company for high-capacity wired data connections to the Internet. Since none of the cable companies face real competition, they have no incentive to invest in fiber networks or even to pass along to consumers the lower prices their large scale makes possible.
One city that has bucked the trend is Chattanooga, Tennessee, which built its own fiber-optic network. In less than a minute, the lucky inhabitants of Chattanooga can download a two-hour movie that takes nearly a half hour to download with a typical high-speed broadband connection. But the cable operators are fighting back. By 2014, Comcast, one of the nation’s largest cable operators, had twice sued the city-owned utility and was spending millions on a PR campaign aimed at discrediting the publicly run service.
Here again, the issue has nothing to do with choosing the “free market” or government. Whoever lays the cable has a monopoly, because no one else has an economic incentive to lay new cables. The real issue is how that monopoly is organized. As noted, Stockholm stimulated competition in the private sector. Comcast and other American cable companies face little or no competition and are consolidating their power even further. Cable broadband might eventually face competitors, such as upgraded DSL from telephone companies, next-generation wireless, and very-high-speed fiber like that being supplied to a few cities by Google. But none of these alternatives is likely to be available for some time, and most cities lack the money and expertise for Google fiber. Put simply, cable is the only game in town—and cable operators intend to keep it that way.
Comcast and other cable operators spend millions of dollars each year lobbying and contributing to political campaigns (in 2014, Comcast ranked thirteenth of all corporations and organizations reporting lobbying expenditures and twenty-eighth for campaign donations). They also provide jobs to officials who make these sorts of decisions. Michael Powell, who chaired the Federal Communications Commission (FCC) in 2002, subsequently became head of the cable industry’s lobbying group. (The National Cable and Telecommunications Association ranked twelfth in lobbyist spending in 2014.)
Comcast is also one of Washington’s biggest revolving doors. Of its 126 lobbyists in 2014, 104 had worked in government before joining Comcast. Former FCC member Meredith Attwell Baker, for example, went to work for Comcast four months after voting to approve Comcast’s bid for NBCUniversal in 2011 (she subsequently went to work for the industry’s lobbying group). Comcast’s in-house lobbyists include several former chiefs of staff to Senate and House Democrats and Republicans as well as a former commissioner of th
e FCC.
I’m not suggesting anyone has acted illegally. To the contrary: CEOs believe they are supposed to maximize shareholder returns, and one means of accomplishing that goal is to play the political game as well as it possibly can be played and field the largest and best legal and lobbying teams available. Trade associations see their role as representing the best interests of their corporate members, which requires lobbying ferociously, raising as much money as possible for political campaigns of pliant lawmakers, and even offering jobs to former government officials. Public officials, for their part, perceive their responsibility as acting in the public interest. But the public interest is often understood as emerging from a consensus of the organized interests appearing before them. The larger and wealthier the organization, the better equipped its lawyers and its experts are to assert what’s good for the public. Any official who once worked for such an organization, or who suspects he may work for one in the future, is prone to find such arguments especially persuasive.
Inside the mechanism of the “free market,” the economic and political power of the new monopolies feed off and enlarge each other.
Monsanto, the giant biotech corporation, owns the key genetic traits in more than 90 percent of the soybeans planted by farmers in the United States and 80 percent of the corn. Its monopoly grew out of a carefully crafted strategy. It patented its own genetically modified seeds, along with an herbicide that would kill weeds but not soy and corn grown from its seeds. The herbicide and herbicide-resistant seeds initially saved farmers time and money. But the purchase came with a catch that would haunt them in the future: The soy and corn that grow from those seeds don’t produce seeds of their own. So every planting season, farmers have to buy new seeds. In addition, if the farmers have any seeds left over, they must agree not to save and replant them in the future. In other words, once hooked, farmers have little choice but to become permanent purchasers of Monsanto seed. To ensure its dominance, Monsanto has prohibited seed dealers from stocking its competitors’ seeds and has bought up most of the small remaining seed companies.
Saving Capitalism Page 4
