The Government's Role in R&D

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So, John Holbo leaves philosophy and gets to the nub of the practical question:

We'll get to the shortages in a minute. But first, assuming McArdle is right about the r&d shortfall, I would prescribe: r&d. The government should fund it (if, ex hypothesi, no private party will). I expect that if the single payer system is otherwise performing tolerably the taxpayers will be willing to pay and consider it a fair deal overall. Presumably they want medical innovation. (If they aren't willing to pay, then maybe things have advanced to the point where everyone is happy with the existing level of medicine. But I would be surprised if that ever happens.) The fact that we have moved to a 'planned health care economy' would be no structural barrier to ramping r&d back up. We don't need private insurance companies to signal where to look for that bold new cancer treatment. (I'm not saying the private market is useless for signaling worthy goals, or working out good systems of provision; but it isn't indispensable, so far as I can tell, not like the generic economic growth/free markets case.) It isn't that hard for government to spend money on big programs (I'm sure McArdle agrees with that.) Doing so helps get politicians re-elected. The people like it. So, if there really were a sort of upset, in the wake of a shift to single payer, with r&d sinking, I would expect it to recover when people noticed this had happened.

He also talks about rationing, but I'm going to leave aside the rationing debate for this reason:  I do not particularly worry about rationing within the context of the US system.  I don't think we have the political will for it.  Holbo and a number of his commenters are spending a lot of time arguing about whether it's rationing if some number of people can leave the system, which is to me not the relevant or interesting question about rationing, though I quite understand why people are worried about the moral philosophy of the thing.  I'm sheerly worried about the fact that rationed markets function badly on all levels, including providing for the needy.

I responded to people who were saying that "We have rationing now" to point out that this is a silly reading that has nothing to do with the two major concerns people have with rationing.  Economists worry about the market screw ups.  Ordinary people worry that they won't be able to get their hands on the rationed goods.  Neither of these are in any way affected by a moral philosophy argument about whether it is somehow morally problematic to provide basic service which the rich can opt out of.  In the relevant sense for economists, the opt out is rarely large enough to overcome the market distortions, and in the case of the ordinary people, the crowding out effects of a government program for which substantial taxes must be paid has for them all the negative features of rationing, whether or not we call it "rationing". 

But that doesn't mean I think we should worry about rationing.  I understand why seniors do, because, well, people are loss averse.  But I think price controls will come long before outright denials of treatment.  And with that, I hope, we put the topic of rationing to rest for a while.

Why shouldn't the government do R&D?  Let me respond by discussing a phenomenon that regularly pisses the hell out of a lot of progressives, and also, me.  It's a dialogue that goes something like this:

Progressive:  If we abolish welfare, some people will end up in degrading, awful poverty, and children may starve.

Libertarian:  That should be provided by private charity.

Progressive:  Yes, well, it isn't.

Libertarian:  That's because the government does it.

This argument is obviously non-falsifiable.  In fact, some people are supported by private charity rather than welfare, so private charity does exist.  It's possible that without the distortions of the government, private charity would take over the whole show and do a better job--I think there's good reaosn to believe that when private charity does these things, it often does a better job than the government can.

But I can't really come up with any very plausible mechanism by which there is a clearing market in private charity.  The amount of food produced corresponds, give or take, to the amount of food that we as a society want to consume.  That's because of the magic of prices and incentives.  But there's no particular reason that the supply of charity should meet or exceed the amount that most people probably believe should be delivered, i.e. one where no one in America starves to death.

The government sucks at a lot of things.  But it is, IMHO, probably better than the private sector at the fairly simple task of ensuring that no American starves by giving food and money to those who need it, and yes, sure, some people who don't. 

When we look at the last time there was no substantial public safety net, I don't see poverty "markets" clearing.  I see people suffering pretty extensively from want.  Yes, we were poorer then, etc.  Nonetheless. The supply of charity did not meet the demand for it at a minimally acceptable standard of existence.

Perhaps unlike my fellow libertarians, I do not view the government as worse than the private sector at all things.  I view it as better than the private sector at some things, like producing streetlamp and policemen and armies and the FDIC and unemployment insurance.  I view it as worse than the private sector at producing many other things, like consumption goods and services.

I view NIH research as invaluable--as with welfare, I see no particular reason to believe that the market will "clear" at a socially optimal amount of scientific research, and my natural bias is towards more scientific research.  But companies do a different thing that is also valuable, for different reasons, and in different ways.  In every system that we know of, the government's ability to step in and do this part of research and development--the part where you develop a robust supply of products that has a fairly fine-tuned tradeoff between the strength of demand for the product, the number of people who demand it, and the likelihood of producing a working drug. The private sector is orchestrated towards this result by a complex interplay of prices and exit rights that government just doesn't have.  Government doesn't worry about going out of business.  Academic researchers are not oriented towards applied research on a P&L.

Now, you can say that profits aren't the best guide to socially optimal production.  But I don't need profits to produce the results that would be ordained by God Himself, if we could persuade him to take a break from running heaven in order to run Pfizer.  I need profits to produce a better result than the government does when it sets out to produce goods, rather than basic research.  And profits really do produce better results than fiat consistently and reliably. 

There is no country in which government has outperformed the market at the production of basic needs (distribution is a different question that we can fight about later).  The only industry that's even vaguely hopeful is defense, and I hope I don't need to persuade progressives that if our pharmaceutical industry starts looking like our defense industry, we're screwed.  It's usually dominated by a few major contractors who are deeply intertwined with the people who buy from them, it's wildly expensive, everyone thinks it's horribly inefficient and produces a lot of products we don't need because they're the pet project of some congressman, and the rest of the world free rides off of our hog-wild spending.  You don't like me too drugs?  Wait until the pet company of some powerful committee member wastes billions of dollars chasing a never-never cure for cancer rather than a promising antidepressant that could produce a 20% improvement over existing treatments in large classes of patients.

Just as private charity does save some people, the government does produce some drugs.  But this is not the rule.

Maybe you think this can change.  Great!  Build the institutions to do it--I'm totally serious about supporting Dean Baker's plan to try to make a government agency to develop drugs.  If they can develop more drugs more cost effectively than private pharma, that's a worthy use of tax dollars.  Here's the thing:  you have to do it before you dismantle the old system.  Not after.

I do think there are big holes in innovation left by the patent system that the government should spend more time covering, particularly clinical trials of off-label uses for generics, orphan drugs, and drugs for the third world.  I think it's worth experimenting with direct funding and prizes to see if either can close the gap.  But until I've got better proof of concept, I'm loathe to tamper with the old system.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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