(Author’s note: Due to technical difficulties with the email server, subscribers stopped getting their regular blog posts by email on 11/11/22. Therefore, I am re-publishing those posts not received by the subscribers from then until Dec. 8 when the problem was corrected. My apologies to those who have been able to read these posts by going directly to my web site.)

 

What do you know about poverty in America? Probably less than you think. I know that’s true for me; maybe for you, too.

John C. Goodman is a healthcare economist who writes a regular column in Forbes magazine. His latest column has some startling information. Here are five surprising facts:

• The U.S. welfare state has almost eliminated poverty in this country.
• Over the last 75 years, income inequality has actually gone down, not up.
• Since the end of World War II, income has steadily risen for every income group – with the greatest increase among the bottom fifth of the income ladder.
• Over half of the population gains very little from working under the U.S. fiscal system – as taxable income replaces untaxed transfer benefits. (Now you know why every business seems to be hiring.)
• The U.S. has the most progressive fiscal system among all developed countries.

 

The source of much of what Goodman is saying is a new book called The Myth of American Inequality by Phil Gramm (former Texas U.S. senator), Robert Ekelund, and John Early. Goodman calls their book “impeccably researched” and strongly endorses reading it.

Poverty

Ronald Reagan once said, “We fought a war on poverty and poverty won.” Most people would agree with this statement, especially if you follow the Census Bureau statistics the media always reports. But the Census Bureau includes only 8 of more than 100 federal transfer programs. (A transfer program is some form of government benefit – which transfers something of value to the population that qualifies.) Among these benefits excluded by the Census Bureau are refundable tax credits, food stamps, Medicare, and Medicaid.

The war on poverty was declared by the Johnson Administration in 1965. Over the past 50 years, the value of taxpayer-funded transfer payments to the poorest 20 percent of American households has risen from an average of $9,677 to $45,389 after adjustment for inflation. Counting these transfer payments dollar-for-dollar as income, the authors estimate the true poverty rate in the U.S. is just 2.5%. But the Census Bureau would have you believe it is 12.8%, based on the same data, but overlooking the other 92 federal transfer programs.

Inequality

A major platform of the Democratic Party is “correcting inequality.” Putting aside the question of whether all people should be equal, regardless of how much they work, let’s just look at how much inequality we have. Are the rich getting richer while the well-being of everyone else is stagnating? The Census Bureau would have you believe so. But in measuring inequality, the Bureau leaves out two-thirds of all government transfer payments enjoyed by those at the bottom of the income ladder and also ignores taxes collected from those at the top.

In other words, the Census Bureau ignores 40 percent of all income that is gained in transfer payments and lost in taxes.

The Census Bureau tells us the income difference between the top 20 percent of households and the bottom 20 percent is 16.7 to 1. But if you throw in transfers and taxes, the difference is only 4 to 1. The Census Bureau would have you believe that inequality has been rising over time, but the authors find that is has actually fallen by 3 percent since 1947.

Income Growth

The U.S. government uses five different price indexes for various purposes. But using hourly earnings and household income are the least accurate means of measuring income growth. The authors show that using the best measure of inflation, and taking account of transfers and taxes, all five income groups have experienced substantial real income growth over the past 75 years – roughly quadrupling on average. (Not so in the last two years of high inflation.)

But here’s the surprise – the greatest growth in real income is among the bottom fifth of households (681 percent) – while those in the top fifth have only grown 456 percent.

Welfare vs. Work

While it is comforting to know that the actual poverty rate is lower than expected, it has come at a significant cost. Welfare has been substituting for work. Since the beginning of the War on Poverty in 1965, the labor force participation rate of the bottom one-fifth of households – who now receive more than 90 percent of their income from the government – has dropped from 70 percent to just 36 percent. That’s why there are about 11 million job openings out there and employees can’t find people who want to work.

But it’s understandable, given that the authors calculate the bottom fifth of households, based on earned income, had an average income of $33,653 per person. The second, and middle fifths, based on earned income, had $29, 497 and $32,574 respectively.

In other words, those who had the least earned income had more actual income than those in the next two higher quintiles! Stated another way, the average household in the bottom fifth (based on income they earned) received 14% more income than those in the next higher earned income category and 3.3% more than the average middle-income family. It pays not to work!

International Comparisons

Most people, especially those on the left of the political spectrum, assume the welfare states of Europe are more progressive than the U.S. system. While it is true that a typical European country has more social insurance than we have, those programs are not mainly paid for by taxing the rich. They are paid for by taxing the beneficiaries.

Compared to our country, Europeans have fewer private goods and more social insurance. The authors note that the top 10 percent of American households earn about 33 perncet of all earned income but pay 45.1 percent of all income and payroll taxes. That’s call a progressivity ratio of 1.35. This is higher than any other country. In comparison, the ratio is 1.10 in France, 1.07 in Germany, and 1.0 in Sweden – all countries thought by most people to be more progressive than us.

The authors also note in a newer study that the U.S. welfare state is actually larger than the European welfare states. The study concludes that “the U.S. redistributes a greater share of national income to low-income groups than any European country.” Don’t expect to hear that statistic reported on CNN or MSNBC anytime soon.

For more on this subject, I suggest you read the book. I know I intend to do so. To quote Mark Twain, “It ain’t what you don’t know that gets you in trouble. It’s what you know that ain’t so.”

(Author’s note: Due to technical difficulties with the email server, subscribers stopped getting their regular blog posts by email on 11/11/22. Therefore, I am re-publishing those posts not received by the subscribers from then until Dec. 8 when the problem was corrected. My apologies to those who have been able to read these posts by going directly to my web site.)

 

I am not a prophet, nor the son of a prophet, but I did see this coming. In previous blog posts (Cancer Drug Breakthroughs Threatened, The Real Cost of Lowering Drug Prices), I warned that the Inflation Reduction Act would not lower inflation, but it would threaten potential breakthrough cures for cancer and other diseases. Those predictions are already coming true.

Joe Grogan, writing in The Wall Street Journal, confirms my worst fears. He says, “While Democrats boast that they’ve given Medicare the power to “negotiate” drug prices, the effect has been to saddle manufacturers with a complex and ill-conceived price-setting scheme. In response, many have canceled drug-development programs, resulting in an unfortunate but predictable loss of patients nationwide.”

You won’t hear this on the newscasts, or read headlines that explain the details, but the impact is nevertheless devastating to the companies that are most responsible for the gains we have made in life expectancy. Grogan explains that one poorly crafted provision of the new law is driving companies away from research into treating rare diseases. In its October 27 earnings statement, Alnylam Pharmaceuticals announced it is suspending development of a treatment for Stargardt disease, a rare eye disorder, because of the company’s need “to evaluate impact of the Inflation Reduction Act.”

What is that all about? Alnylam’s decision turns on a provision in the Democrats’ bill that exempts from price-setting negotiations drugs that treat only one rare disease. The company’s drug is currently marketed as treating only amyloidosis, the protein that accumulates in the brain in Alzheimer’s disease. As long as the drug is only marketed as a treatment for amyloidosis, it is exempt from price-setting. But if the company proceeded with research into treating Stargardt disease, as they previously planned, it would lose that exemption. Therefore, those who suffer from Stargardt disease are out of luck! Perhaps they can express their appreciation to the Democrats that passed the bill.

If you’ve never heard of Stargardt disease, you’re not alone. But this same situation applies to much more common diseases such as cancer. Eli Lilly pharmaceutical company just announced it is canceling work on a drug that had been undergoing studies for certain blood cancers. “In light of the Inflation Reduction Act,” the company wrote to Endpoints News, “this program no longer met our threshold for continued investment.” In other words, they understandably determined that if the price of their drug for these diseases is going to be controlled by the government, the costly investment isn’t worth the risk if they can’t be reasonably sure they’ll get a return on that investment.

Grogan explains that when pharmaceutical companies develop cancer drugs, they usually first develop them for a single indication. Only after the first approval do they research additional indications. For example, Merck’s Keytruda, which successfully treated President Jimmy Carter, was first approved for advanced melanoma in 2014. Today the company lists 19 approved indications on its website. Genentech’s Herceptin, a critical breast cancer treatment, gained approval in the adjuvant cancer setting eight years after its original approval in the metastatic setting. Today it also has an indication for treating gastric cancer.

How often does this happen? Nearly 60% of oncology medications approved a decade ago received additional approvals in later years. But the new law eliminates the incentive to conduct additional research, because its price-setting mechanisms kick in after nine years for small-molecule drugs and 13 years for biologics, regardless of how much research companies conduct after the drug’s initial approval.

While Democrats are now bragging on the campaign trail about lowering prescription drug prices (only on Medicare and only some drugs), their bill has effectively undone decades of bipartisan policy that promoted research and development by balancing profit incentives with cost concerns. For instance, the Orphan Drug Act of 1983, which Alnylam counted on in developing its now-abandoned program, provided a combination of tax credits, grants and market exclusivity to create incentive for investment in rare-disease drugs. Fifty-two Republicans and 118 Democrats co-sponsored the law, which Democratic Rep. Henry Waxman called “an example of government at its finest, demonstrating how Congress applies itself to solve overlooked, but deeply important, problems that affect millions of Americans.”

The following year, Waxman and Republican Senator Orrin Hatch led another bipartisan coalition to pass the Hatch-Waxman Act. Their bill granted drug makers a temporary market monopoly of five years with potential extensions. In return, innovators would submit to generic competition at the end of their monopoly period. This has been a boon for the generic-drug industry and innovators, as well as patients and their families.

The Hatch-Waxman Act also provide six months of market exclusivity for generic manufacturers that undertook the expense and risk of developing first-on-the-market generic drugs. This allowed generics to recoup costs over those first six months as they gained market share against the innovator. As a result of this growth of the generic market, more than 90% of prescriptions in Medicare Part D program in 2019 were for generic drugs, which saves more than $96 billion annually for Medicare and billions more for seniors. But with the impending price caps, these incentives are lost.

All this was done to give Democrats a short-term talking point for the mid-term elections. With any luck, a new Congress controlled by the Republicans can undo the damage the Inflation Reduction Act has done. Remember, Democrats get sick just as often as Republicans.