Minnesota’s Economic News — W/E 10/15/21
State and local taxes and spending KSTP: State of Minnesota considering ways to cover unemployment fund debt Hometown Focus: Minnesota counties receive $36.3 million in PILT revenue Labor market KAAL…
In a recent interview, former Vice President Joe Biden said “Milton Friedman isn’t running the show anymore.” Friedman was one of the most effective economists of the 20th century, but he has been dead now for 14 years so it isn’t clear what Biden meant by this. Indeed, what is amazing is how well so many of Friedman’s judgments hold up and how timely so many of his writings remain. Often, I’ll read something he wrote before I was born and it could be published just as usefully today.
I have been struck by this again during the Covid-19 pandemic. Whether it is tests or facemasks, we see that government regulators – who are supposed to protect the public – are actually hindering efforts to safeguard public health. The Food and Drug Administration (FDA) are one of these regulatory bodies. Below, from his classic 1980 book Free to Choose, is Friedman’s take on the FDA:
…[T]he second major foray of the federal government into consumer protection—the Food and Drug Act of 1906—did not arise from protests over high prices, but from concern about the cleanliness of food. It was the era of the muckraker, of investigative journalism. Upton Sinclair had been sent by a socialist newspaper to Chicago to investigate conditions in the stockyards. The result was his famous novel, The Jungle, which he wrote to create sympathy for the workers, but which did far more to arouse indignation at the unsanitary conditions under which meat was processed. As Sinclair said at the time, “I aimed at the public’s heart and by accident hit it in the stomach.”
Long before The Jungle appeared and crystallized public sentiment in favor of legislation, such organizations as the Women’s Christian Temperance Union and the National Temperance Society had formed the National Pure Food and Drug Congress (1898) to campaign for legislation to eliminate the medical nostrums of the day—mostly heavily laced with alcohol and so enabling spirits to be purchased and consumed in the guise of medicine, which explains the involvement of the temperance groups.
Here, too, special interests joined the reformers. The meat packers “learned very early in the history of the industry that it was not to their profit to poison their customers, especially in a competitive market in which the consumer could go elsewhere.” They were especially concerned by restrictions on the importation of U.S. meat imposed by European countries, using as an excuse the allegation that the meat was diseased. They eagerly seized the opportunity to have the government certify that the meat was disease-free and at the same time pay for the inspection.
Another special interest component was provided by the pharmacists and physicians through their professional associations, though their involvement was more complex and less single-mindedly economic than that of the meat packers—or of the railroads in the establishment of the ICC. Their economic interest was clear: patent medicines and nostrums, sold directly to the consumer by traveling medicine men and in other ways, competed with their services. Beyond this, they had a professional interest in the kinds of drugs and medicines available and were keenly aware of the dangers to the public from useless medicines promising miraculous cures for everything from cancer to leprosy. Public spirit and self-interest coincided.
The 1906 act was largely limited to the inspection of foods and the labeling of patent medicines, though, more by accident than design, it also subjected prescription drugs to control, a power which was not used until much later. The regulatory authority, from which the present Food and Drug Administration developed, was placed in the Department of Agriculture. Until the past fifteen years or so, neither the initial agency nor the FDA had much effect on the drug industry.
Few important new drugs were developed until sulfanilamide appeared in mid-1937. That was followed by the Elixir Sulfanilamide disaster, which occurred as a result of a chemist’s efforts to make sulfanilamide available to patients who were unable to take capsules. The combination of the solvent he used and sulfanilamide proved deadly. By the end of the tragedy “a hundred and eight people were dead—a hundred and seven patients, who had taken the ‘elixir, ‘ and the chemist who had killed himself.” “Manufacturers themselves learned from the . . . experience the liability losses that could be suffered from the marketing of such drugs and instituted premarketing safety tests to avoid a repetition.” They also realized that government protection might be valuable to them. The result was the Food, Drug, and Cosmetic Act of 1938, which extended the government’s control over advertising and labeling and required all new drugs to be approved for safety by the FDA before they could be sold in interstate commerce. Approval had to be granted or withheld within 180 days.
A cozy symbiotic relation developed between the pharmaceutical industry and the FDA until another tragedy occurred, the thalidomide episode of 1961-62. Thalidomide had been kept off the U.S. market by the FDA under the provisions of the 1938 act, though limited amounts of the drug have been distributed by physicians for experimental purposes. This limited distribution ended when reports surfaced about deformed babies born to European mothers who had taken thalidomide during pregnancy. The subsequent uproar swept into law in 1962 amendments that had developed out of Senator Kefauver’s investigations of the drug industry the prior year. The tragedy also changed radically the thrust of the amendments. Kefauver had been concerned primarily with charges that drugs of dubious value were being sold at unduly high prices—the standard complaint about consumer exploitation by monopolistic business. As enacted, the amendments dealt more with quality than price. They “added a proof-of-efficacy requirement to the proof-of-safety requirement of the 1938 law, and they removed the time constraint on the F.D.A.’s disposition of a New Drug Application. No new drug may now be marketed unless and until the F.D.A. determines that there is substantial evidence not only that the drug is safe, as required under the 1938 law, but that it is effective in its intended use.”
The 1962 amendments coincided with the series of events that produced an explosion in government intervention and a change in its direction: the thalidomide tragedy, Rachel Carson’s Silent Spring, which launched the environmental movement, and the controversy about Ralph Nader’s Unsafe at Any Speed. The FDA participated in the changed role of government and became far more activist than it had ever been before. The banning of cyclamates and the threat to ban saccharin have received most public attention, but they are by no means the most important actions of the FDA.
No one can disagree with the objectives of the legislation that culminated in the 1962 amendments. Of course it is desirable that the public be protected from unsafe and useless drugs. However, it is also desirable that new drug development should be stimulated, and that new drugs should be made available to those who can benefit from them as soon as possible. As is so often the case, one good objective conflicts with other good objectives. Safety and caution in one direction can mean death in another.
The crucial questions are whether FDA regulation has been effective in reconciling these objectives and whether there may not be better ways of doing so. These questions have been studied in great detail. By now, considerable evidence has accumulated that indicates that FDA regulation is counterproductive, that it has done more harm by retarding progress in the production and distribution of valuable drugs than it has done good by preventing the distribution of harmful or ineffective drugs.
The effect on the rate of innovation of new drugs is dramatic: the number of “new chemical entities” introduced each year has fallen by more than 50 percent since 1962. Equally important, it now takes much longer for a new drug to be approved and, partly as a result, the cost of developing a new drug has been multiplied manyfold. According to one estimate for the 1950s and early 1960s, it then cost about half a million dollars and took about twenty-five months to develop a new drug and bring it to market. Allowing for inflation since then would raise the cost to a little over $1 million. By 1978, “it [was] costing $54 million and about eight years of effort to bring a drug to market”—a hundredfold increase in cost and quadrupling of time, compared with a doubling of prices in general.” As a result, drug companies can no longer afford to develop new drugs in the United States for patients with rare diseases. Increasingly, they must rely on drugs with high volume sales. The United States, long a leader in the development of new drugs, is rapidly taking a back seat. And we cannot even benefit fully from developments abroad because the FDA typically does not accept evidence from abroad as proof of effectiveness. The ultimate outcome may well be the same as in passenger rail traffic, the nationalization of the development of new drugs.
The so-called “drug lag” that has resulted is manifested in the relative availability of drugs in the United States and other countries. A careful study by Dr. William Wardell of the Center for the Study of Drug Development of the University of Rochester demonstrates, for example, that many more drugs are available in Great Britain that are not available in the United States than conversely, and that those available in both countries were on the average on the market sooner in Great Britain. Said Dr. Wardell in 1978,
If you examine the therapeutic significance of drugs that haven’t arrived in the U.S. but are available somewhere in the rest of the world, such as in Britain, you can come across numerous examples where the patient has suffered. For example, there are one or two drugs called Beta blockers, which it now appears can prevent death after a heart attack—we call this secondary prevention of coronary death after myocardial infarction—which, if available here, could be saving about ten thousand lives a year in the United States. In the ten years after the 1962 amendments, no drug was approved for hypertension—that’s for the control of blood pressure—in the United States, whereas several were approved in Britain. In the entire cardiovascular area, only one drug was approved in the five year period from ’67 to ’72. And this can be correlated with known organizational problems at F.D.A. . . .
The implications for the patient are that therapeutic decisions that used to be the preserve of the doctor and the patient are increasingly being made at a national level, by committees of experts, and these committees and the agency for which they are acting—the F.D.A.—are highly skewed towards avoiding risks so there’s a tendency for us to have drugs that are safer but not to have drugs that are effective. Now I’ve heard some remarkable statements from some of these advisory committees where in considering drugs one has seen the statement “there are not enough patients with a disease of this severity to warrant marketing this drug for general use.” Now that’s fine if what you are trying to do is minimize drug toxicity for the whole population, but if you happen to be one of those “not enough patients,” and you have a disease that is of high severity or a disease that’s very rare, then that’s just tough luck for you.
Granted all this, may these costs not be justified by the advantage of keeping dangerous drugs off the market, of preventing a series of thalidomide disasters? The most careful empirical study of this question that has been made, by Sam Peltzman, concludes that the evidence is unambiguous: that the harm done has greatly outweighed the good. He explains his conclusion partly by noting that “the penalties imposed by the marketplace on sellers of ineffective drugs before 1962 seems to have been sufficient to have left little room for improvement by a regulatory agency.” After all, the manufacturers of thalidomide ended up paying many tens of millions of dollars in damages—surely a strong incentive to avoid any similar episodes. Of course, mistakes will still happen—the thalidomide tragedy was one—but so will they under government regulation.
The evidence confirms what general reasoning strongly suggests. It is no accident that the FDA, despite the best of intentions, operates to discourage the development and prevent the marketing of new and potentially useful drugs.
Put yourself in the position of an FDA official charged with approving or disapproving a new drug. You can make two very different mistakes:
1. Approve a drug that turns out to have unanticipated side effects resulting in the death or serious impairment of a sizable number of persons.
2. Refuse approval of a drug that is capable of saving many lives or relieving great distress and that has no untoward side effects.
If you make the first mistake—approve a thalidomide—your name will be spread over the front page of every newspaper. You will be in deep disgrace. If you make the second mistake, who will know it? The pharmaceutical firm promoting the new drug, which will be dismissed as an example of greedy businessmen with hearts of stone, and a few disgruntled chemists and physicians involved in developing and testing the new product. The people whose lives might have been saved will not be around to protest. Their families will have no way of knowing that their loved ones lost their lives because of the “caution” of an unknown FDA official.
In view of the contrast between the abuse poured on the European drug companies that sold thalidomide and the fame and acclaim that came to the woman who held up approval of thalidomide in the United States (Dr. Frances O. Kelsey, given a gold medal for Distinguished Government Service by John F. Kennedy), is there any doubt which mistake you will be more anxious to avoid? With the best will in the world, you or I, if we were in that position, would be led to reject or postpone approval of many a good drug in order to avoid even a remote possibility of approving a drug that will have newsworthy side effects.
This inevitable bias is reinforced by the reaction of the pharmaceutical industry. The bias leads to unduly stringent standards. Getting approval becomes more expensive, time-consuming, and risky. Research on new drugs becomes less profitable. Each company has less to fear from the research efforts of its competitors. Existing firms and existing drugs are protected from competition. New entry is discouraged. Research that is done will be concentrated on the least controversial, which means least innovative, of the new possibilities.
When one of us suggested in a Newsweek column (January 8, 1973) that for these reasons the FDA should be abolished, the column evoked letters from persons in pharmaceutical work offering tales of woe to confirm the allegation that the FDA was frustrating drug development. But most also said something like, “In contrast to your opinion, I do not believe that the FDA should be abolished but I do believe that its power should be” changed in such and such a way.
A subsequent column, entitled “Barking Cats” (February 19, 1973), replied:
What would you think of someone who said, “I would like to have a cat provided it barked”? Yet your statement that you favor an FDA provided it behaves as you believe desirable is precisely equivalent. The biological laws that specify the characteristics of cats are no more rigid than the political laws that specify the behavior of governmental agencies once they are established. The way the FDA now behaves, and the adverse consequences, are not an accident, not a result of some easily corrected human mistake, but a consequence of its constitution in precisely the same way that a meow is related to the constitution of a cat. As a natural scientist, you recognize that you cannot assign characteristics at will to chemical and biological entities, cannot demand that cats bark or water burn. Why do you suppose the situation is different in the social sciences?
The error of supposing that the behavior of social organisms can be shaped at will is widespread. It is the fundamental error of most so-called reformers. It explains why they so often feel that the fault lies in the man, not the “system”; that the way to solve problems is to “turn the rascals out” and put well-meaning people in charge. It explains why their reforms, when ostensibly achieved, so often go astray.
The harm done by the FDA does not result from defects in the people in charge—unless it be a defect to be human. Many have been able and devoted civil servants. However, social, political, and economic pressures determine the behavior of the people supposedly in charge of a government agency to a far greater extent than they determine its behavior. No doubt there are exceptions, but they are rare—almost as rare as barking cats.
That does not mean that effective reform is impossible. But it requires taking account of the political laws governing the behavior of government agencies, not simply berating officials for inefficiency and waste or questioning their motives and urging them to do better. The FDA did far less harm than it does now before the Kefauver amendments altered the pressures and incentives of the civil servants.
John Phelan is an economist at the Center of the American Experiment.