Federal drug-price controls or divide pharmaceutical companies?

Should we have government drug-price controls? A good article exploring this subject is titled, “Government Regulated or Negotiated Drug Prices: Key Design Considerations.” This is from that article:

  1. What process should HHS use to set the price for a drug?
  2. Will the new system set prices only for a limited number of high-cost drugs that lack therapeutic alternatives or more broadly by including drugs that compete with other medicines?
  3. Does the specified price represent the actual price for all sales of a drug, or is it a “ceiling” price, with payers retaining the ability to negotiate lower prices?
  4. Will drug prices set by HHS apply to a narrow or broad population (e.g., only Medicare Part B or Part D beneficiaries or all patients, regardless of their insurance coverage)?
  5. How would HHS assess and incorporate the value of a drug when establishing its acceptable price?
  6. How should HHS select drugs for lowered prices?

The answers are complex, filled with “It depends” and “Maybes.”

The truth is we already have quite a bit of federal price controls, some helpful, some not. The question arises because many people now favor government negotiation of pharmaceutical prices.

Consider this brief video. It shows a woman weeping. She was suffering because the cost of a lifesaving drug was beyond her ability to pay.

In response to many thousands of similar, heart-rending stories:

U.S. Sens. Cory Booker (D-NJ) and Mark R. Warner (D-VA) reintroduced legislation to help lower the costs of needed medical care and prescription drugs for children.

The Fair Drug Prices for Kids Act would give states the ability to purchase prescription drugs at the lowest price possible, reducing the cost of prescription drugs for children who receive coverage through the Children’s Health Insurance Program (CHIP) and generatingimmediate savings for states and the federal government.

Actually, it’s not “the lowest price possible.” It’s the lowest price being offered, anywhere. And it’s state governments that would negotiate.

But that is a digression from our real question. Should the federal government determine prices for pharmaceuticals?

Senior living: Medicare could get to negotiate drug prices under Democratic bill By KAISER HEALTH NEWS | PUBLISHED: July 25, 2022 Democratic senators recently took a formal step toward reviving President Joe Biden’s economic agenda, starting with a measure to let Medicare negotiate prices with drugmakers and to curb rising drug costs more broadly.

A similar proposal died in December when Sen. Joe Manchin, D-W.Va., decided to oppose Biden’s $1.9 trillion Build Back Better bill, which also included provisions allowing for Medicare drug negotiations.

Reining in drug costs has long been wildly popular with the public, with more than 80% of Americans supporting steps such as allowing Medicare to negotiate and placing caps on drug price inflation.

The bill revealed in early July would do both. It would also limit annual out-of-pocket drug costs for Medicare beneficiaries to $2,000, make vaccines free for people on Medicare and provide additional help for lower-income seniors to afford their drugs.

The heart of the bill is the negotiation provisions.

Under the legislation, Medicare could start the new pricing procedures next year, with the secretary of Health and Human Services identifying up to 10 drugs subject to bargaining. The resulting prices would go into effect in 2026. As many as 10 additional drugs would follow by 2029.

The use of the word “negotiate,” when talking about the federal government, is ludicrous if one side has all the power.

The federal government arbitrarily can set an unprofitable price for any drug. But, that drug won’t be sold, which is unacceptable to the public or drug companies.

The populace, which has a limited amount of money available for any spending, always wants, often needs, feels it deserves, and usually will vote for, lower prices.

The federal government, being Monetarily Sovereign, has an unlimited amount of spending money.

With no more effort than to touch a computer key, it can pay the full, asking prices for any drugs, or it can set prices by law. Clearly, when people are made to suffer from high prices, market forces are not working.

So why not either:

  1. Have the federal government pay the asking price for all drugs and offer them free to the people or,
  2. Have the government set an “affordable” price for all drugs, despite what the drugmakers want.

Solution #1 has problems: Healthcare providers, including pharma makers, would jack up prices to astronomical levels, and simply feed off the government’s trough.

There would be no profit motive for the Research & Development of new drugs, because the current drugs would provide infinite profits.

Government price-setting is a risky business. It often has the opposite results from what one would hope. Rent controls are a perfect example.

Limit rents, and landlords will refuse to maintain or upgrade apartments.

Research & Development World
Costly, time-consuming, not itself profitable.

Limit profits, and fewer people will become doctors; fewer hospitals will upgrade ; fewer new drugs will be created; fewer patients will be served.

Solution #2  also has problems. It too would not provide the profits needed for the Research & Development of new drugs, especially drugs for rare diseases and low-profit categories (anti-biotics, for example).

Since the Orphan Drug Act was signed into law in 1983, the FDA has approved hundreds of drugs for rare diseases, but most rare diseases do not have FDA-approved treatments.  

The FDA works with many people and groups, such as patients, caregivers, and drug and device manufactures, to support rare disease product development. 

In one sense, Medicare already does #2.

Without negotiation, it sets the healthcare prices it is willing to pay, on a take-it or leave-it basis with healthcare practitioners.

That policy has generated the “concierge doctor” system. For annual fees, primary care (usually) doctors can limit their practices to a manageable 600-800 patients, allowing plenty of time to devote to each patient.

This compares with the more typical 2500+ patient load, characterized by quick, robotic diagnoses, treatments, then on-to-the-next.

There is a commonality to the problem of all federal price setting. It doesn’t pay for improvements.

When rents are controlled, landlords don’t maintain or upgrade. When doctor’s fees are controlled, doctors are not rewarded for being better doctors. They are not rewarded for doing the daily “R&D” to keep themselves up to date with the latest procedures. Nor are they rewarded for taking more time with patients.

When the primary reward is numbers sold — how many apartments, how many patients, how many sales — hospitals, convalescent homes, pharmaceutical companies, etc. are rewarded for more, but not for better.

Yet another economics writer who doesn’t understand the fundamentals.

A fundamental truth of economics: A Monetarily Sovereign nation never unintentionally can run short of its own sovereign currency.

The nation does not need to tax and does not need to borrow. It creates its sovereign currency at will.

To not understand that fact is to not understand economics, for it is the absolute foundation of economics.

THEWEEK Magazine recently published the article, “The big question about Modern Monetary Theory everyone is missing,” by Ryan Cooper.

Modern Monetary Theory (MMT) and Monetary Sovereignty (MS) share many characteristics regarding money in today’s economies.

Here are a few excerpts from the article, together with my comments.

Economists are in the midst of one of the periodic debate flare-ups over Modern Monetary Theory.

On the pro-MMT side we have economists like Stephanie Kelton and Randall Wray, while on the other we have the odd bedfellows of The New York Times’ Paul Krugman and the People’s Policy Project’s Matt Bruenig.

Professor Kelton has been a “pen pal” of mine for several years. I met Professor Wray years ago, when I gave a talk to his class at UMKC.

This intricate debate is about the main merits of MMT, an economic school of thought which has received wide attention for its dismissal of the need for taxes to pay for new spending.

Both MMT and MS agree that unlike state and local taxes, which do pay for state and local government spending, federal taxes do not pay for federal spending.

The reason is that the U.S. federal government is Monetarily Sovereign. It is sovereign over U.S. dollars, which it creates ad hoc, every time it pays a creditor.

Even if the U.S. government collected zero taxes, it could continue spending, forever.

However, there is an important question which has to this point not been raised. The MMT advocates say that inflation should be controlled through fiscal policy, instead of monetary policy conducted by the central bank as is current practice.

In other words, if prices start rising, we can keep them in line by raising taxes.

But does that actually work?

No, it doesn’t work, cannot work and never will work.

Raising taxes is too slow and too political (waiting for Congress), too undirected (which taxes?), not incremental enough (raise taxes how much?), and too damaging to economic growth (taxes reduce the money supply). 

Unfortunately, MMT takes incompatible positions. It says correctly, that federal taxes do not fund federal spending, but incorrectly that federal taxes are necessary to cause demand for U.S. dollars.

During times of recession and economic slack, a state borrowing in its own currency has unlimited capacity to spend, because printing money or borrowing to spend on public works and so on will not cause inflation so long as there are unemployed workers and idle capital stock.

Think, Mr. Cooper. If a state has the unlimited capacity to spend and to “print” money, why would it need to, or even want to, borrow? Think.

Contrary to popular wisdom, the U.S. does not borrow dollars. Instead, it accepts deposits into T-security accounts, the purpose of which are:

  1. To provide the world with a safe place to park unused dollars. This helps stabilize the dollar.
  2. To assist the Fed in controlling interest rates, which control inflation.

But if there is full employment, taxes are needed for new programs — to fund them for the former, or to stave off inflation for the latter.

Here, Cooper reveals he doesn’t understand the differences between monetarily non-sovereign state and local government financing (where borrowing is necessary), vs. Monetarily Sovereign federal financing (that requires no borrowing).

The federal government levies taxes, but not to obtain dollars. It freely produces all the dollars it needs.

The purpose of federal taxes is to control the economy by discouraging certain activities with higher taxes and by encouraging others with tax reductions.

The effect of federal taxes (as opposed to the purpose), is to reduce federal deficit spending which reduces the money supply.

All federal taxes do this — income taxes, FICA, sales taxes, import duties, etc. They all reduce the money supply. Just as tax cuts are economically stimulative, tax increases are recessionary.

And just as increased federal deficit spending helps cure recessions, decreased federal deficit spending causes recessions, and worst case, depressions.

U.S. depressions tend to come on the heels of federal surpluses.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

Now, it should be noted that MMT’s style of argumentation seems to have dented the brainless pro-austerity mindset that dominates much of elite discourse, which is very much to its credit.

Remember the above comment, because later in his article, Cooper unknowingly supports the very austerity he calls “brainless.”

He discusses the key objection to MMT (and MS), inflation:

The way tax-side inflation control is supposed to work is through supply and demand.

Since taxation will leave buyers with less money in their pockets to spend, market competition will force suppliers to cut prices and workers to accept lower wages.

But if markets have become dominated by a few big firms, then business can resist this pressure, because buyers have nowhere else to go.

Taxation reduces the supply of money. Though taxation can support the demand for money, it is not necessary for that purpose.

Interest is a more effective device for supporting the demand for money. While taxes depress an economy, interest stimulates the economy by increasing federal dollar interest input.

Money growth grows an economy.

A good test of this prediction came in the late 1970s, when inflation was at its postwar peak.

Economist John Kenneth Galbraith argued for price controls, but conservative “monetarists” like Milton Friedman argued that (with) a steep hike in interest rates, inflation would come down quickly and easily.

The Fed tried Friedman’s policy, but it turned out Galbraith was right.

The Fed hiked interest rates to an eyewatering 20 percent, creating the worst recession since the Great Depression up to that time.

But inflation only came down very slowly — partly through Keynesian-style spending effects, but partly by badly damaging the labor movement, which cut unionization.

In the past 50 years, since President Nixon took the U.S. off a gold standard, inflation has not been caused by America’s massive federal deficit spending. See: Inflation has been caused by the price of oil.

The Fed wisely has not recommended controlling the price of oil, an action that would lead to an oil shortage, and a recession, if not a depression. That is what price controls do: Lead to shortages.

And what do shortages lead to? Hyperinflations.

So, Cooper writes that Galbraith was right about price controls?? Where did that come from? He provides no evidence.

The true effect of price controls is to reduce economic growth by reducing supply and profits — the economic necessities for growth.

Price control is a feature of the “brainless, pro-austerity mindset” that Cooper properly criticized a few paragraphs ago.

And do increased interest rates really lead to recessions? Or is it simply that recessions lead to decreased interest rates?

Interest rates (red); deficit spending increases (blue); recessions (vertical gray bars)

The above graph shows that sometimes interest rates peak at the start of recessions, sometimes they peak in the midst of economic growth, and sometimes they decline at the start of recessions.

One cannot say that increased interest rates historically have caused recessions.

The real pattern is that decreased deficit spending causes recessions and increased deficit spending cures recessions.

Why? Because a growing economy requires a growing supply of dollars, and deficit spending adds stimulus dollars to the economy.

Federal deficit spending and debt don’t cause inflation.

Since the U.S. went off the gold standard in 1971, the federal debt (blue) has risen massively, while inflation (red) has been moderate.

Most inflations and nearly all hyperinflations are caused by shortages, usually shortages of food, and often shortages of oil.

For instance, Zimbabwe, an oft-mentioned hyperinflation victim, had its hyperinflation begin with a food shortage. (Farmland was stolen from farmers and given to non-farmers.)

One reason inflation control is delegated to the central bank is that it can work quickly, adjusting interest rates in response to economic conditions several times per year.

Congress works extremely slowly at the best of times, and control is usually split between the two parties.

The Fed may have performed poorly over the last decade, but do we really want Mitch McConnell having to sign off on inflation policy?

Exactly. Now that Cooper belatedly has confirmed why price controls and tax increases don’t work and can’t work, we come to the:


Modern Monetary Theory (MMT) and Monetary Sovereignty MS) describe the realities of economics similarly.

They agree that a Monetarily Sovereign nation, such as the U.S., cannot run short of its own sovereign currency, and neither needs nor uses tax dollars to fund spending.

They differ in many other areas however, one of which has to do with controlling inflation:

Three inflation controls were discussed, only one of which is effective:

  1. Price controls which cut profits and thus cut economic growth, lead to recessions and ultimately cause inflations by causing shortages. They don’t work, and neither MMT nor MS supports this approach.
  2. Tax increases, which are too slow, too political, not incremental, and cause recessions by decreasing the money supply. They don’t work, though MMT supports this approach.
  3. Interest rate increases, which actually increase the money supply (by causing the federal government to pay more interest into the economy, and work by increasing the value of dollars (by increasing the demand for dollars). Works, and has been working since the end of WWII. MS supports this approach.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell


The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.