Over the last decade, pharmaceutical companies have spent close to $2.5 billion lobbying members of congress, including hundreds of millions of dollars to help shape and promote the passage of Obamacare (which resulted in around $35 billion in additional profits for the industry). For years, politicians from across the political spectrum have given Big Pharma a pass. So, when this clip surfaced of an exchange between Congresswoman Alexandria Ocasio-Cortez of New York and Aaron Kesselheim of Harvard during congressional hearings on the drug industry earlier this year, it was an eye-opener. With just two questions, Ocasio-Cortez punctured a gaping hole in the myth of pharmaceutical innovation:
Ocasio-Cortez: “Would it be correct, Dr. Kesselheim, to characterize the NIH [National Institutes of Health] money that is being used in development and research as an early investment? The public is acting as an early investor in the production of these drugs. Is the public receiving any sort of direct return on that investment from the highly profitable drugs that are developed from that research?”
Kesselheim: “No, in most cases there is—when those products are eventually handed off to a for-profit company, there aren’t licensing deals that bring money back into the coffers of the NIH. That usually doesn’t happen.”
Ocasio-Cortez: “So the public is acting as an early investor, putting tons of money in the development of drugs that then become privatized, and then they receive no return on the investment that they have made.”
Pharmaceutical companies routinely engage in price gouging (not to mention research misconduct and public manipulation)—unsavory practices for which there is virtually no oversight. The political justification for allowing these entities to engage in such practices—and reap most of the profits from drug research and developmentin the process—is that pharmaceutical companies drive the innovation behind vital drugs. As a result, pharmaceutical companies should be able to charge what they wish—otherwise, Americans would not benefit from these drugs at all.
Martin Shkreli, the former pharma CEO and current federal inmate, epitomized this mindset in 2015 when he defended his decision to raise the price of Daraprim, the only approved drug for a rare disease called toxoplasmosis, by 5,000 percent. "No one wants to say it, no one's proud of it, but this is a capitalist society, a capitalist system and capitalist rules," he said. "And my investors expect me to maximize profits, not to minimize them or go half or go 70 percent but to go to 100 percent of the profit curve."
Ocasio-Cortez unearthed a very different story about pharmaceutical innovation that is not widely understood by consumers: most of these drugs would not exist if it weren’t for public investment. This does not mean that the private sector is completely inept or that the public sector is anywhere near perfect, but it does mean story we tell about economic prosperity in America is deeply flawed. Every single one of the 210 new drugs approved by the Food and Drug Administration (FDA) from 2010 to 2016 was developed thanks to NIH’s taxpayer-funded research.
In her 2004 book The Truth About Drug Companies, physician Marcia Angell notes that for decades, the NIH has backed research into the most promising drugs in the United States to the tune of $30 billion every year. Meanwhile, executives and shareholders combined receive 99 percent of the over $500 billion profits generated by the industry’s largest 18 drug companies, leaving relatively little room for new spending on research.
For years, progressive proposals like a 70 percent marginal income tax rate or a 2 percent wealth tax, have been dismissed as unworkable and naïve. Such policies, the argument goes, will stifle the underlying mechanism that drives the U.S. economy: private sector innovation. As Paul Graham, the founder of Y Combinator, the country’s preeminent start-up incubator, put it “if income taxes are high enough, start-ups stop happening.”
This argument rests on a story of an American economy driven primarily by genius entrepreneurs, corporate risk takers, and private innovators who could solve our society’s most pressing problems if government just got off their backs. Typically, progressives have found themselves responding to this story in two ways: they ignore it and focus on inequality, or they reaffirm it and assure the public that private innovation will continue to flourishunder progressive leaders.
But the fact that some of the world’s most innovative companies are American is not because of low taxes or loose regulations. It is because America is home to the biggest venture capitalist in the world: the U.S. government. The taxpayers who fund these innovations should be compensated accordingly.
Silicon Valley is the poster-child of private sector innovation in the U.S.—a shining representation of what happens when the government steps back and allows intrepid entrepreneurs and venture capitalists to work their magic. But reality is far more complicated. The cutting-edge innovations responsible for the tech industry’s massive success did not originate as one-off startups funded by private capital but government programs funded by the American people.
The Internet began as ARAPNET, a 1960s program funded by the Department of Defense. Touchscreen technology was developed by a professor at a publicly-funded university using grants from the National Science Foundation and CIA. GPS began as a 1970s as a U.S. military program called NAVSTAR. Even the voice recognition technology behind Apple’s Siri and Amazon’s Alexa traces its lineage to an artificial intelligence project run by the U.S. Government’s Defense Advanced Research Projects Agency (DARPA).
As economist Mariana Mazzucato has pointed out, each and every one of the twelve core technologies that make the iPhone a “smartphone instead of a stupid phone” stemmed from government research projects. “The true secret of the success of Silicon Valley, or of the bio- and nanotechnology sectors,” Mazzucato argues, “is that venture investors surfed on a big wave of government investments.”
The same pattern persists in energy, one of America’s fastest growing sectors. In 2012, researchers at the Breakthrough Institute concluded that the “revolution in natural gas,” often touted as the product of private sector innovation, “is the product of over 25 years of federal agencies and programs driving technology development.” Since 2005 alone, Department of Energy Loan Guarantee Programs have awarded over $35 billion to high-risk clean-technology ventures, including a $465 million loan in Tesla’s early days when it couldn’t attract significant private investment (not to mention, billions in public subsidies).
Private innovation is not necessarily the rising tide that lifts all boats. A more accurate story of American innovation comes with a new potential set of answers to the question inevitably asked of all progressive policymakers: “How are you going to pay for that?” Commentators from the left and right have criticized Ocasio-Cortez’s call for a 70 percent marginal tax rate (which, for the record, the majority of Americans favor) because it would simply not be enough to fund policy initiatives like the Green New Deal, Medicare-For-All, and tuition-free college.
However, Ocasio-Cortez’s line of questioning suggests that progressive policymakers would go beyond just raising tax rates. They could fund some these widely popularinitiatives by ensuring that taxpayers are duly compensated for the investments they make in the innovation process.
This is not some crazy idea dreamed up by socialists. In fact, this argument was made most forcefully in by Italian economist Mariana Mazzucato in her 2013 book The Entrepreneurial State (which garnered praise from radical left-wing outlets such as The Financial Times, Forbes, and The Wall Street Journal). Mazzucato’s thesis takes President Obama’s “you didn’t build that” comment to the next level: “if we [the taxpayers] are funding all the risks,” Mazzucato asks, “where are the rewards for the [taxpayers]?”
Unsurprisingly, these rewards often end up in the pockets of private companies. The way that public innovation currently works, Mazzucato explains, is that the government takes on the massive risk to develop a new technology, and then hands it over to the private sector to reap the profits. While the public is supposed to retain some of these benefits by taxing these profits, many corporations pay no taxes at all, others have historically paid a significantly reduced rate, and in the wake of President Trump’s tax cuts the amount of corporate taxes collected by the U.S. government has plunged to a near-record low.
Far from a rising tide that lifts all boats, the American economy resembles a rising tide that crushes most boats, while a few lucky boats cruise to safety using the advanced navigation technology that all of the other boats paid to develop.
The way to fix this unjust system, according to Mazzucato, is to develop new rules which ensure that taxpayers are adequately rewarded for their contributions to new innovations, in the same way that private investors would be compensated for their successful investments. She advocates for reforms that would create royalty streams to the public for successful bets; transparency in and measurement of state-operated investment vehicles; and opportunities for direct equity in companies backed by the state.
Similar policies are fairly common in countries like Finland, where the state agency SITRA retained equity from its investment in Nokia and made significant returns which it used to reinvest in other companies. This kind of model has also proved successful in Germany, where the state investment bank KfW invested almost half of its funds in protecting the climate and environment while still amassing more than $2 billion in profits in 2017.
Public-private partnerships should not simply drive innovation on behalf of the rich and powerful. They should operate for the greater good. As Mazzucato said in her 2013 Ted Talk: “If the U.S. government had asked for 0.5 percent from [the companies that developed the Internet] there would be so much money available…[for] the next period of growth [to] be smart and green and inclusive. The public schools in Silicon Valley can actually benefit from the tech boom, because [up until now] they haven’t.”
So, the next time you are wondering how progressives are going to pay for Medicare-For-All, tuition-free college, or a Green New Deal, you might want to start by asking Marianna Mazzucato.
Or better yet, Alexandria Ocasio-Cortez.