Can anything hold back China’s economy? [feedly]

Summers on China: 

I have higher hopes for socialist led development than Larry Summers. And I agree its a tricky problem what level of "state subsidies" unfair or improper. A US machine tool company might have a competitive problem -- and thus grievance -- against a Chinese firm (with state help) giving away machines for free to establish itself in a market. On the other hand every nation engages in subsidies to strategic industries in one form or another.

Thus, its probably a waste of time to debate any of this in the abstract with capitalist enterprise leaders. But Summers is a pragmatist, a brilliant one, and knows it IS possible, even with differently oriented social systems at different stages of development, to deal pragmatically with differences where harm is being done. Thus, grievances against China need not alter either countries' ability to grow an prosper in the future.

The great debate over whether state directed capitalism gets to happy life faster, and more reliably, than free-for-all markets and cowboys, remains unresolved But the Chinese are making a strong case for the former.

Can anything hold back China's economy?
http://larrysummers.com/2018/12/05/can-anything-hold-back-chinas-economy/

Presidents Trump and Xi Jinping reached an agreement over the weekend at the Group of 20 meeting in Argentina on a framework for trade dialogue that will delay the imposition of new American tariffs. While surely better than the alternative, this step does not address any of the fundamental tensions in the economic relationship between the United States and China.

Few observers doubt that China needs to make significant changes in areas such as intellectual property, the rights of foreign investors and subsidies to state-owned companies if it is to meet international norms. Antipathy toward Chinese economic practices is hardly confined to Trump. Recent months have witnessed attacks on the existing economic relationship from members of previous U.S. administrations, noted China experts and the American business community. Indeed, it can be fairly said there are no China accommodationists left in Washington. When foreign governments get past their frustrations with the Trump administration, they acknowledge that they, too, are frustrated with Chinese commercial practices.

Yet it is also easy to sympathize with Chinese leaders who insist that China's political system is for it to choose, and that economic negotiations should focus on the pragmatic identification of win-win opportunities, rather than on questions of ideology. At the same time, it is hard to see how anyone with a modicum of historical knowledge could fail to be concerned by a combination of increased domestic repression, centralization of power in one man, rapidly increased military spending and rhetoric about enlarging China's role in the world.

The United States requires a viable strategy for addressing its legitimate grievances. Unfortunately, neither rage nor proclamation constitutes such a strategy. A viable approach would involve feasible objectives clearly conveyed and supported by carrots and sticks, along with a willingness to define and accept success.

At the heart of the problem in defining an economic strategy toward China is the following awkward fact: Suppose China had been fully compliant with every trade and investment rule and had been as open to the world as the most open countries at its income level. China might have grown faster because it reformed more rapidly, or it might have grown more slowly because of reduced subsidies or more foreign competition. But it is highly unlikely that its growth rate would have been altered by as much as 1 percent.

Equally, while some U.S. companies might earn more profits operating in China, and some job displacement in American manufacturing because of Chinese state subsidies may have occurred, it cannot be argued seriously that unfair Chinese trade practices have affected U.S. growth by even 0.1 percent a year.

This is not to say that China is not a threat to the international order. It is a seismic event for the United States to be overtaken after a century as the world's largest economy. If, as is plausible though far from certain, the United States loses its lead over the next decade in information technology, artificial intelligence and biotech, the trauma will be magnified.

Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world's largest? Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the United States to be so greatly surpassed in economic scale, does it have the means to stop it? Can China be held down without inviting conflict?

These are hard questions without obvious answers. But that is no excuse for ignoring them and focusing only on short-run frustrations. China appears to be willing to accommodate the United States on specific trade issues as long as the United States accepts its right to flourish and grow, knowing that sheer weight of numbers will make it the clear world's largest economy before long.

That is a deal the United States should take while it can. It can bluster but it cannot, in an open world, suppress the Chinese economy. Trying to do so risks strengthening the most anti-American elements in Beijing.

Trump, for all his failings, has China's attention on economic issues in a way that eluded his predecessors. The question is whether he will be able to use his leverage to accomplish something important. That will depend on his ability to convince the Chinese that the United States is capable of taking yes for an answer, and on his willingness to go beyond small-bore commercialism. We can hope, but we should not hold our breath.

 -- via my feedly newsfeed

Dan Little: Is corruption a social thing? [feedly]

Is corruption a social thing?
http://understandingsociety.blogspot.com/2018/12/is-corruption-social-thing.html

When we discuss the ontology of various aspects of the social world, we are often thinking of such things as institutions, organizations, social networks, value systems, and the like. These examples pick out features of the world that are relatively stable and functional. Where does an imperfection or dysfunction of social life like corruption fit into our social ontology?

We might say that "corruption" is a descriptive category that is aimed at capturing a particular range of behavior, like stealing, gossiping, or asceticism. This makes corruption a kind of individual behavior, or even a characteristic of some individuals. "Mayor X is corrupt."

This initial effort does not seem satisfactory, however. The idea of corruption is tied to institutions, roles, and rules in a very direct way, and therefore we cannot really present the concept accurately without articulating these institutional features of the concept of corruption. Corruption might be paraphrased in these terms:

• Individual X plays a role Y in institution Z; role Y prescribes honest and impersonal performance of duties; individual X accepts private benefits to take actions that are contrary to the prescriptions of Y. In virtue of these facts X behaves corruptly.

Corruption, then, involves actions taken by officials that deviate from the rules governing their role, in order to receive private benefits from the subjects of those actions. Absent the rules and role, corruption cannot exist. So corruption is a feature that presupposes certain social facts about institutions. (Perhaps there is a link to Searle's social ontology here; link.)

We might consider that corruption is analogous to friction in physical systems. Friction is a factor that affects the performance of virtually all mechanical systems, but that is a second-order factor within classical mechanics. And it is possible to give mechanical explanations of the ubiquity of friction, in terms of the geometry of adjoining physical surfaces, the strength of inter-molecular attractions, and the like. Analogously, we can offer theories of the frequency with which corruption occurs in organizations, public and private, in terms of the interests and decision-making frameworks of variously situated actors (e.g. real estate developers, land value assessors, tax assessors, zoning authorities …). Developers have a business interest in favorable rulings from assessors and zoning authorities; some officials have an interest in accepting gifts and favors to increase personal income and wealth; each makes an estimate of the likelihood of detection and punishment; and a certain rate of corrupt exchanges is the result.

This line of thought once again makes corruption a feature of the actors and their calculations. But it is important to note that organizations themselves have features that make corrupt exchanges either more likely or less likely (link, link). Some organizations are corruption-resistant in ways in which others are corruption-neutral or corruption-enhancing. These features include internal accounting and auditing procedures; whistle-blowing practices; executive and supervisor vigilance; and other organizational features. Further, governments and systems of law can make arrangements that discourage corruption; the incidence of corruption is influenced by public policy. For example, legal requirements on transparency in financial practices by firms, investment in investigatory resources in oversight agencies, and weighty penalties to companies found guilty of corrupt practices can affect the incidence of corruption. (Robert Klitgaard's treatment of corruption is relevant here; he provides careful analysis of some of the institutional and governmental measures that can be taken that discourage corrupt practices; link, link. And there are cross-country indices of corruption (e.g. Transparency International) that demonstrate the causal effectiveness of anti-corruption measures at the state level. Finland, Norway, and Switzerland rank well on the Transparency International index.)

So -- is corruption a thing? Does corruption need to be included in a social ontology? Does a realist ontology of government and business organization have a place for corruption? Yes, yes, and yes. Corruption is a real property of individual actors' behavior, observable in social life. It is a consequence of strategic rationality by various actors. Corruption is a social practice with its own supporting or inhibiting culture. Some organizations effectively espouse a core set of values of honesty and correct performance that make corruption less frequent. And corruption is a feature of the design of an organization or bureau, analogous to "mean-time-between-failure" as a feature of a mechanical design. Organizations can adopt institutional protections and cultural commitments that minimize corrupt behavior, while other organizations fail to do so and thereby encourage corrupt behavior. So "corruption-vulnerability" is a real feature of organizations and corruption has a social reality.  

 -- via my feedly newsfeed

US stocks plunge amid trade uncertainty [feedly]

US stocks plunge amid trade uncertainty
http://www.atimes.com/article/us-stocks-plunge-amid-us-china-trade-deal-skepticism/

The dog that didn't bark in today's equity market crash was the Chinese market. The most popular proxy for Chinese stocks, the large-cap ETF FXI, lost 1.5%, about half the 3% decline in the broad US market.

The biggest losers were financials, for whom a yield curve inversion is like Kryptonite for Superman, and the parcel delivery companies who face competition from Amazon.

UPS lost 7%, the worst performer in the S&P 100, while FedEx lost 5.5%. Major financials like Blackrock, CapitalOne, Morgan Stanley and Bank of America were down around 5%. Utilities and consumer staples companies, which the market treats like bond proxies, gained along with US Treasuries.

There is a clear message from today's market action.
The first is that the US Administration can't un-break the glass in world trade investment with happy talk. World economic growth has depended on a global supply chain in which electronic components are manufactured in Japan, Taiwan, and South Korea, and assembled into finished goods in China, and then exported to the US and Europe.

The profitability of major corporations from Apple to the chipmakers depends on this supply chain, which would be the first casualty of a trade war. As I showed in an Asia Times analysis last week, the contraction in world trade during the past several months appears to reflect a sharp reduction in orders for investment goods, promoted by Washington's trade war threats.

Falling exports, in turn, pushed the German economy into negative growth during the third quarter, and preliminary data suggest that Germany will endure a second quarter of negative growth. Switzerland, Sweden and Italy also reported negative growth for the third quarter. Japan reported negative growth in two of the last three quarters as well, with GDP down 0.3% during the third quarter.

That leaves most of the world's big economies – excluding the US and China – in recession or close to it. The US is still growing, but likely to slow sharply in 2019. CapEx in the US remains extremely weak, a disappointment following the 2017 corporate tax cut. S&P companies spent more buying back their own stock than on CapEx during the second and third quarters. The US housing market, moreover, is already in recession.

President Trump is looking at a weakening economy and a heightened risk of recession before the 2020 elections. Credit conditions are tightening around the world, most severely in Europe, where the cost of protection on a bundle of subordinated debt of financial companies has doubled during 2018 (from LIBOR +100 to LIBOR +200). The collapse of European bank stock prices by 26% during 2018 and of Japanese bank stocks by 18% is a reminder of the fragility of the financial system.

That explains why the Federal Reserve's Chairman Jerome Powell last week indicated that interest rates are "close to neutral," which means the Fed is close to done tightening monetary policy.

One of the biggest irritants in the system remains the threat of trade war. Presidents Trump and Xi Jinping last weekend called a truce at the G20 meeting in Buenos Aires last weekend, but a truce is not the same as the end of a war. Restoring the damaged confidence of major actors in the world economy will require speedy and decisive action to come to an agreement with China. I continue to believe as I wrote in October that China will make it easy for Trump to strike a deal which he can claim as a victory.

Earlier today, for example, China announced stiff penalties for intellectual property theft, a major concern of the Trump Administration. At this point, Chinese companies probably are stealing more intellectual property from each other than they are from the United States, and it is in China's interest to discourage the practice.

The relative outperformance of Chinese stocks in a market freefall suggests that investors believe that the Trump Administration will do what it takes to put the trade war behind it.
 

-- via my feedly newsfeed

Progress Radio:The Ideal Became Real: A RIOT of TRUTH on the Progress Diner Radio Show -- Drunks Delight #2

John Case has sent you a link to a blog:



Blog: Progress Radio
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Link: http://progress.enlightenradio.org/2018/12/the-ideal-became-real-riot-of-truth-on.html

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Olivier Blanchard : The French "Yellow Vest" Movement and the (Current) Failure of Representative Democracy : "Go back ... [feedly]

Blanchard was the IMF Chief Economist from the onset of the global financial crisis through October 2015. He was appointed to this position under the tenure of Dominique Strauss-Kahn. I tend to agree with him that both the content and forms of "left" and "right" are undergoing, and need to undergo significant shifts in content, and that global relations will increasingly dominate economic, labor, and political alignments as advancing integration brings both collisions and embraces of nations and peoples. 

However, it is always curious to me, in Lenin's old spirit  of attending to the details of different 'class' perspectives on the same incident or idea, why and when the "globalist liberal" views democracy as "chaos".  If one considers constantly spending most of a lifetime walking betwixt disasters as also 'chaotic', that the describes life for most of the working classes throughout history, which was mostly autocracy.  Democracy, and the revolutions that gave birth to it, are festivals of the oppressed.  They look chaotic to ruling classes --- but maybe THOSE alignments also need to shift!

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Olivier Blanchard : The French "Yellow Vest" Movement and the (Current) Failure of Representative Democracy : "Go back ...
https://www.bradford-delong.com/2018/12/olivier-blanchard-_the-french-yellow-vest-movement-and-the-current-failure-of-representative-democracyhttpspii.html

The French "Yellow Vest" Movement and the (Current) Failure of Representative Democracy

Olivier Blanchard (PIIE)
December 3, 2018 1:00 PM
Photo Credit: REUTERS/Stephane Mahe/File Photo

Images of gilets jaunes in France—so named for the yellow vests they wear—have flooded news broadcasts in recent weeks. To trace the deep roots of their protests, one has to go back to the end of communism and the failure of central planning as an alternative to the market economy.

Up until then, central planning represented for some the hope that there was a more humane alternative to capitalism, one in which there was less inequality and less insecurity. Politics could be organized from left to right, along mostly economic lines, with central planning at one end and the market economy at the other.  The communist party stood at one extreme, then the socialist party, then (rather timidly in France) the more market-oriented center right parties at the other end.  Political life was fairly well organized, and parties and unions played their role as conduits for their constituency's preferences.

However, with the end of communism, it became clear that there was no alternative, only a muddle between market intervention and free markets. So long as growth was strong, and all boats were indeed lifted, the problem was manageable. Then growth slowed down, and inequality and insecurity became more salient, with no simple solution in sight.

The center-right and center-left parties tried their best to manage, but their efforts were not good enough. Sarkozy tried reforms but failed. Hollande, his successor, had a more realistic agenda but did not achieve much. Unemployment remained high and taxes increased. People increasingly felt that the traditional parties did not improve their lot, nor did they represent them.

Then came Macron, who correctly pointed out that the left/right distinction did not make much sense anymore, and he won by occupying the large middle. In doing so, he tore the traditional center left and right parties to pieces, leaving only the extreme right and the extreme left as alternatives.

In the process, he may have made the political system worse. As the economy has not improved much yet, people, unhappy with the lack of results, do not have the traditional parties to turn to. Some have joined the extreme left or the extreme right. More have become skeptical of any representation, be it parties or unions, and have taken to the streets. Thus the gilets jaunes was born, a spontaneous and unorganized response, a form of direct democracy.

But unorganized direct democracy does not work. In a country of 65 million people, ancient Athens' agora-style democracy cannot work. We have seen this in the last three weeks. There is no coherent voice or message emerging from the movement: The state cannot provide more public services and simultaneously lower taxes. In the streets, the movement cannot avoid being hijacked, to its dismay, by anarchists or vandals. It is going nowhere.

The challenge to the government and the political class is immense. If I am right, the sources of the problem are old and deep. The government must convince people that it is hearing them, while making clear that it cannot deliver the impossible. And the opposition must avoid playing with fire: Unorganized anger can lead to chaos.

 -- via my feedly newsfeed

Excavating Layers of the Tax Cuts and Jobs Act of 2017 [feedly]

Excavating Layers of the Tax Cuts and Jobs Act of 2017
http://conversableeconomist.blogspot.com/2018/12/excavating-layers-of-tax-cuts-and-jobs.html

A deep dive into the 2017 Tax Bill

"The 2017 Tax Act, sometimes called the Tax Cuts & Jobs Act, has been heralded by some as historic reform and by others as Armageddon. This Collection analyzes the Act, exploring the process by which it was passed, the values that undergird its policies, and how specific provisions will affect the structure of the U.S. and global economy moving forward." Thus begins a five-paper "Forum: Reflections on the 2017 Tax Act" from the Yale Law Journal (dated October 25, 2018)

Michael J. Graetz writes the "Foreword—The 2017 Tax Cuts: How Polarized Politics Produced Precarious Policy." He touches on a number of the themes mentioned in the two papers by Joel Slemrod and Alan Auerbach in the"Symposium on the Tax Cuts and Jobs Act" that appeared in the Fall 2018 issue of the Journal of Economic Perspectives: yes, the US corporate taxation needed both lower rates and more sensible treatment of multinational companies, but in many ways the new tax bill created a muddle--and a muddle that will lead to substantially higher budget deficits. Here's a flavor of Graetz (footnotes omitted throughout): 

"The Democrats' complaints about the law's reduction in the corporate tax rate from 35% to 21% ring hollow. Democrats themselves had long realized that the U.S.'s exceptionally high corporate tax rate in today's global economy—with highly mobile capital and intellectual property income—invited both U.S. and foreign multinational companies to locate their deductions, especially for interest and royalties, in the United States, and to locate their income in low- or zero-tax countries. This is obviously not a recipe for economic success. Both before and after the legislation, Democrats urged a corporate tax rate of 25% to 28%; meanwhile, Donald Trump asked for a 15% rate.So, even if Democrats had been involved in the legislative process, the 21% rate that we ended up with would be in the realm of a reasonable compromise. ... [A] significantly lower corporate rate has been long overdue, and raising it would be a mistake. If Democrats are unhappy with the distributional consequence that a corporate tax cut will benefit high-income shareholders, the appropriate remedy––given the mobility of business capital, businesses' ability to shift mobile intellectual property and financial income to low-tax jurisdictions, and the challenges of intercompany transfer pricing––is to increase taxes at the shareholder level, not to increase corporate tax rates. ...

Congress's greatest challenge in crafting this tax legislation was figuring out what to do about the international tax rules. ... Congress confronted daunting challenges when deciding what rules would replace our failed foreign-tax-credit-with-deferral regime. There were essentially two options: (1) strengthen the source-base taxation of U.S. business activities and allow foreign business earnings of U.S. multinationals to go untaxed; or (2) tax the worldwide business income of U.S. multinationals on a current basis when earned with a credit for all or part of the foreign income taxes imposed on that income. Faced with the choice between these two very different regimes for taxing the foreign income of the U.S. multinationals, Congress chose both. ...
No doubt analysts can find provisions to praise and others to lament in this expansive legislation, but we should not overlook its most important shortcoming: its effect on federal deficits and debt.  ...

Under the 2017 tax law, the federal debt held by the public is estimated to rise to more than 96% of GDP by 2028, and this does not count the omnibus spending bill signed in 2018 by President Trump. ... If the current policy levels of taxes and spending are maintained, total deficits over the next decade will approach $16 trillion, with deficits greater than 5% of GDP beginning in 2020. By 2028, current fiscal policy will produce deficits of more than 7% of GDP annually. This is unsustainable. ... The budget legislation of the 1990s, along with the economic growth unleashed by the information technology revolution of the late 1990s, completely eliminated the projected deficits by the year 2000 and produced a federal surplus for the first time since 1969. Indeed, the budget surpluses projected by the Congressional Budget Office at the beginning of this century were so large that, in March 2001, Chairman of the Federal Reserve Alan Greenspan told Congress that the federal government would soon pay off all of the national debt and would have to begin investing its surplus revenues in corporate stocks, a prospect he abhorred. The good news is that this problem has been solved. 

I was also struck by the essay by Linda Sugin, "The Social Meaning of the Tax Cuts and Jobs Act." Sugin describes the social values that seem to underlie the provisions of the TCJA. She writes:

This Essay discusses five American priorities and values revealed by the TCJA:

1. The traditional family is best;
2. Individuals have greater entitlement to their capital than to their labor;
3. People are autonomous individuals;
4. Charity is for the rich; and
5. Physical things are important.

The TCJA's distributional effects dovetail with these values. ... First, traditional families with a single working spouse and a stay-at-home spouse are disproportionately prosperous, so subsidizing that family model reduces progressivity. Second, access to capital increases with affluence, so a greater entitlement to investment income favors taxpayers who enjoy that affluence. Third, valuing individual autonomy is consistent with robust individual property rights, and less consistent with high levels of taxation for shared community purposes. Fourth, favoring the charitable giving of the rich allows them tax reductions not available to others, and sends the message that philanthropy substitutes for tax paid. Fifth, prioritizing physical assets favors individuals are able to invest in such assets and underrates the important value that workers contribute to prosperity. Critics of the legislation concerned about the law's reallocation of tax burdens down the income scale and its projected budgetary deficits must focus more on these embedded priorities.

Of the other three papers, two papers dig into details of the changes in the international corporate tax regime, while the other argues that the Tax Cuts and Jobs Act will push firms away from the use of debt financing--and thus toward alternative types of financing--with implications that are not yet clear.

Rebecca M. Kysar discusses "Critiquing (and Repairing) the New International Tax Regime."

"In this Essay, I address three serious problems created—or left unaddressed—by the new U.S. international tax regime. First, the new international rules aimed at intangible income incentivize offshoring and do not sufficiently deter profit shifting. Second, the new patent box regime is unlikely to increase innovation, can be easily gamed, and will create difficulties for the United States at the World Trade Organization. Third, the new inbound regime has too generous of thresholds and can be readily circumvented. There are ways, however, to improve upon many of these shortcomings through modest and achievable legislative changes, eventually paving the way for more ambitious reform. These recommendations, which I explore in detail below, include moving to a per-country minimum tax, eliminating the patent box, and strengthening the new inbound regime. Even if Congress were to enact these possible legislative fixes, however, it would be a grave mistake for the United States to become complacent in the international tax area. In addition to the issues mentioned above, the challenges of the modern global economy will continue to demand dramatic revisions to the tax system."

Susan C. Morse raises implications about International Cooperation and the 2017 Tax Act.

"Some have criticized the 2017 Tax Act for lowering the corporate tax rate. This Essay argues instead that Congress deserves credit for bringing the U.S. rate in line with other OECD countries, potentially saving the corporate tax by establishing a minimum global rate. ... There is a silver lining for the corporate income tax in the Tax Cuts and Jobs Act of 2017. This is because the Act's international provisions contain not only competitive but also cooperative elements. The Act adopts a lower, dual-rate structure that pursues a competitiveness strategy and taxes regular corporate income at 21% and foreign-derived intangible income at 13.125%. But the Act also supports the continued existence of the corporate income tax globally, thus favoring cooperation among members of the Organisation for Economic Cooperation and Development (OECD). Its cooperative provisions feature the minimum tax on global intangible low-taxed income, or GILTI, earned by non-U.S. subsidiaries. Another cooperative provision is the base erosion and anti-abuse tax, or BEAT. The impact of the Act on global corporate income tax policy will depend on how the U.S. implements the law and on how other nations respond to it."

Robert E. Holo, Jasmine N. Hay and William J. Smolinski discuss issues of corporate leverage in "Not So Fast: 163(j), 245A, and Leverage in the Post-TCJA World."

"The Tax Cuts and Jobs Act will require large multinational corporations to reevaluate the use of debt in their acquisition and corporate structures. Changes to the Tax Code brought about by the Act have reduced incentives to use debt in these contexts. These changes may require practitioners to identify new approaches to financing acquisitions and will necessitate reevaluation of current capital structures used by large multinational entities. ...

"In other words, is it a good idea to dampen the worldwide preference for debt in capital structures? Is there a problematic preference for debt that needs fixing in the first place? It is likely too early to make that call given the potential number of unintended consequences that my result under the new law. ... By changing the rules of the game, the IRS has effectively changed the inputs to that modeling exercise. It remains a complicated question whether, holistically, business entities carry excess debt relative to equity; but it is certainly the case that a new set of rules which, on their face, appear to favor equity over debt, may very well cause those modeling exercises to produce an output that suggests a shift in debt-equity preferences is in order."

 -- via my feedly newsfeed

Sanders-Khanna Bill Would Stop Monopoly Drug Pricing in the US [feedly]

Sanders-Khanna Bill Would Stop Monopoly Drug Pricing in the US
http://cepr.net/publications/op-eds-columns/sanders-khanna-bill-would-stop-monopoly-drug-pricing-in-the-us

Dean Baker
Truthout, December 3, 2018

See article on original site

Debates on economic policy are often far removed from reality. Nowhere is this truer than in the case of prescription drug prices.

In the United States, we pay high drug prices because the government gives pharmaceutical companies patent monopolies, where it threatens to arrest anyone that sells a drug in competition with the patent holder. As a result, drugs often sell for prices that are several thousand percent above their free market price.

Incredibly, in debates on drug prices, these monopoly prices are routinely described as being the result of the free market, turning reality completely on its head. The people who want to lower drug prices are then said to be trying to interfere with the free market, which we are all supposed to think is a bad thing to do.

This is one of the reasons why a new bill to lower drug prices by Sen. Bernie Sanders and Rep. Ro Khanna is so brilliant. The bill is actually lowering drug prices by using the power of the market, making it clear that the proponents of high drug prices are the ones who want the government to interfere with the market to keep drug company profits high.

The bill would effectively end the patent monopoly for any drug where the price in the United States is above the median of the prices charged in the next seven largest wealthy countries. This is likely to mean a reduction in the price of most brand drugs by around 50 percent.

The reason is that, while other countries also grant patent monopolies and related protections to drugs, they don't allow the manufacturers to exploit these monopolies to the same extent as in the United States. They have some sort of price negotiation with drug companies, which is intended to place a limit on the price that can be charged when people's health or life is at stake.

In effect, the Sanders-Khanna bill imports the price negotiation process put in place by these other countries. Drug companies will have a strong incentive to set their price below the median of the seven benchmark countries. If they charge a higher price, they effectively lose their patent monopoly. They could still make some money off of licensing fees charged to generic producers, but this would be a small fraction of what they would make from having a patent monopoly.

Another nice feature of the Sanders-Khanna bill is that it would lower drug prices for everyone, not just Medicare patients. There have been a number of bills introduced in recent years that have been designed to reduce the cost of drugs for people in Medicare. While lower drug prices for people enrolled in Medicare would be good, we should be looking to reduce our drug prices across the board. There is no reason people in the United States should be paying so much more than everyone else.

The industry's response will be to whine that if they charged lower drug prices they won't be able to finance the development of new drugs. There is a grain of truth to this, but only a grain. The industry will collect roughly $440 billion (2.2 percent of GDP) in revenue this year from sales in the United States alone. It spends around $70 billion on research. This is less than one-sixth of the money it pulls in.

Certainly, if we did bring spending down to the levels in other wealthy counties it would lead to somewhat less research, but the question is the size of the falloff in research. After all, by giving another $1.5 trillion to corporations over the next decade, the Trump tax cut will almost certainly lead to some additional investment, but the question is how much. The evidence to date with the tax cut is that we are seeing very little payoff in the form of higher investment. Similarly, the additional revenue from unchecked patent monopolies is likely to translate into little by way of additional research into developing new drugs.

Ultimately we should be looking to more modern and efficient mechanisms than patent monopolies for financing drug research. The government already spends almost $40 billion a year on biomedical research through the National Institutes of Health. If we paid for the research up front, then all new drugs could be sold at their free market price from day one, saving us close to $400 billion a year. In that world, prescriptions would be $20 or $30 a piece, not hundreds or thousands of dollars.

But for now, the Sanders-Khanna bill is a huge step forward in making drugs affordable. And, it does it by using the market forces, a prospect that is very scary to the pharmaceutical industry.

 -- via my feedly newsfeed