Nearly half a billion dollars in federal money has been spent
developing four state Obamacare exchanges that are now in shambles —
and the final price tag for salvaging them may go sharply
higher.
Each of the states — Massachusetts, Oregon, Nevada and
Maryland — embraced Obamacare, and each underperformed. All have
come under scathing criticism and now face months of uncertainty as
they rush to rebuild their systems or transition to the federal
exchange.
The federal government is caught between writing still more
exorbitant checks to give them a second chance at creating viable
exchanges of their own or, for a lesser although not inexpensive sum,
adding still more states to HealthCare.gov. The federal system is
already serving 36 states, far more than originally anticipated.
As for the contractors involved, which have borne most of the
blame for the exchange debacles, a few continue to insist that fixes
are possible. Others are braced for possible legal action or waiting
to hear if now-tainted contracts will be terminated.
The $474
million spent by these four states includes the cost that officials
have publicly detailed to date. It climbs further if states like
Minnesota and Hawaii, which have suffered similarly dysfunctional
exchanges, are added.
Monday, May 12, 2014
Hardship Makes a New Home in the Suburbs
MORENO
VALLEY, Calif. — The freeway exits around here are dotted with people
asking for money, holding cardboard signs to tell their stories. The
details vary only slightly and almost invariably include: Laid off. Need
food. Young children.
Mary
Carmen Acosta often passes the silent beggars as she enters parking
lots to sell homemade ice pops, known as paletas, in an effort to make
enough money to get food for her family of four. On a good day she can
make $100, about double what she spends on ingredients. On a really good
day, she pockets $120, the extra money offering some assurance that she
will be able to pay the $800 monthly rent for her family’s
three-bedroom apartment. Sometimes, usually on mornings too cold to sell
icy treats, she imagines what it would be like to stand on an exit ramp
herself.
“Everyone
here knows they might have to be like that,” said Ms. Acosta, 40,
neatly dressed in slacks and a chiffon blouse, as she waited for help
from a local charity in this city an hour’s drive east of Los Angeles.
Both she and her husband, Sebastian Plancarte, lost their jobs nearly
three years ago. “Each time I see them I thank God for what we do have.
We used to have a different kind of life, where we had nice things and
did nice things. Now we just worry.”
Five
decades after President Lyndon B. Johnson declared a war on poverty,
the nation’s poor are more likely to be found in suburbs like this one
than in cities or rural areas, and poverty in suburbs is rising faster
than in any other setting in the country. By 2011, there were three
million more people living in poverty in suburbs than in inner cities,
according to a study released last year by the Brookings Institution.
As a result, suburbs are grappling with problems that once seemed
alien, issues compounded by a shortage of institutions helping the poor
and distances that make it difficult for people to get to jobs and
social services even if they can find them.
In
no place is that more true than California, synonymous with the
suburban good life and long a magnet for restless newcomers with big
dreams. When taking into account the cost of living, including housing,
child care and medical expenses, California has the highest poverty rate
in the nation, according to a measure introduced by the Census Bureau
in 2011 that considers both government benefits and living costs in
different parts of the country. By that measure, roughly nine million
people — nearly a quarter of the state’s residents — live in poverty.
Not
long ago, the Inland Empire, as the sprawling suburban area east of Los
Angeles is known, attracted people hoping to live out that good life.
Before the recession, it was booming; housing developments were cropping
up all the time, quickly followed by big box stores and strip malls to
cater to the new residents.
The
region was — and still is — the fastest growing in the state. But the
jobs have never really followed the people who come here looking for
cheaper housing. The median home value is $325,000 and the median rent
is $1,690, according to the real estate database Zillow. That compares
with $462,000 and $1,860 in Los Angeles.
For
many, those costs are still unaffordable. Unemployment in the region
hovers around 10 percent and nearly one-fifth of all residents live in
poverty, the highest rate among the largest metropolitan areas in the
country. By the official federal measure, nearly one-third of all
children here are poor. The number of poor in San Bernardino and
Riverside Counties nearly doubled over the last decade.
Many
would-be workers lack office skills or more than a basic education,
making minimum-wage jobs the norm for them. Many here are immigrants —
some living in the United State illegally, making them ineligible for
most government benefits. But like Ms. Acosta, many others came here
legally decades ago and had a strong foothold in the American economy — a
job, a house, cars and regular travel.
“This
is where poor people live now, and this is where they are going to
live,” said Alan Berube, an author of the Brookings Institution study.
“When poverty moved out of the inner cities it didn’t just go next door,
it went 30 miles away. But at the time those families might not have
been poor — they were just chasing the middle-class dream. Then, boom,
that evaporated.”
Prosperity Slips Away
Most
mornings Sebastian Plancarte, 39, puts on a freshly laundered, collared
polo shirt, carefully tucked in. He gets his daughter, Camila, dressed
for kindergarten and makes sure his son, Sebastian, has his homework
ready for middle school. They are out the door by 7:30 a.m. and he is
home nearly two hours later, back to wander parking lots selling ice
pops before the afternoon pickup routine begins. He is happy to be
involved in his children’s lives, but this is hardly the kind of
fatherhood he once imagined.
For
years, the couple thought of themselves as wealthy. They bought a
five-bedroom house in a suburb just a few miles east of downtown Los
Angeles, where they both worked in the jewelry district — she inspected
diamonds and he designed bracelets and rings. Making $16 an hour, plus
commissions, they earned as much as $2,000 a week. They traveled to San
Diego and Las Vegas, they bought their two children the toys they asked
for. Just more than a decade after they had emigrated from Mexico, they
believed their hopes had become a reality.
But
in 2011, Ms. Acosta was laid off. So was Mr. Plancarte, just a few
months later. They soon sold the house for far less than they had paid.
They drove east, looking for something they could afford to rent, and
landed in Moreno Valley, a city 60 miles inland that has become a common
outpost for those priced out of Los Angeles. They live in a sprawling
apartment complex designated for low-income families.
The
paletas have become a centerpiece of their lives. The couple constantly
think about the best prices for ingredients and how many pops are in
their small freezer; they take orders by phone to deliver to backyard
parties. When their son asks to get hamburgers at the local In-N-Out,
they have a standard response: “The mathematics are very simple,” Ms.
Acosta said. “If you want to eat there, we need you to sell $25” of the
ice pops.
Caught in Poverty
Articles in this series examine American hardship 50 years after the war on poverty.
“The
hardest part is the shame,” Mr. Plancarte said, sitting at his kitchen
table as his wife and daughter ate mango paletas doused in chamoy, a
blood-red sugary hot sauce. “People say to me, ‘Why don’t you find a job
over there, or at that factory or that place?’ First of all, they
aren’t there, I’ve tried. But even if they have a job, it’s going to be
paying me $8 an hour. So I’ll spend no time with my family to make less
money than I make now selling these.”
By
Ms. Acosta’s calculation, the couple earned about $25,000 last year,
nearly all of it in cash. And while it is nearly $2,000 above the
official poverty line for a family of four nationally, it is hardly
enough to meet their basic needs. By the time they pay for rent, gas,
phone, electricity and food, they have spent about $2,000 a month, Ms.
Acosta said.
Her
husband is still looking for work; in the winter months they relied
mostly on whatever she could make selling cosmetics and costume jewelry
door to door. Their lives reflect the contradictions of many living on
the edge. They have a 2001 Jeep Cherokee, a small flat-screen television
and a few remaining pieces of jewelry. They don’t have health insurance
or any savings, and they have not bought new clothes for nearly two
years.
For the last year, Ms. Acosta spent much of her time at the local Catholic Charities office,
taking self-help classes with other women in similar circumstances. She
earned $100 a month enrolling women in courses on healthy diets,
balancing checkbooks and parenting skills. She keeps a folder thick with
certificates she has earned in such classes. A letter from President
Obama thanking her for volunteering at her son’s school, calling her a
“shining example,” is tucked in a protective plastic sleeve. The few
friends she has made here, she said, are the women she has met at
Catholic Charities.
“My friends in L.A., the ones who still have money, it’s like they forgot all about us,” she said.
The
family’s economic descent has proved most difficult for 12-year-old
Sebastian, who remembers Christmas trips to Universal Studios and
regular mall excursions. Camila, 5, cannot recall anything different
from what she has now. Neither child knows that their Christmas gifts
came from charity. They are all contributing to the piggy bank in the
kitchen; if they can save enough, Ms. Acosta has promised to take them
to Disneyland this year. For now, even going to the beach an hour west
would cost too much for gas. The local park is hardly a fun outing — it
reminds them of their work selling ice pops most weekends.
“We
have to be really good actors,” Ms. Acosta said. “But after they go to
bed, we just sit and worry about how we are going to pay for things we
want to give them.”
When
his son asked for pizza recently, Mr. Plancarte took a silver bracelet
he had given his wife to a pawnshop, where he was offered a fraction of
what he thought it was worth. He accepted, too embarrassed to tell his
son they could not have pizza. Ms. Acosta recently went back and saw the
bracelet priced at $90 — more than twice what her husband had received.
Traveling More to Make Less
Sitting
inside Catholic Charities offers a glimpse of the constant need: this
family needs extra cash to pay the utility bill; this single mother
cannot find child care to allow her to work a graveyard shift; that
elderly man who came from Mexico has no way to pay for his medication.
Imelda
Santana, whose desk is just a few feet away from the entrance, is often
the first stop for requests. Ms. Santana is empathetic — just a couple
of years ago she needed help after her husband left her and she lost her
job as a loan officer amid the housing crisis. After working as a
volunteer for months, Ms. Santana was hired to sift through requests to
see which families the organization might assist. Even on the best days,
she said, there are more demands than they can handle.
“We
have people here who used to make donations now knowing what it is to
run out of toilet paper in their house and not have the money to buy
more,” she said. “Even if they get food stamps, it does not cover
toiletries. There’s just never enough.”
Suburban Poor
Number living in poverty
15 million
Suburbs
10
Cities
5
’70
’80
’90
’00
’10
Yadira
Rodriguez, 35, has traveled hundreds of miles looking for work in this
county, which is roughly the size of New Jersey. When her husband
stopped earning enough to pay for monthly expenses for their three young
children, she took a job in a factory packing boxes to be shipped to
retail stores. But the $8-an-hour job was 30 miles north of her Moreno
Valley apartment, taking her more than an hour in traffic, twice that if
she needed to take the bus.
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Since
she was classified as a temporary worker, she would leave her home at 4
a.m. only to find out at 6 a.m. that she would not be hired for the
day. On days there was work, she would arrive back home 12 hours after
she left.
“I
could not understand how this was worth the money,” Ms. Rodriguez said.
“I would get home and the kids would be tired and cranky and I didn’t
have energy for them. How was this going to make my life better?”
After
three months, she quit. Her family relies on $800 a month from the
state’s temporary cash assistance program to pay for groceries and
utilities, and gets occasional help from charities. The landlord has let
the family slide on the rent at times, Ms. Rodriguez said.
Like
Ms. Rodriguez, many would-be employees see unpredictability as a fact
of life. Many social workers see more clients working two part-time
minimum wage jobs, juggling schedules to make sure they do not
disappoint any boss and hustling to cobble together child care for
shifts that can begin or end before dawn. Many are immigrants who speak
only basic English after years of living in Latino enclaves, first in
Los Angeles, and now here.
“This
is the edge of affordability; people came here because they were pushed
out to the only place where they could afford,” said John Husing, a
local economist who has studied the region for years. “When they came
here the primary wage earner could find a job to pay the bills. The
problem is that time has passed and we don’t have a lot of jobs that
allow that anymore.”
While
many of the state’s coastal areas have begun to see signs of an
improved economy, the inland region has continued to struggle.
Unemployment and foreclosure rates remain stubbornly high here and there
are few signs that the area will boom as it did a decade ago. Housing
prices have inched up as wages have stagnated, making it even more
difficult for families to stay afloat.
“What
we have out here is more need and fewer centers of resources,” said Dom
Betro, the executive director of Family Services, a nonprofit group
that provides child care and food to needy families in Riverside County.
“We have more working poor than anyone can know how to handle. People
travel further distances to work for less pay because they have to. Even
if there is help — and that’s not always — people who need it can’t get
to it.”
Social workers here often point to a 2009 study by the James Irvine Foundation,
which showed that the region has far fewer nonprofit groups per capita
than the rest of the state, with less money funneled in from local
foundations.
“There’s
all these new problems but no new philanthropic dollars there to
address them,” said Mr. Berube, from the Brookings Institution. “In many
places there are these de facto systems in place but not the kind of
leadership to really address what’s needed.”
When
Larry Ellwell became principal of Victoria Elementary School in San
Bernardino a few years ago, he was stunned by the number of families who
could not afford necessities like clothes and dental care. When he
worked with poor students closer to Los Angeles, he said, they knew
where to find aid. But in the Redlands school district, home to a
university and well-appointed mansions, there were few free clinics or
other outlets for assistance. So he began to offer them — now the school
hosts a roving clinic staffed by medical students and a clothing
giveaway known as Victoria’s Closet.
“It’s
a lot of triage work — who needs something the most and what do they
most need,” Mr. Elwell said. “There’s no stigma anymore, because so many
people are just trying to scrape by and make it work.”
For
Ms. Acosta, scraping by recently took a new turn: She moved to the
other side of the desk at Catholic Charities, taking a job as an intake
worker. She works about 30 hours a week at $12 an hour, giving people
the same kind of help she seeks. Even now, she is not earning enough to
stop selling ice pops.
Just
a couple of years ago, when the dry cleaner called reminding her to
pick up a pair of pants, Ms. Acosta told him to give them to charity.
“Now I am one of the people taking giveaways,” she said. “I see people
all the time in worse positions than we are in. The kids are healthy, we
have a roof. Maybe that’s the best we can hope for.”
Obama’s New Helicopter Fleet Could Cost $20 Billion
The U.S. government has been
trying for decades—and burning through billions—to replace Marine One,
the president’s helicopters. Will it finally get it right this time?
The Pentagon has awarded a contract to begin development of the most expensive helicopters ever made.Each helicopter will probably cost at least $400 million. The entire project, to build at least 23 helicopters, has been estimated to eventually cost between $10 billion to $17 billion. By comparison, the project could pay the combined defense budgets of Finland, Norway, and Sweden for one year ($16.9 billion).
The passengers for this enormously expensive helicopter fleet? The President of the United States and his entourage.
The first president to fly regularly in helicopters was Dwight Eisenhower. Eisenhower faced a two-hour commute to and from his summer home in Rhode Island, a commute that could be shaved down considerably if taken by helicopter. In these early days of the Cold War the president needed to be moved around quickly—the president could not be stuck on a ferry for an hour in case the Soviet Union launched a nuclear attack.
The South Lawn of the White House was designated as the official presidential helicopter landing pad, and official flights to Andrews Air Force Base began.
A Marine Corps helicopter squadron, HMX-1 (“The Knighthawks”) is responsible for flying and maintaining the fleet of presidential helicopters. The current Marine One helicopters are derivatives of the Sikorsky Sea King helicopter, which was phased out of the U.S. military during the 1990s. Those currently flying were built somewhere around 1975, making them only 14 years younger than President Obama himself.
In 2002, the U.S. government solicited proposals for replacing the Sea Kings with a new, modern helicopter. In the wake of 9/11, with concerns about terrorist attacks against the president, the call went out for a helicopter that could fend off a terrorist shoulder-fired surface to air missile and keep functioning in the wake of a nuclear attack on Washington, D.C.
In 2005, the Department of Defense announced that the team of Lockheed Martin and the Anglo-Italian helicopter giant AgustaWestland had won the contract to build 28 presidential helicopters. The helicopters would be known as the VH-71 Kestrel. (The “V” stands for “VIP Transport”)
At the time the contract was signed, the estimated cost of the program was $6.5 billion, or $232 million per helicopter, including development costs. Unfortunately, the Kestrel program spun rapidly out of control, dragged down by the weight of program requirements and other “good ideas.”“The helicopter I have seems perfectly adequate to me," Obama said. "Of course, I've never had a helicopter before. Maybe I've been deprived and I didn't know it.”
Marine One helicopters must satisfy a number of requirements. The president’s helos must be small enough to land on the South Lawn, but large enough to lift 14 people and several thousand pounds of equipment a distance of 300 miles. The helicopters must be armored, with a bullet-resistant fuselage and glass.
The president’s helicopters must have a full suite of defensive countermeasures to throw off the targeting and guidance systems of missiles. They must be “hardened” against the electromagnetic pulse of a nuclear blast that could fry electronics and knock out everything from smartphones to helicopters.
Secure communications are must-haves. Marine One must be able to send and receive encrypted communications and hold secure videoconferences with U.S. military and government leaders worldwide, including those in charge of U.S. nuclear forces.
Finally, the president’s helicopter must include a toilet.
So many requirements were piled on the Kestrel program that it was decided the helicopters would need new engines, gear boxes, and drive trains just to lift everything, not to mention a 180-pound President of the United States. The program quickly became so expensive each helicopter—then estimated to cost about $400 million in 2009 dollars—rivaled the cost of Air Force One, the president’s Boeing 747 jumbo jet.
Even President Obama seemed bewildered by the runaway program. “The helicopter I have seems perfectly adequate to me," Obama said. "Of course, I've never had a helicopter before. Maybe I've been deprived and I didn't know it.”
The program was cancelled in 2009, with $3 billion already spent.
The new, initial contract awarded to the American defense contractor Sikorsky, is valued at $1.24 billion. Under the terms of the new contract, the U.S. military will take delivery of two prototype helicopters—based on the Sikorsky S-92 medium helicopter--in 2016. Another 21 fully capable helicopters will follow.
Why so many helicopters, essentially for one person? Marine One always flies with decoys—as many as five—when transporting the president. Multiple helicopters are also needed when the president travels outside Washington D.C., as fresh helicopters are cached along the route ahead of time.
Time will tell if Sikorsky can hold down costs and deliver the helicopter on time. One thing’s for sure, though: President Obama himself will never ride on one, except as a guest. The fleet of new presidential helicopters should be fully operational by 2022, long after Obama has left office.
Bangkok blast injures two protesters
Two
anti-government protesters in Thailand have been injured in an
explosion outside the prime minister’s office in the capital, Bangkok.
According to local media reports, unidentified attackers threw a grenade at anti-government protesters around midnight on Sunday outside the Government House, but it has not been confirmed if a grenade caused the explosion.
“It was an explosion that slightly hurt two protesters but we can’t confirm whether it was a grenade,” a district police officer was cited as saying in media reports.
The incident occurred as the caretaker government loyal to Yingluck Shinawatra, the unseated prime minister, is struggling to hold on to power and hoping to survive until an election set for July to restore authority.
Opponents of the government demand the upper house of parliament, the courts and the Election Commission to appoint a new prime minister.
Source and full story: Press TV, 11 May 2014
According to local media reports, unidentified attackers threw a grenade at anti-government protesters around midnight on Sunday outside the Government House, but it has not been confirmed if a grenade caused the explosion.
“It was an explosion that slightly hurt two protesters but we can’t confirm whether it was a grenade,” a district police officer was cited as saying in media reports.
The incident occurred as the caretaker government loyal to Yingluck Shinawatra, the unseated prime minister, is struggling to hold on to power and hoping to survive until an election set for July to restore authority.
Opponents of the government demand the upper house of parliament, the courts and the Election Commission to appoint a new prime minister.
Source and full story: Press TV, 11 May 2014
Pfizer's bid for AstraZeneca shows that big pharma is as rotten as the banks
Global pharmaceutical companies are dodging the risks by loading R&D costs on to taxpayers
Every one of Pfizer’s patented drugs benefited from decades of taxpayer funds. Photograph: Canadian Press/Rex
Countries around the world are seeking long-run, innovation-led
growth in the "real economy". This is born of a wish to move away from
speculative growth led by short-term financial markets. For this reason,
industrial policy is back on the agenda after years of being a near
blasphemy.
The life-sciences industry is top of the list, for both Barack Obama and David Cameron, of "real" industries to nurture through such policy. But this month they have been reminded of an uncomfortable truth: big pharma is just as sick as the banks. And, like speculative finance, it is hurting taxpayers in the process.
Pfizer wants to buy AstroZeneca, a British firm, to cuts its high overheads and especially to pay the lower UK tax rate (20%) – the cheap way the UK attracts "capital"– rather than the 40% US tax rate. This is nothing new as Google and Apple have been shifting profits around the world to avoid tax. Even within the US, Apple moved one of its subsidiaries to Reno, Nevada to avoid paying higher tax in Cupertino, California. Let's call it a race to the bottom.
What makes this dynamic particularly problematic for the taxpayer is that the knowledge behind Apple and Pfizer products – the key to their long-run profits – has been virtually bankrolled by that same taxpayer. As I discuss in my book The Entrepreneurial State: Debunking Private vs Public Sector Myths, every technology behind the iPhone was publicly funded (internet, GPS, touch-screen, Siri) and every one of Pfizer's patented drugs benefited from decades of taxpayer funds through the US National Institutes of Health, which in 2012 alone spent £32bn (£19bn).
Indeed, Pfizer's recent shift of one of its largest R&D laboratories from Sandwich in Kent to Boston was not due to the lower taxes or regulation in Boston but to be closer to this pot of gold. Coming back to the UK only to suck more blood out of the system should warn the government of the kind of image it wants to present of itself. Is it happy to be played front and back?
And what is happening to big pharma's research and development? In the name of "open innovation" – the admission that most of their knowledge comes from small biotech and large public labs – big pharma have been closing down their own R&D (reducing total numbers of researchers), as well as moving the remaining ones to be close to those labs.
Big pharma is no longer in the innovation business, using its own resources to fund the high-risk ideas, most of which will fail. It has become more risk-averse and prefers to focus on the D of R&D and please shareholders. Mergers and acquisition strategies reduce expensive overheads and costs (of which research infrastructure is the highest).
Things become even clearer when we look at the numbers behind one of their biggest expenditures: share buybacks. These are geared to boost stock prices, stock options and executive pay. Indeed it is this type of dynamic that has been driving the extreme inequality described by Thomas Piketty. The calculations of Professor William Lazonick suggest that in 2011, along with $6.2bn paid in dividends, Pfizer repurchased $9bn in stock, equivalent to 90% of its net income and 99% of its R&D expenditures.
While the justification for such buybacks is often that there are no "opportunities for investment", the increased public funds in pharma research shows who is funding the opportunities and who is free-riding. Though in the end both lose since without an engaged private partner, innovation suffers.
To make matters worse, these "innovative" companies advising governments on their "life-sciences" strategies are constantly seeking handouts through R&D tax credits, or more recently through the UK Patent Box tax scheme introduced in 2013 (as well as in the Netherlands, Belgium and Spain, and soon in the US), with a 10% tax for income earned on patented drugs.
Patents are already monopolies with 17 years' protection. There is no reason to increase profits even more during that time. Especially as what drives the research that leads to patents is not the "cost" of the research, but the opportunities that are perceived—historically driven by large amounts of risk-loving public funds.
Experts from the Institute for Fiscal Studies have argued that this policy will diminish government revenue by about £2bn a year, and have no effect on business investment in research – which was meant to be the point. Indeed, private investment tends to follow well-funded public investments, that are of course undermined by the constant bashing away at the ability of government to collect tax revenue. This not an innovation strategy but a City-like speculation strategy.
The parallel goes even further: just like the banks, big pharma socialises the risk, but privatises rewards. The few drugs that are coming out would not have emerged without taxpayer-funded research. Yet the taxpayer then pays twice: first for the research then for the high prices, justified by the supposedly high risk that big pharma is taking on. This is almost surreal: what risk? And what about taxpayer risk?
Rather than empty words on a life-sciences strategy, what is needed is for policymakers to become more confident in their negotiations with business. The 1980 Bayh-Dole act that allowed publicly funded research to be patented says that government should have a say on the prices of the drugs. The fact government has never exercised this right shows who has the upper hand.
But things can change. Innovation policy should be linked to corporate governance – why should companies that spend more on share buybacks than R&D benefit from public research funds? Then "intelligent" R&D tax credits could be created, linked not to the income generated from R&D but the research labour hired to conduct it (as introduced in the Netherlands).
Government could also retain a golden share of the intellectual property rights (patents) which public research produces, and/or make sure that the prices of the new drugs reflect how the taxpayer paid for the most high-risk research. And, finally, given the high dependence of the industry on publicly -funded R&D, do not allow acquisitions that undermine the underlying research base the companies themselves should commit to - and for which they constantly request handouts.
In short, we need to start fostering a more symbiotic innovation eco-system. It's time to put an end to the current, increasingly parasitic one. We could start by realising that government does have power to actively shape and create markets, and not just fix broken ones.
The life-sciences industry is top of the list, for both Barack Obama and David Cameron, of "real" industries to nurture through such policy. But this month they have been reminded of an uncomfortable truth: big pharma is just as sick as the banks. And, like speculative finance, it is hurting taxpayers in the process.
Pfizer wants to buy AstroZeneca, a British firm, to cuts its high overheads and especially to pay the lower UK tax rate (20%) – the cheap way the UK attracts "capital"– rather than the 40% US tax rate. This is nothing new as Google and Apple have been shifting profits around the world to avoid tax. Even within the US, Apple moved one of its subsidiaries to Reno, Nevada to avoid paying higher tax in Cupertino, California. Let's call it a race to the bottom.
What makes this dynamic particularly problematic for the taxpayer is that the knowledge behind Apple and Pfizer products – the key to their long-run profits – has been virtually bankrolled by that same taxpayer. As I discuss in my book The Entrepreneurial State: Debunking Private vs Public Sector Myths, every technology behind the iPhone was publicly funded (internet, GPS, touch-screen, Siri) and every one of Pfizer's patented drugs benefited from decades of taxpayer funds through the US National Institutes of Health, which in 2012 alone spent £32bn (£19bn).
Indeed, Pfizer's recent shift of one of its largest R&D laboratories from Sandwich in Kent to Boston was not due to the lower taxes or regulation in Boston but to be closer to this pot of gold. Coming back to the UK only to suck more blood out of the system should warn the government of the kind of image it wants to present of itself. Is it happy to be played front and back?
And what is happening to big pharma's research and development? In the name of "open innovation" – the admission that most of their knowledge comes from small biotech and large public labs – big pharma have been closing down their own R&D (reducing total numbers of researchers), as well as moving the remaining ones to be close to those labs.
Big pharma is no longer in the innovation business, using its own resources to fund the high-risk ideas, most of which will fail. It has become more risk-averse and prefers to focus on the D of R&D and please shareholders. Mergers and acquisition strategies reduce expensive overheads and costs (of which research infrastructure is the highest).
Things become even clearer when we look at the numbers behind one of their biggest expenditures: share buybacks. These are geared to boost stock prices, stock options and executive pay. Indeed it is this type of dynamic that has been driving the extreme inequality described by Thomas Piketty. The calculations of Professor William Lazonick suggest that in 2011, along with $6.2bn paid in dividends, Pfizer repurchased $9bn in stock, equivalent to 90% of its net income and 99% of its R&D expenditures.
While the justification for such buybacks is often that there are no "opportunities for investment", the increased public funds in pharma research shows who is funding the opportunities and who is free-riding. Though in the end both lose since without an engaged private partner, innovation suffers.
To make matters worse, these "innovative" companies advising governments on their "life-sciences" strategies are constantly seeking handouts through R&D tax credits, or more recently through the UK Patent Box tax scheme introduced in 2013 (as well as in the Netherlands, Belgium and Spain, and soon in the US), with a 10% tax for income earned on patented drugs.
Patents are already monopolies with 17 years' protection. There is no reason to increase profits even more during that time. Especially as what drives the research that leads to patents is not the "cost" of the research, but the opportunities that are perceived—historically driven by large amounts of risk-loving public funds.
Experts from the Institute for Fiscal Studies have argued that this policy will diminish government revenue by about £2bn a year, and have no effect on business investment in research – which was meant to be the point. Indeed, private investment tends to follow well-funded public investments, that are of course undermined by the constant bashing away at the ability of government to collect tax revenue. This not an innovation strategy but a City-like speculation strategy.
The parallel goes even further: just like the banks, big pharma socialises the risk, but privatises rewards. The few drugs that are coming out would not have emerged without taxpayer-funded research. Yet the taxpayer then pays twice: first for the research then for the high prices, justified by the supposedly high risk that big pharma is taking on. This is almost surreal: what risk? And what about taxpayer risk?
Rather than empty words on a life-sciences strategy, what is needed is for policymakers to become more confident in their negotiations with business. The 1980 Bayh-Dole act that allowed publicly funded research to be patented says that government should have a say on the prices of the drugs. The fact government has never exercised this right shows who has the upper hand.
But things can change. Innovation policy should be linked to corporate governance – why should companies that spend more on share buybacks than R&D benefit from public research funds? Then "intelligent" R&D tax credits could be created, linked not to the income generated from R&D but the research labour hired to conduct it (as introduced in the Netherlands).
Government could also retain a golden share of the intellectual property rights (patents) which public research produces, and/or make sure that the prices of the new drugs reflect how the taxpayer paid for the most high-risk research. And, finally, given the high dependence of the industry on publicly -funded R&D, do not allow acquisitions that undermine the underlying research base the companies themselves should commit to - and for which they constantly request handouts.
In short, we need to start fostering a more symbiotic innovation eco-system. It's time to put an end to the current, increasingly parasitic one. We could start by realising that government does have power to actively shape and create markets, and not just fix broken ones.
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