TCS Daily

Mistakes in the Land of 10,000 Lakes

By John E. Tamny - April 20, 2004 12:00 AM

On March 23rd Minnesota Governor Tim Pawlenty issued executive orders that require state agencies to take into account where companies make their products before awarding business to them. The rationale behind the Governor's plan is "the current job climate in this country," and the "need to encourage jobs in New Prague or New Ulm," as opposed to "New Delhi."

Governor Pawlenty's lurch into the anti-trade camp is news on its own, not to mention that overburdened Minnesota taxpayers will be the ones forced to foot the bill for his highly questionable jobs program. What perhaps makes it even more stunning is the John Kerry-style flip-flop he's done on the job question itself in the past month.

Indeed, on March 10th Pawlenty wrote all 49 of his fellow governors to ask them to join him in jawboning down the prices pharmaceutical companies charge in the United States. While the Minnesota State Board of Investment's stake in drug companies is relatively small, Pawlenty thinks there is strength in numbers, and that the states can use their combined ownership to force drug prices in the U.S. down to Canadian levels.

At issue are the price controls in Canada that theoretically make drugs more affordable to Canadian citizens. Pawlenty would like for U.S. citizens to have similar access to the lower-priced drugs offered for sale in Canada, and thinks massive shareholder resolutions will help him to accomplish his goals. Workers and pensioners should be aware that Governor Pawlenty's interests are inimical to theirs, and as such should use their numerical strength to stop the Minnesota pol.

Consider what would happen if drug re-importation were to suddenly be allowed. One response from drug companies could be to stop selling in Canada (as some have), and other countries that have implemented price controls.

This might work, but the resulting loss of income would lead to a fall in the stock prices of pharmaceutical companies and as a result, a reduction in the value of the pensions presently invested by states so heavily in drug companies. Drug stocks would also presumably be weighed down by fear of more aggressive efforts to pirate their products.

State pension plans could simply divest their pharmaceutical holdings, but the Pfizers and Johnson & Johnsons of the world actually rose in the last four years, while the S&P 500 and Nasdaq are respectively 25% and 55% off of their highs. Pharmaceutical firms are defensive stocks, and their removal would greatly increase the volatility of pension plans, all the while reducing returns.

Conversely, pharmaceutical firms could sell to Canada at the Governor's recommended higher price, all the while lowering prices in the U.S. Leaving aside the very understandable fear that any loss in profits might ground life-saving drug innovations to a halt, it's logical to ask what the "Stage Two" result might be for U.S. jobs.

Pfizer presently has 44,000 employees in the U.S., many of those jobs the high-paying research positions that politicians are so eager to keep onshore. Novartis CEO Daniel Vasella said in a recent Wall Street Journal interview that lack of price controls in the U.S. is a reason that the pharmaceutical industry employs so many Americans, and was a factor in his "outsourcing" a research facility to Cambridge (MA) from Basel, Switzerland.

Assuming Governor Pawlenty succeeds in rearranging how drug companies price their products, U.S. workers can also assume that many pharmaceuticals firms will "rearrange" their countrywide distribution of jobs.

Kind of curious when one considers the Governor has so recently shown his willingness to sacrifice Minnesota taxpayers in the name of job preservation. Minnesota taxpayers should also ask why he demands less of his own government than drug companies. His actions suggest that Minnesota's state functions could cost less, and that the 9th highest state income tax rate in the country could drop substantially.

Here's hoping Minnesota voters start asking some of these questions. Government interventions in the private markets have always ended in tears for workers and investors. Furthermore, as he's governing a state with the 9th highest income tax rate in the country, it seems Governor Pawlenty would be serving his constituents far better by leaving job creators alone, and instead start concentrating on lowering a tax rate that has killed far more jobs in Minnesota than any drug-pricing scheme could ever hope to.

John E. Tamny recently wrote for TCS about Eliot Spitzer and small investors.


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