TCS Daily

The Regulatory Roach Motel

By Sam Kazman - March 31, 2005 12:00 AM

Imagine that our country had a strange law under which foreign citizens were entitled to rent homes here at bargain prices. For a while, our housing market operates relatively well despite this law. While foreign citizens take advantage of it, their numbers are small compared to the masses of Americans who continue to pay market rates, and those rates are high enough to encourage the construction of needed new housing.

But suddenly there's a new development. A quirk is discovered in the law that allows foreigners to sublet their rent-controlled units to Americans. In fact, they can rent and sublet limitless numbers of units in this manner. As these bargains become publicized over the Internet, more and more Americans get their housing by subletting from foreigners. Soon this form of renting takes over the entire rental housing market. At first it seems like a great deal for American tenants, but eventually it does what all price controls do -- it destroys the incentive to produce more goods. Housing stocks deteriorate as existing housing falls into disrepair and no new units are constructed. As one economist has pointed out, "rent control appears to be the most efficient technique presently known to destroy a city -- except for bombing."

The drive to legalize drug reimportation is surprisingly similar to the imposition of rent control after World War II. There are currently several proposals to legalize the growing consumer practice of purchasing drugs from abroad at lower prices that what they sell for here. These cheaper prices do not result from lower production costs or economies of scale. They result from the fact that most foreign countries impose price controls on these drugs, and those controls are often backed up by the threat of breaking the drug's patent if its manufacturer objects.

That threat is actually enshrined in a 2001 international treaty, under which a country can declare a health emergency and impose compulsory licensing on an uncooperative firm. This, in the words of one advocate, gives "primacy to public health over private intellectual property." That's a polite way of saying that it shreds the rights of the drug companies that spent hundreds of millions of dollars developing these medicines, and that now find themselves relatively powerless to prevent their expropriation. In fact, due to American antitrust laws, American drugmakers can't even band together to collectively negotiate with those foreign countries.

Reimporting these drugs is currently illegal under federal law, but the practice is growing. Several state and local governments have actually moved to facilitate it, setting the stage for a possible showdown with the Food and Drug Administration. The congressional bills to end the federal ban are supported not only by the usual advocates of increased government control over medicine, but by some free-market voices as well. In their view, the current federal ban violates the basic principle of free trade. After all, if a drug is available from abroad for less than in the U.S., why should Americans be barred from obtaining these bargains?

But several factors undercut this free trade claim. For one thing, such free-market advocates as Milton Friedman and Richard Epstein favor the ban. To quote from a letter to Congress signed by Professor Friedman and other over 100 other economists, under reimportation "American consumers would get the short-term windfall of lower prices, but they would end up unnecessarily suffering and living shorter lives -- because promising new therapies would be delayed or not even developed."

Moreover, at issue here are patent rights -- limited exceptions to free trade that are expressly provided for in the Constitution. And finally, the duress exerted by foreign governments means that this trade involves not freely produced products, but extorted ones.

Perhaps the best evidence of this comes from the very language of the major pro-reimportation proposal, the "Pharmaceutical Market Access and Drug Safety" bill introduced by Sen. Byron Dorgan (D-ND), which now has 30 cosponsors. This bill has a set of provisions to prevent what it calls "gaming the system" -- drug company attempts adjusting foreign sales practices in order to curtail reimportation. "Gaming the system" is thus a derisive codeword for freedom of contract, and the bill is written to gut that freedom. But in order not to be too brazen about this, it declares that it is not intended "to compel the manufacturer of a drug to distribute or sell the drug in a country."

But if history is any guide, this will soon be interpreted to mean the opposite -- that once a drugmaker has sold the drug, no matter when or how indirectly, it won't ever be allowed to stop.

It's here that the connection between reimportation and rent control becomes explicit. The rent control laws followed this same pattern, down to practically the identical language. Beginning sixty odd years ago, those laws declared that they did not "require any person to ... offer any accommodations for rent." But the end result was diametrically different -- once you started to rent out a unit, it was next to impossible for you to stop. Just ask any New York City landlord who's ever tried to take a rent-controlled unit off the market.

The "anti-gaming" provisions of Sen. Dorgan's reimportation bill (and of at least one other proposal like it) are likely to have this very same effect. As in the case of rent control, they create a regulatory Roach Motel -- drug companies can check in, but they can't check out.

When individual cities imposed rent control and wrecked the future of their housing, their residents at least were able to move elsewhere. If importation is imposed on the pharmaceutical industry, where ya gonna go?

Sam Kazman is general counsel of the Competitive Enterprise Institute,, a Washington-based free-market advocacy organization.



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