Thursday, November 16, 2006


Pharmaceutical Follies — Redux

Pfizer and Other Drug Makers Report Higher Profits.” That was a headline in the October 20 th business section of The New York Times. Included was a sub-head reading, “The Medicare Part D prescription drug plan is having a positive impact on earnings.” That should not come as a surprise to those who read the three part series of articles titled “Pharmaceutical Follies” published in this blog in June of last year.

The series described the undue influence imposed by lobbyists on legislation as a result of the funneling of campaign funds to legislators. Despite this practice verging on legalized bribery, it is not only condoned, it is a perk to which legislators (of both parties) have become addicted. With the pharmaceutical industry, represented by its trade association Pharmaceutical Research and Manufacturers of America (PhRMA)) employing the largest number of lobbyists in Washington, it comes as no surprise when that endeavor more than pays for itself.

The pharmaceutical companies’ profits alluded to above are attributed to “price increases and growth in new prescriptions.” Both factors are the result of one of the most successful lobbying activities ever, one that produced the badly flawed Medicare Prescription Bill signed by President Bush in December, 2003. Not mentioned specifically in the article as a prime driver of profits is that portion of the drug bill that prohibits the Secretary of Health and Human Services from negotiating lower drug prices with the pharmaceutical companies. (If the Democrats gained control of both the House and the Senate, one of their first actions will be to reverse that decision).

If you have the patience to read what follows, you will be dismayed, disillusioned, and perhaps disgusted about the way the recent legislative process really has worked in Washington—how lobbyists have the power to control and even write legislation. This is an amazing revelation that has received little or no coverage in the media. It concerns a letter to the Republican majority leader, Dennis Hastert from three Democrat leaders, Nancy Pelosi, Democratic Leader, Steny H. Hoyer, Democratic Whip, and Henry A. Waxman, Ranking Minority Member of the Committee on Government Reform. While some Republicans might bristle at the contents and use the worst epithet possible to describe the authors, namely the “L” word (Liberal), which they are, it is difficult to refute the basic information. Read it and weep (for our country).

The letter, dated January 25, 2006, is addressed to Dennis Hastert, the Speaker of the House of Representatives. It calls for an investigation into the role that the Alexander Strategy Group, a lobbying firm closely linked to Tom DeLay and Jack Abramoff, played in crafting the Medicare Prescription Drug Act of 2003 and the budget reconciliation bill then pending before Congress.

It stated that “The Medicare Prescription Drug Act, which has caused so much confusion and havoc since January 1, was a product of a corrupt legislative process. When the bill passed, we knew that Democratic members had been denied opportunities to offer amendments and that the vote had been held open for hours in the dead of night to twist arms. [This was an act unprecedented in the long history of the House.] Afterwards, we learned that crucial cost estimates were illegally withheld (as well as deliberately understated) from Democratic members; that the key Administration official responsible for writing the bill was simultaneously negotiating a high-paying job representing drug and insurance companies; and that the Republican chairman responsible for steering the legislation through Congress subsequently accepted a lucrative job in the pharmaceutical industry.” [That was Billy Tauzin (R-LA) who became President of the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry’s primary trade association with a salary of over $1 million a year—quite a payoff].

We further learned about a Republican member who had alleged that a bribe had been offered him on the House floor [that was Tom DeLay, to change a vote on the drug prescription bill]. We know from lobby disclosure forms that the largest single client of the Alexander Strategy Group was the pharmaceutical industry, which paid the small firm over $2.5 million, including nearly $1 million in 2003 when the prescription drug law was being written. We also know from these records that the primary lobbyist for the drug industry at Alexander Strategy Group was Tony Rudy, who previously worked for both Mr. DeLay and Mr. Abramoff and who is identified as "Staffer A" in Mr. Abramoff's indictment. And we know from multiple accounts in the news media that the Alexander Strategy Group has been deeply implicated in the scandals now sweeping through Washington.” [As a result of these and other disclosures, that Group has been forced to go out of business, and Mr. Rudy pled guilty to a conspiracy charge].

The letter then demanded an investigation and ended by stating, “We have an obligation to the public - and especially to the seniors of America - to find out how the legislative process went astray and to hold those responsible to account.”

As far as I can determine, the request for an investigation was never approved by Speaker Dennis Hastert. That is not surprising since it was Hastert who in January, fired the Chairman of the House Ethics Committee and two other members (all Republicans) for having the impudence to file three admonishments (official letters of rebuke) against Tom DeLay that began the former majority leader’s ethical and legal free-fall. Now that Hastert himself is ethically suspect, is it any wonder that Congress is viewed with such disdain and antipathy? If you are interested in reading more, Google the following: “Medicare bill tied to Abramoff.”

Judge the So-Called Vote Expert

Now that the mid-term elections are over, you can judge the prediction by Jim McTague, a writer for Barron’s, whose headline read, “Why the Republicans will hang on to both the House and Senate on November 7.” It is his thesis that the winner “in about every race” can be predicted based on “which candidate had the largest campaign war chest, a sign of superior grassroots support.” (Unless Mr. Tague believes ‘grassroots’ is another word for lobbyists, he is being naïve). As a result, he maintains that polls can be ignored—it’s the money that counts. For example, in our own District 22, Republican Clay Shaw had raised $3.9 million while Democrat Ron Klein only $3.2 million. Mr. Tague maintains that Shaw would win. By now you know who won. Was it Shaw?

Mr. Tague suggests that looking at “House races back to 1972, you’ll find the candidate with the most money has won about 93% of the time, and that’s closer to 98% in recent years, according to the Center for Responsive Politics.” He admits “our method isn’t quite as accurate in senate races.” In those races, the cash advantage has spelled victory about 89% of the time since 1996.

In a well-publicized senate vote in New Jersey, he picks Democrat Bob Menendez ($10.5 million) over Republican Tom Kean ($5.6 million). In another highly controversial race in Montana, despite evidence that he received campaign funds from the notorious lobbyist, Jack Abramoff, the predicted winner was Republican Conrad Burns ($8.3 million) over democrat Jon Tester ($3.8 million). Even in Pennsylvania, the underdog in polls, Republican Rick Santorum has raised $17.3 million compared to his Democratic challenger, Bob Casey’s $15 million.

Mr. Tague admits however, that in 1968, 1974, and 1994, “the wave of anti-incumbent sentiment was so strong, that money didn’t trump voter outrage.” With the election over, we now know whether or not that same scenario played out in 2006.

To get back to the Rick Santorum race, it is the poster child for the first article above since it relates to the undue influence wielded by special interest groups, in this case the pharmaceutical industry through PhRMA. Of the top ten campaign fund recipients, Senator Santorum received the most money, over $450,000, primarily for his contributions to the Medicare Prescription Drug Bill that benefited the industry by prohibiting the government from negotiating prices, for inserting the concept of the doughnut hole into the bill, and thus for producing the record sales and profits mentioned above for the industry.

An additional roughly $1,000,000 of PhRMA funds was shared by six other Republican candidates, and as an indication of how pervasive this system is, two Democrats, including Edward Kennedy, and one Independent, Joe Lieberman, shared over $600,000. For a broader perspective consider these numbers: In 2005, about 3,000 pharmaceutical industry Washington lobbyists distributed some $2.3 billion to their friends in Congress. But in addition, 38,324 other lobbyists spread $952,676,588 to state legislators and executive offices.

I doubt that anyone, especially honest politicians (if that is not an oxymoron) would deny that power devolves to lobbyists, and the more money at a lobbyist’s disposal the more power he or she controls (think of Jack Abramoff). That brings to mind the axiom attributed to the legendary British historian, Lord Acton, “Power tends to corrupt, and absolute power corrupts absolutely.” The only pure solution is public funding of elections. Think about it!

Florida Bashed—Deservedly So?

As the author of articles published on the op-ed page of a newspaper, Stephen L. Goldstein is obviously not in the same league as Thomas Friedman or Frank Rich or Maureen Dowd, all of The New York Times—but then who is? Nevertheless, despite ignoring Goldstein’s columns in the Sun Sentinel for many years, I stumbled across two that had the audacity to denigrate the place I live in and love, and consider to be Paradise on earth, as many others also believe. After all, compared to almost any other area of the country or any other state, how dare he point out a few minor flaws that most citizens of the state are not aware of, nor do they apparently much care.

Here are some examples of Mr. Goldstein’s whiney complaints and criticisms in his own words: “…spooking voters with a Neanderthal religious-medical agenda to get right wing radicals to elect them, for eight years, Republicans have been guilty of malign, neglect — obsessing on ending legal abortions and exploiting Terri Schiavo, but ignoring real issues of life or death.” (C’mon now! Isn’t that a rather radical exaggeration? After all Terri Schiavo was smiling.) To back up this contention, all he has to go on is some cockamamie survey called the Morgan Quitno Health Care State Rankings 2006 and State Trend, Third Edition. This outfit has been publishing this survey for only the last 17 years so how accurate can it be?

Mr. Goldstein immediately places his reputation in jeopardy by prefacing some of the survey findings by stating, “It’s indisputable that Republicans have put us in the medical Stone Age.” Just read some of the findings and determine for yourself whether or not Goldstein exaggerates.
  1. Instead of effective sex education, Republicans have pushed “abstinence only.” Can you imagine that is blamed for Florida being third nationally in the number of births of teen-age mothers in 2000, 2002, and 2004? (That’s probably due to the fact that kids fall in love faster in hot weather).

  2. Florida was third in the nation for persons not covered by health insurance, and had the sixth highest percent of children not covered. (These people are probably exercising their prerogative to deny commissions to insurance agents).

  3. Florida has one of the highest incidences of AIDS infections, the second highest number of both reported cases, and number of AID cases in children 12 and younger. (I’m certain that if we really try, we can be number 1 next time).

  4. Ten years ago 6.7 percent of Floridians lacked access to primary care. Now that number has grown almost 135 percent to 15.7 percent, the worst in the nation. (Those damn doctors make too much money anyway).

At that point, Mr. Goldstein goes into full diatribe mode by exclaiming, “Data like these cry out for leadership, for someone to set a meaningful public health agenda. If, in eight years, Tallahassee had focused on trying to reduce teen pregnancy and the spread of AIDS, not to mention initiating health insurance reform, we might have seen a dent in some of the state’s more persistent, even deadly statistics.”

Now I ask you, do our hard working politicians deserve that type of condemnation and criticism? In my opinion, the political leaders in Tallahassee have lived up to every expectation I anticipated. As if the above uncalled for tirade was not enough, in another column, Mr. Goldstein had some harsh words about Florida’s education system. I’ll describe them in the next issue.

Wednesday, November 01, 2006

Ethanol or Hybrids? — The Real Story, Part I

If anyone doubts that Americans are addicted to oil, he or she must be living on another planet. President Bush was absolutely correct in calling attention to this dependence on what has been called “black gold” but could be termed today as “black platinum.” But recognizing that a problem exists is much easier than establishing a solution. After all, that solution has eluded every president for over 30 years. The fundamental problem can be attributed to an economic theory first developed in 1838 but not widely accepted until published again in 1890. We know it as the “theory of supply and demand,” a concept that now seems deceptively simple—the price of a good is determined by both the supply and demand for it. For example, if the demand for oil exceeds the supply, the price will escalate until equilibrium exists. Well, hello America! Does it take 138 years for Americans to understand that model?

Furthermore, is it so difficult to recognize that the United States, with only 5 percent of the world’s population consumes 25 percent of the world’s oil production? But consider this, because the outlook is even worse: by the year 2025, U.S. demand for oil is estimated to increase by 50 percent, and the demand for oil by China will exceed that figure. If the Peak Oil theorists are right, unless we develop some realistic solutions quickly, the world could be facing an energy crisis of gigantic proportions.

Scary Predictions From an Oil Expert

In an interview in the October 16 th issue of Barron’s, (note that Barron’s is very selective relating to the caliber of their interviewees) Charley Maxwell, an oil veteran of 20 years, predicted that “More than 50% of the non OPEC production will therefore have peaked [by 2008].” He then says, “There are all kinds of issues as to when the whole world peaks. I use a range from 2015 to 2020, which depends on when the rest of the world wakes up to the need to conserve, which could delay the peak.” Conserve? Conserve? Does that word exist in the vocabulary of possible solutions put forth by this administration? Well, no-o-o-o-o! The administration’s view is in sync with “Big Oil” — find new sources of energy and increase production. In other words, concentrate on increasing supply and more or less ignore the demand factor.

Mr. Maxwell also comments on the fact that “The oil companies as a group, [especially Exxon Mobil] seem to believe the future production potential of the world is very large, very wide open, and yet production numbers don’t indicate this is so.” He cites the “recent big discovery in the Gulf of Mexico,” but the fact that Exxon is not taking on any leases for deep-water drilling after 2008” is a clear indication that Exxon must think, “the deep water leases aren’t going to be important because the oil found will be more expensive than the common garden-variety Texas oil from 6000 feet down, and that [since] you will have lots of oil coming from sources like that you don’t need these high cost leases down the road.”

If you want a further idea as to the critical nature of this problem, Mr. Maxwell also predicts that if solutions are not quickly implemented, the price of a barrel of oil will stand at $85 by 2010, $180 by 2015, and $300 by 2020.

Ethanol as Panacea—But Whose?

On October 13 th of this year, Thomas Friedman’s column in The New York Times described a survey taken of likely voters from both parties that indicated 42% of the participants chose “energy independence” as their number one security concern. Surprisingly, this far outnumbered the number two choice “combating terrorism, which garnered 24% of the vote.” Perhaps the public has finally grasped the dimensions of the problem. Friedman has long been a staunch advocate of energy independence, as well as a strong critic of this administration’s weak and misdirected energy policies. Unpredictably, the same issue of The New York Times contained an article detailing a speech given by President Bush at a conference to promote bio-fuels where he suggested that the push to wean America from oil addiction would be a priority of the last two years of his administration. It is unclear whether Bush knew of Friedman’s survey information, or whether Freidman knew the subject of Bush’s speech. Whether this was just a serendipitous coincidence is impossible to establish.

Of course, this is not the first time a president declared oil independence as a priority. Thirty-three years ago, President Nixon initiated “Project Independence.” In 1977, Jimmy Carter, in an oft quoted line promised, “Beginning this moment, the Nation will never again use more foreign oil than we did in 1977—never!” Yeah, sure! Neither of these initiatives, nor any other over the ensuing years has been effective in achieving the goal. We are using more imported oil than ever before.

Nevertheless, since President Bush (rightfully) stated the obvious, that Americans are addicted to oil, there has been a sudden rush to judgment regarding the best way for the country to ultimately achieve the oil independence that (as mentioned above) has thwarted every president for more than thirty years. In his infinite wisdom, the President has announced that the not so secret weapons that will accomplish the goal of oil independence are ethanol and hydrogen fuel cells. While the latter is by far the most desirable of all possible solutions, and automakers are working toward that goal, it is questionable whether most readers of this article will live long enough to benefit from that process. As far as ethanol is concerned, that is another story. While it is a story where the ending is unknown, (and although this is not exactly the beginning), what follows is as good a place to start as any.

ADM—Part of the Problem, Not the Solution

Just as WMD is an acronym, ADM is also a symbol, but for something much more benign than Weapon of Mass Destruction. Nevertheless, ADM is a stock market symbol, representing a company whose ethical misdeeds became the internal WMD that could have backfired by destroying the company. In the early 1990’s, that company, Archer Daniels Midland, the agricultural behemoth, became the personification of corporate greed and deceit.

In 1995, just prior to the whistle-blower led exposure that precipitated a much-publicized scandal (two books were written about it), the Cato institute, a non-profit public policy foundation, well known for its ultra-conservative values, published a policy analysis titled “A Case Study in Corporate Welfare.” The first paragraph read, “The Archer Daniels Midland Corporation (ADM) has been the most prominent recipient of corporate welfare in recent U.S. history. ADM and its chairman Dwayne Andreas have lavishly fertilized both political parties with millions of dollars in handouts and in return have reaped billion dollar windfalls from taxpayers and consumers. Thanks to federal protection of the domestic sugar industry, ethanol subsidies, subsidized grain exports, and various other programs, ADM has cost the American economy billions of dollars since 1980 and has indirectly cost Americans tens of billions of dollars in higher prices and higher taxes over that same period. At least 43 percent of ADM’s annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 dollar of profit earned by ADM’s corn sweetener operation costs consumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30.”

Shortly after this analysis was published, what seemed like disaster struck ADM. This was well depicted in the International Herald Tribune as follows: “In mid-1990 the business pages had the peculiar odor of a cheap spy novel. There were secret rendezvous in hotel rooms, allegations of prostitutes hired to do corporate espionage, an FBI dragnet, and a double crossing mole.” [Sounds like a great movie plot to me.] “But this was not just pulp fiction. It was the story of Archer Daniels Midland Co. a $20 billion [the current figure is $32.6 billion] international powerhouse in agricultural-commodities processing.” And here is the key information: “From 1991 to 1995, the company was involved in several international price-fixing cartels. Mark Whitacer, an ADM executive blew the whistle. In 1996, three of the company’s top executives, [including Chairman Andreas’s son] were sentenced to jail terms ranging from two to two and a half years.” (Ironically, Whitacre, who worked as an informant for the FBI, was himself a thief since he ended up serving nine years for embezzling $9 million from ADM.)

As a result of its indiscretions, ADM was fined a breathtaking $100 million, and subsequently paid an additional $400 million to settle a civil class action lawsuit accusing the company of fixing prices in the huge market for corn sweetener. As determined by the Cato Institute, much of ADM’s ability to garner huge subsidies for its products were the results of large contributions and inside connections to both political parties. From a cost/benefit standpoint, these payments and relationships were a staggering success. (Remember that song from the show Cabaret, “Money Makes the World Go Round?)

And don’t think that the scandal, fines, and huge monetary settlements changed the way business is conducted, and continues to be conducted. As recently as one month ago, the editorial page editor for Barron’s wrote an editorial deriding the concept of ethanol as “the” solution to our oil addiction. He stated, “Like Brazil, the U.S. has provided some foolish incentives to use ethanol made from corn, and President Bush wants more. Since taking office, his administration has spent more than $10 billion on alternative fuel research and development, and in his most recent State of the Union address he pointed to the promise of ethanol fuels. He set a goal of replacing 70% of imported oil from the Middle East by 2025—coincidentally his stated target year for sending an expedition to Mars.” (That last bit was supposed to be sarcastic).

The article continues, “The political motivation is partly to provide another form of aid to corn farmers. Most states raise some corn, and so most senators support corn farmers. And, of course, the road to the White House starts in the Tall Corn state of Iowa. Furthermore, the well connected and politically generous firm, Archer Daniels Midland is the nation’s largest producer of fuel ethanol [to the tune of 25% of the total ethanol production.]” (My emphasis)

It appears that nothing much has changed. Apparently substantial election campaign funds still flow from ADM to candidates, very substantial subsidies still flow into ADM, and equally substantial federal funds flow into research and development for alternate energy forms including ethanol. While the first two activities are suspect, the latter, incentives for research and development cannot be faulted—although the case for supporting corn ethanol has seen increasingly vociferous criticism.

In early October, at a bio-fuels conference where President Bush spoke, (the CEO of ADM also attended) he said that corn-produced ethanol was good for farmers and good for the country’s economy. Good for the farmers? Maybe, but the real profits as well as the government subsidies are going to the big agricultural companies like ADM and Cargill, as well as the other producers of corn ethanol. Good for ADM?—absolutely. Unfortunately, the president’s speech writers neglected to reveal that ADM’s political connections has helped them become the largest beneficiary of more than $2 billion in annual government subsidies received by the ethanol industry. That results from a 51-cent-a-gallon tax credit provided to refiners and blenders—not to farmers. ADM is estimated to earn $1.3 billion this year from ethanol alone, and its stock price and profits have doubled in the last year.

On June 25 th of this year, The New York Times ran a long article on ethanol in which it stated, “For all the interest in ethanol, however, it is doubtful whether it can serve as the energy savior President Bush has identified. He has called for bio-fuels — which account for just 3 percent of total gas usage — to replace roughly 1.6 million barrels a day of oil imported from the Persian Gulf.”

The doubt expressed by The Times, the pros and cons of ethanol, and what could be the real savior will be discussed in the next issues.

Disclosure: The author admits he does not own stock in ADM or any other company involved in the production of ethanol — which in retrospect was a major oversight.