Brilliant Houston trial lawyer John O’Quinn strikes again.
Update: Dylan over at Slithery D observes that Mr. O’Quinn’s formidable talents are often misdirected.
Wyeth gets hammered in Beaumont
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America’s health care finance mentality
Holman Jenkins of the Wall Street Journal ($) has some interesting observations about America’s health care finance mentality today in his weekly Business World column. The subject of the column is the rather inane political issue involved in the importation of government subsidized prescription drugs from Canada, but Mr. Jenkins uses the subject to clear up some common misconceptions regarding how American drug companies finance development of drugs and how America’s health care finance mentality affects such development.
Inasmuch as American drug company profit margins are relatively high, some politicians who are in favor of imports from Canada suggest that American drug prices are too high and that the companies are greedy, which Mr. Jenkins quickly debunks:
What can it possibly mean to call an industry “greedy”? Drug companies are said to be an unconscionable exception because their profits are comparatively high, 15.4%, when measured as a percentage of sales. But here’s a question: Grocery stores have a measly return on sales of 1.4%, and liquor stores an even measlier 1%. So why does anybody invest in these businesses rather than the drug business? Last time we looked, the grocery industry and liquor stores still existed.
Such indictments of the drug industry overlook the fact that profits are a cost — the cost of a company’s capital. Nobody pays back their investors more than they are obligated to. By the same token, if your capital costs are 15.4% of your total costs, profits had better be 15.4% of your revenues or you won’t be in business long. Measures of profitability, in short, tell you a lot more about an industry’s need for capital than about its “greed.”
And how about the demagogues’ allegation that the excessive amount of money that drug companies spend on advertising is proof that they make too much money? Mr. Jenkins explains:
Wrong. Companies spend money on advertising because it generates profits, not because it consumes them. You’ve spent 10 years and $500 million to develop a new product and haven’t rung up your first sale yet. What could be a smarter investment than spending a few dollars more to let the world know the product exists? Advertising actually makes companies more willing to invest in R&D. Capital can be earned back faster; fixed costs can be spread over a larger number of customers, allowing each to be charged a lower price.
But then Mr. Jenkins bears down on the real problem relating to financing of prescription drug development — America’s health care finance mentality:
America’s real problem is that drugs have been roped into the same perverse incentives that govern most health care spending. Consumers don’t weigh cost vs. benefit; drug companies focus their development efforts on drugs aimed at large populations of price-insensitive, insured patients. At the same time, consumers who don’t have drug insurance and pay out of their own pockets scream bloody murder because drugs seem like a violation of a natural order in which medical care is increasingly perceived as a costless entitlement.
Think we exaggerate? Everybody noticed when HCA, the big hospital chain, earlier this month put aside $700 million to cover the bad debts of uninsured patients, who are typically good for only seven cents on the dollar. Little noticed was the fact the company also has to cover the bad debts of insured patients, who routinely skip out on their co-payments and deductibles. Nowadays these people are good for only 45 cents on the dollar on average.
Medical bills seem to have become optional to Americans when deciding which envelopes to toss in the trash unopened at the end of the month. “Hospitals are ninth” on the payment list, HCA’s Chief Jack Bovender told Reuters in February, well behind mortgages, car payments and cable-TV bills. “The only thing people pay worse is the student loan program.”
Read the entire column. Good stuff again from Mr. Jenkins.
Texas public school finance reform
Marc Levin is associate editor of The Austin Review, a conservative monthly journal, and President of the American Freedom Center. He writes this op-ed today in the Chronicle proposing an alternative to the rather mundane public school finance proposals currently being floated in the special session of the Texas Legislature:
One almost universal assumption in the school finance debate is that everyone must pay the same type of tax. While no tax is pleasant, what if Texans could choose how they want to pay their share of the cost of public education? The Legislature should consider completely replacing the property tax for education with an increased statewide sales tax coupled with an opt-out for Texans who choose to pay a flat income-based assessment instead.
Such a system would have many benefits. First, it would allow for the complete elimination of highly unpopular school property taxes, which are subject to the vagaries of the appraisal process. As our society has become increasingly mobile and driven by technology, real property has become a less reliable measure of a person’s wealth.
The business property tax for education, which this proposal would also eliminate, is even more antiquated. Today, many highly profitable businesses have little physical property.
Furthermore, to encourage businesses to locate in Texas as opposed to the other 49 states, most economists agree that ideally there should be no state taxes on business. The current business property and franchise taxes, a gross receipts tax, or any other business tax make Texas less attractive for business investment and undermine the competitiveness of Texas businesses in exporting goods and services.
In addition to abolishing the residential and business school property tax, this proposal would also allow for full statewide equity in school funding without recapture. No longer would school districts be dependent on the taxable value of the property within their boundaries.
On the other side of the ledger, such a system would also provide greater revenue stability for the state. The drawback of a sales tax is that revenues can decline in absolute terms during a recession. However, average income tends to increase, or at least remain constant, during all economic periods. Therefore, those who choose an income assessment would provide a buffer that would help even out state revenues over time.
Read the entire op-ed, which is quite well-reasoned and, as a result, probably has a zero chance of being noticed in the current legislative session. I don’t know about you, but it seems to me rather pathetic that Texas legislators are considering basing something as important as public school finance on notoriously unreliable revenue generated from taxes on use of slot machines, consumption of cigarettes, and viewing of exotic dancers.
The Bush Administration and scientific research
Randall Parker over at FuturePundit has this excellent post that analyzes the Bush Administration’s proposed funding of research in the 2005 budget, to which he concludes:
The Bush Administation’s plans for research and development spending are short-sighted. Scientific advances can solve problems in ways that pay back orders of magnitude more than the original research will cost to fund. Budget deficits and huge unfunded liabilities for those who are going to become elderly in the coming decades combined with the threat of terrorism and the greater global competition for a limited supply of oil call for mammoth attempts to research and innovate our way to solutions.
The consequences of inadequate security
Daniel Drezner points to this San Francisco Chronicle article about the Iraq experience of Larry Diamond, a senior fellow of the Hoover Institute who was an advisor to the Coalition Provisional Authority in Iraq and a promoter of democratic principles in government. As Mr. Drezner’s post points out, Diamond is still a promoter of democracy, but is not optimistic about Iraq, primarily because of the United States’ failure to provide adequate security for the Iraqi people willing to risk commitment to democratic principles. As the Chronicle article notes:
We just bungled this so badly,” said Diamond, a 52-year-old senior fellow at Stanford University’s Hoover Institution. “We just weren’t honest with ourselves or with the American people about what was going to be needed to secure the country.”
“You can’t develop democracy without security,” he said. “In Iraq, it’s really a security nightmare that did not have to be. If you don’t get that right, nothing else is possible. Everything else is connected to that.”
Diamond relates that his realization of the deficiencies in the American security force came to him while speaking to a woman’s group in Baghdad:
“I had one of those moments when you cut through all the bull,” he said. “I was speaking to this women’s group, and one woman got up and asked, ‘If we do all these things, who’s going to protect us?’ ” Diamond recalled. “That was the moment when I said to myself, ‘Oh my God, some of these women are going to be assassinated because they are here listening to me.’ It just struck me between the eyes.”
As the violence spread, Diamond said, he felt ever more painfully the mistake the United States had made by not sending in more troops to keep the insurgents at bay.
The American policies basically encouraged Iraqis to stand up — only to face the threat of being mowed down for doing so, he said.
“It was totally hypocritical of us to do one and not the other,” Diamond said of the lack of security.
The entire article is interesting and thought provoking, so read it all.
Analyzing mediocre intelligence
Robert Baer is a former CIA intelligence field officer who has written extensively (“Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude“; “See No Evil: The True Story of a Ground Soldier in the CIA’s War on Terrorism“) about how political wrangling in Washington over the past 30 years has badly damaged the ability of the CIA and other intelligence gathering agencies to generate an effective product for our nation’s leaders for use in evaluating and implementing foreign policy.
In this Wall Street Journal ($) op-ed, Mr. Baer uses his extensive experience in intelligence matters to evaluate the recently declassified and now famous August 6, 2001 Presidential Daily Briefing (“PDB”) that President Bush and his advisors reviewed a little more than a month before the attacks of September 11, 2001. Mr. Baer begins by explaining the nature of a PDB:
. . . PDBs are the crown jewels. They meld the best information from the CIA’s clandestine sources, our embassies all over the world, the National Security Agency, the Federal Bureau of Investigation, and every other federal agency with a possible input. Like crown jewels, too, they are protected to within an inch of their lives. In all my years in the CIA, I never once was given access to a PDB, and I was by far the rule, not the exception. Compartmentation rules forbid it. Sources and methods are too valuable.
The Aug. 6, 2001, PDB, in short, represents the very best intelligence we then had on Osama bin Laden and his plans.
So, Mr. Baer asks, how good was the August 6, 2001 PDB?:
In fact, pretty awful. The first item in the PDB refers the president to two interviews that Osama bin Laden gave to American TV in 1997 and 1998. In the interviews, bin Laden promises to “bring the fighting to America,” following “the example of World Trade Center bomber Ramzi Yousef.” As it turns out, bin Laden was telling the truth, but that’s not the point. In intelligence documents as in corporate reports and the evening news, the best stuff goes up top, and in this case the best was cribbed straight from the boob tube.
How about items two and three? The information in both relates to bin Laden’s intention to attack the U.S., but it is from “liaison services” — i.e. foreign governments. We now know from leaks what those liaison services were, but we don’t know the provenance of the information. Was our friendly liaison reading it in the local paper? Was it fabricating, as happened with the Italians and the Niger yellow cake that was supposedly going to Saddam Hussein? The CIA rule used to be that you never ever trust liaison reporting unless you can confirm it with your own sources. Imagine The Wall Street Journal relying on Mad magazine for its investigative sourcing, and you’ll see just where such sloppy vetting can lead.
And what of the PDB’s disclosure of a bin Laden cell in New York recruiting Muslim-American youth for attacks? Mr. Baer is not impressed:
Not until three-quarters of the way through the PDB do we finally get to our own intelligence: a clandestine source who reported directly to a U.S. official that “a bin Laden cell in New York was recruiting Muslim-American youth for attacks.” Why bury this seemingly valuable nugget? Perhaps because our own source was dead wrong. Sept. 11 was planned and organized in Afghanistan and Germany. The 19 hijackers found their own way here and relied on their own funds. Support inside the U.S. came from unwitting contacts. No American Muslim was recruited to help the hijackers.
What’s in the PDB is damning enough, but to me, maybe the most alarming part is what’s not there. In the entire document — this crown jewel of intelligence — there isn’t a single mention of Saudi Arabia, the real Ground Zero of 9/11. Apparently, we had no idea suicide bombers were being recruited there or that cash was being raised for an attack on America.
Mr. Baer closes with a cautious observation regarding the future of American intelligence gathering:
In his testimony before the 9/11 Commission, CIA director George Tenet — the most candid of any of the witnesses, by the way — said we need five more years to catch up. I think he’s optimistic. It takes a generation to build an effective clandestine service. In the meantime, we have no choice but to rely on the Saudis to tell us whether we need to worry about all the killing going on in the Kingdom, whether it really has the petroleum reserves it claims to have, and a lot of other issues vital to our national security.
Personally, I would like to have my own source to tell me what’s happening inside the Kingdom’s fire-breathing mosques. That’s the only way we’re going to find out if more young Saudis are being recruited and money raised for another 9/11. Until then, we’re flying blind not just on Osama bin Laden but on Islamic extremism throughout the Arab world and our own. That’s the opposite of intelligence.
Over the past generation, each Democratic and Republican administration has contributed in varying degrees to the progressive evisceration of the American government’s intelligence gathering capability. The government’s failure to anticipate the 9/11 attacks was in large part the result of that gradual weakening of intelligence over the past 30 years. Consequently, during this political season, make sure that any politician who criticizes the present administration’s production or use of intelligence is not one of the politicians who was contributed to the demise of such intelligence in the first place.
Doing business in Russia — not for the fainthearted
On the heels of this announcement regarding Russian oil giant Yukos’ default on $1 billion in bank debt, this Wall Street Journal ($) article provides an excellent overview of Exxon‘s travails in attempting to make a major investment in Yukos. The entire article is well worth reading, and here are several excerpts:
Exxon and many other Western oil companies had big ambitions when they flocked to Russia looking for deals after the collapse of communism in 1991. Once the world’s largest oil producer, the former Soviet Union represented the biggest new opportunity for the world’s oil companies in a generation.
But the story of Exxon’s delicate dance with Russia shows that the opportunity has been much more elusive than the oil giants and the Western political leaders hoping for an alternative to Middle Eastern oil envisioned. Russian President Vladimir Putin, whose methodical strengthening of Kremlin authority has fueled fears he is undermining democracy, has increasingly sought to keep the state’s hand in the oil industry, which was almost completely privatized in the 1990s.
U.S. officials privately acknowledge that highly publicized efforts to diversify energy sources by cooperating with Russia have largely turned out to be a dry hole. Exxon officials declined to comment on anything related to a possible Yukos pact. The Kremlin press office declined to respond to a detailed request for comment.
As Exxon pursued the investment with Yukos president, Mikhail Khodorkovsky, the following exchange and incident occurred after one negotiating session:
After the session, where the exchange about Russia’s oil reserves took place, Mr. Khodorkovsky was asked if the Kremlin would allow him to sell a majority stake. “Political realities here change every day,” he said.
Moments later, as most panelists and audience members crossed the hall for a speech by President Putin, Mr. Khodorkovsky got an urgent cellphone call from his wife. She told him their house was surrounded by police.
As Exxon pressed on for an investment in Yukos, Russian government control tightened:
In an interview published that day on the Kremlin’s Web site, Mr. Putin was asked his view of Exxon buying 40% of Yukos. Mr. Putin said he would support Exxon’s activities, but that “it would be right” for Exxon to consult in advance with the Russian government on such a large deal. Russian oil-industry executives detected a cautionary tone, but Exxon officials remained confident their deal was on track, according to people familiar with the situation.
Mr. Khodorkovsky held a defiant news conference at Yukos’s new Moscow headquarters the Monday after the police searches. “If the goal is to drive me from the country or put me in jail,” he told a room packed with TV cameras and reporters, “they’d better put me in jail.”
On Oct. 25, they did. Heavily armed agents stormed onto his rented jet at a refueling stop in Siberia. He was flown back to Moscow.
The message from Exxon’s experience is clear — Russia will gladly accept foreign investment so long as Russian control of the assets and business is not disturbed. Frankly, Russia needs a few (maybe more) of dwindling foreign investment before its unrealistic position will change.
Making peace with pot
Eric Schlosser writes this interesting op-ed in the NY Times on the continued high costs associated with the criminalization of marijuana use, in which he observes:
This year the White House’s national antidrug media campaign will spend $170 million, working closely with the nonprofit Partnership for a Drug-Free America. The idea of a “drug-free America” may seem appealing. But it’s hard to believe that anyone seriously hopes to achieve that goal in a nation where millions of children are routinely given Ritalin, antidepressants are prescribed to cure shyness, and the pharmaceutical industry aggressively promotes pills to help middle-aged men have sex.
Vijay wins Shell Houston Open
Vijay Singh — the second-ranked golfer in the World Rankings — won the rain-delayed Shell Houston Open today by two strokes with a 72 hole total of 277, 11 under par. Singh shot a 69 in the final round to hold off 48 year old Scott Hoch, who shot a 68 and finished in second place at 279. Here is the final leaderboard.
Citgo moving to Houston
Citgo Petroleum Corporation. is expected to announce today that it plans to relocate its headquarters from Tulsa, Oklahoma to Houston. In addition to the economies of being located among Houston’s many major energy companies, the move makes sense because most of Citgo’s vendors, and the customers of Citgo’s parent — Petroleos de Venezuela SA — are located in Houston. Update: Here is the Chronicle story on the move.
Citgo is the nation’s fourth-largest retailer of gasoline, with 13,500 outlets. It also operates three oil refineries in the United States and owns a 42 percent interest in another refinery in Houston. The company will move approximately 700 jobs to Houston, leaving about 300 in Tulsa. As an inducement to make the move, Citgo will receive a $5 million grant from the state of Texas and $30 million in low-interest loans from the cities of Houston and Corpus Christi, where Citgo operates a major refinery.