HIGH PRICES TODAY, EFFECTIVE DRUGS TOMORROW:

America pays higher prices for drugs because the government doesn’t negotiate with insurers. The government doesn’t negotiate with insurers in part because we have a powerful pharmaceutical industry that lobbies the government not to, but also in part because we’re not willing to have the government say, “Nope, we’ve decided you can’t sell your expensive treatment here,” which is a major way that other governments get their bargaining power. Telling Americans they can’t have stuff is really politically unpopular, so we mostly don’t do that. Instead, we pay some of the highest prices in the world for prescription drugs.

That sounds terrible! But it also has a benefit: Those profits give drug companies the necessary incentive for innovation.

This issue is often misunderstood on the left, where the argument goes: “If we slashed their profits by 90 percent, they’d still be making money, so obviously they don’t need such high profits in order to do research.” This is a fundamental misunderstanding of how profits function in the pharmaceutical industry, where funding research is not a budget problem; it’s an investment problem.

Most lefty policy pronouncements are based on fundamental misunderstandings of economics. The rest are based on the hopes that voters have a fundamental misunderstanding of economics.