Debts, Deficits, And Patent Monopolies

Board, Blackboard, Economy, Inflation, Money

Image Source: Pixabay

Yes, it is spring. The flowers are blooming, the birds are singing, and the deficit hawks are whining. The proximate cause is President Biden’s new budget, which will push the ratio of government debt to GDP to its highest level ever.

The question is whether this should bother anyone who has a life? The projections show that the debt to GDP ratio will rise to 117 percent of GDP in 2031. If that sounds scary, consider that Greece’s debt to GDP ratio is over 180 percent. And, the bond vigilantes don’t seem to be too bothered by this. The interest rate on long-term Greek debt is 0.8 percent, compared to the 1.6 percent on U.S. Treasury bonds.

Of course, if we really want to go big we can look at Japan, where the debt to GDP ratio is approaching 250 percent of GDP. It is paying 0.08 percent interest on its long-term debt.

But let’s get to the issue at hand, how patent monopolies are like government debt. At the most basic level, we have to understand that patent (and copyright) monopolies are a way the government pays for things it wants. Instead of using government funds to pay drug companies to develop new drugs and vaccines, we reward them with a patent monopoly. (Actually, in some cases, like Moderna, we do both. We pay them and give them a patent monopoly.)

In the government’s accounting, we treat patent monopolies and spending very differently. The grant of a patent monopoly does not appear in the government’s budget, so we can award these monopolies as an alternative to direct spending if we want the deficit to appear smaller.

We sometimes have literally gone this route of using a patent monopoly, or an equivalent grant of exclusivity, as a substitute to direct spending. In the case of prescription drugs, in order to get drug companies to do pediatric trials, the government will award a company a six-month period of exclusivity, beyond any patent duration, in order to pay for the trial. 

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