Congress Should Stop Attacks on Mylan

The congressional attacks against pharmaceutical company Mylan (NASDAQ: MYL) for the pricing of its EpiPen is nothing less than a jaw-droppingly hypocritical slap in the face of free market capitalism.

Among the most vocal last week was the Democratic House Representative from my home state of Maryland, Elijah Cummings, who pointed out Mylan marked up the price of its EpiPen product to $600, while it costs the company only a few dollars to produce.

Cummings said Mylan “jacked up the price of a lifesaving product for no discernible reason” other than “to get filthy rich at the expense of our constituents.”

And the anti-corporate heat didn’t solely come from Democrats, as you might expect.

Representative John Duncan (R-TN) told Mylan CEO Heather Bresch, “The greed is astounding, it’s sickening and disgusting… I’m a very conservative, pro-business Republican, but I am really sickened by what I heard today, and what I’ve read before about this situation.”

So I think it’s clear that Mr. Cummings and Mr. Duncan are both saying here that asking $600 for a lifesaving product that only costs a few dollars to produce is simply too much.

And they would agree such a markup was simply “to get filthy rich at the expense of our constituents” and they’re “sickened and disgusted” by the “greed.”

Ok, well, let’s take a look at another private product… another essential life tool… one with a more incredible price markup… and one that Congress already essentially helps regulate…

The United States dollar.

In his most recent book, The Curse of Cash, Kenneth Rogoff points out that it costs 12.3 cents to produce a 100-dollar bill. And of course, you can trade that new 100-dollar bill for one already in circulation, effectively selling it.

So, the markup the Federal Reserve is effectively putting on 100-dollar bills is 81,200%!

But Congress is going to jump down Mylan’s throat for essentially doing the same thing?!

There are actually different estimates about the actual production costs of Mylan’s EpiPen. Some of these cost estimates go up to $35 per pen. But let’s assume Mylan only spends one single dollar on production, and it’s asking $600. That’s a 60,000% price markup, still below the Federal Reserve’s markup on $100 bills (which make up 80% of the total $1.4 trillion in physical U.S. paper currency).

If Mr. Cummings and Mr. Duncan are so “sickened and disgusted” by the “greed” of what is even the low-end estimate of a 60,000% price markup, then surely they must have something to say about an 81,200% price markup.

And here’s the real kicker to all this…

Congress most likely already has the direct legal authority to do something about the Federal Reserve’s markup on its currency notes!

Now, here’s where it’s important to remember that the Federal Reserve is not exactly a government organization. The Federal Reserve is independently operated with shareholders, who are its member banks. But the Federal Reserve is also very heavily regulated…

By f-ing Congress!

In a handful of countries, like China, the central bank is completely nationalized. But in most countries, including the United States, central banks are independently operated but derive their authority to operate from government. In other words, most central banks, including the Federal Reserve, are essentially controlled by a mix of both independent and national interests.

In the U.S., the Federal Reserve derives its authority from Congress. In fact, Congress has a lot more authority over the Federal Reserve’s monetary policy than you might think.

During the Gold Clause Cases of 1935, the Supreme Court ruled that Congress has the power expressly to prohibit and invalidate any contracts (even if made previously valid) when they interfere with carrying out any monetary policy Congress is free to adopt.

In short, Congress can invalidate any contracts (written, verbal, or implied) it currently has with the independently operated Federal Reserve when they interfere with whatever monetary policy it wants, within legal boundaries. But since Congress also benefits from the Federal Reserve’s markup on its currency, it has no motivation to curb it.

This markup we’re talking about here is called “seigniorage.” Seigniorage is essentially the face value of a currency minus its cost of production.

Now, as you can imagine, this is quite a profitable business. Governments and central banks around the world rake in billions annually from seigniorage. In fact, I would argue that seigniorage is one of the single most profitable legal businesses in history.

But in essence, seigniorage is a tax… an inflation tax on the note holders. This tax redistributes real resources (value from your savings and money) to the currency issuer (the Federal Reserve and U.S. government).

In The Curse of Cash, Kenneth Rogoff points out that the Federal Reserve and U.S. government made $70 billion in revenue from seigniorage in 2015.

Between 2006 and 2015, U.S. revenues from seigniorage totaled 0.4% of GDP!

But let’s attack a pharmaceutical company (not even a big one) for its price markup?

Should we next drag Major League Baseball in front of Congress to explain why it allows vendors to sell warm beers for $12 a pop?

Should we force Starbucks to explain why it charges $5 for a 20 oz. coffee or bend the arm of Comcast to justify a $200/month cable bill?

Should we march exotic dancers in front of a congressional hearing to have them explain why they think they deserve hundreds of dollars per night in profit with the absolute bare minimum of clothing investment?

Actually, that sounds like a hilarious setup… so, yes, let’s do that one.

Now, of course, some are going to point out that while the Federal Reserve’s product is a unit of currency, Mylan’s product is a lifesaving tool. And comparing EpiPens to U.S. dollars is akin to apples and oranges.

But without dollars, you simply wouldn’t be able to buy EpiPens, or anything else for that matter. So even though the dollar is only a unit of currency, it’s an intrinsic part of the transaction we’re talking about here, and can even be considered “lifesaving” because of its purchasing power.

In short, the U.S. dollar is not a “luxury” product. It’s an essential tool for labor storage and exchange. The Federal Reserve, its member banks, and the U.S. government see tens of billions of dollars in profit from this essential tool in what is essentially “free money” every year. But Congress is going to ignore that and jump down a pharmaceutical company’s throat for its profit price markup.

The congressional attacks on Mylan, however, are more than just hypocritical. There is simply a logical inconsistency with putting profit regulations or capping on a for-profit business or industry. And that’s the very simple fact that the intrinsic nature of a for-profit company is to profit.

Every organization (and organism) must be self-sustaining to a minimum extent, or else it will fail (or die). However, that “minimum extent” is not equal among all organizations.

An animal can survive with a zero-sum gain in terms of calories. It simply needs to eat enough calories to survive long enough for its next meal. For organisms, the level of self-sustainability can potentially be a zero-sum game.

The same goes for non-profit organizations, charities, churches, etc. These kinds of organizations can potentially survive with a $0.00 balance at the end of balance sheet.

But for-profit businesses must profit. They cannot survive with a $0.00 balance. And that’s simply due to the competitive nature of the marketplace. Investors won’t finance firms we know can’t (or won’t, due to regulations) provide a return on our risk.

What I’m getting at here is that while organisms and non-profit organizations can be self-sustaining with a zero-sum balance, for-profit businesses cannot.

For-profit businesses have a higher level of need in terms of sustainability. And that includes profit. It’s a very basic idea. But it’s one that Congress is seemingly forgetting when chastising Mylan.

Lastly, the demonizing of Mylan’s profit erodes fundamental ideals of free market capitalism. Now, let me say here that I’m not an anarcho-capitalist by any means. And I’m sure you’re not, either. There’s at least some room for debate over directly marketing and selling addictive, proven-dangerous products like cigarettes to children. But my economic beliefs are absolutely laissez-faire in general. So the attacks on Mylan are especially upsetting to me.

I believe such attacks open the door for profit regulations and/or capping, which I believe is generally anti-progressive. There is, of course, debate over the merits of free market capitalism. And I’m not going to try to persuade you either way.

But if you think Congress was being hypocritical with the attacks on Mylan, or if you believe these hearings are threats to laissez-faire economics as I do, please state your concerns to Representative Elijah Cummings (D-MD) by emailing him here or Representative John Duncan (R-TN) by contacting him here.

I will be forwarding this letter myself to both representatives.

Until next time,

Luke Burgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.