There have been many complaints about prescriptiondrug prices lately. Critics seem to think drugs cost toomuch, and they point to drug company profits as proof.

The conventional wisdom — reflected by reporters who weredoing stories on the presidential candidates’ proposedMedicare prescription drug benefit — is that the pharmaceuti-cal industry is the most profitable industry in the country.The implication is that drug companies make a lot ofmoney, so what’s the harm if the federal governmentdips into their pockets by forcing themto charge a little less?

Merrill Matthews Jr., Ph.D.

J A N U A R Y2 0 0 1

INSIDE:Charting The

Road Map for Tax Reform

ALSO:Unlocking ThePrivacy Issue

Drug Company Profits. There are really two phar-maceutical industries: one that mass-producesaspirin, cold medicines, ointments and other over-the-counter drugs. The other pharmaceutical indus-try — the “pharmatech” industry — is a NewEconomy industry, where initial costs to create andtest a patentable item are very high, but onceachieved the reproduction costs are usually minimal.

While it is true that many prescription drug man-ufacturers are profitable, and several have been con-sistently profitable over the years, those profits arenot out of line with other successful New Economycompanies and industries thatproduce products in highdemand.

According to Fortune maga-zine’s annual survey of the top1,000 companies, the drugindustry’s median profit — themiddle point between the mostand least profitable of the 12drug companies included —was 18 percent (profit as a per-cent of revenue). Amgen hadthe highest profit at 33 percent,with American Home Productsthe lowest, having lost 9 per-cent.

Most companies rangedbetween 15 and 20 percent.

Other Profitable Companies. Profitable, to be sure.But that isn’t the whole story. Many companies thatspend far less on research and development makemore money than even the most profitable drug com-panies. Nabisco, for example, reported a 36 percentprofit last year, according to Fortune. As the figure onthe back page shows, Coca-Cola, which produces aproduct that is competitively priced and very afford-able, had higher profits than the drug industry medi-an for most of the 1990s.

Or how about The New York Times, which printsso many stories about excessive drug company prof-its? The Times made 10 percent last year. Gannett,publisher of USA Today, made 17 percent — right upthere with the drug companies.

Of course, no one is accusing The New York Timesor Gannett of price gouging. Indeed, it’s the news

media that are voicing most of the criticism. Oh, anddid I mention that Tribune, a media conglomeratethat includes the Chicago Tribune, the LA Times and anumber of broadcasting stations, made 46 percentprofit, according to Fortune?

When CBS ran the final segment of its hit pro-gram “Survivor,” it charged $600,000 for a 30-secondad. At the time, that was the highest any networkhad charged for a slot in prime time, up from the pre-vious high of $319,000. This fall, however, the popu-lar program “ER” will also command $600,000 for a30-second ad. The networks are very clear that whenthey have a popular show, they charge as much asthe market will bear. By contrast, one Celebrextablet, which costs a little more than $2.00, takendaily allows people with arthritis and other chronicpain to return to their activities.

So if CBS news were doing a story on price goug-ing, which would most likely be the subject: drugcompanies or the networks?

New Economy Companies and Monopoly Profits.Software compa-nies are importantto this discussionbecause they, likethe drug compa-nies, are NewEconomy compa-nies. That is, theytoo make knowl-edge-based prod-ucts, and bothspend a lot ofmoney up frontresearching anddeveloping thoseproducts.

For example,this year pharma-

ceutical companies will spend about $24 billiondeveloping and testing new drugs — about 21 per-cent of their sales, more than any other industry andtwice as much as the computer software industry.However, even though software companies spent lessthan drug companies on R & D, Microsoft reported a39 percent profit last year, while BMG Softwarereported 28 percent.

Once a knowledge-based company produces aprototype, mass producing the product is usuallyvery cheap. Companies charge significantly morethan it costs to produce the product in order torecoup research and development outlays. Andwhile economists understand this process well, it canbe difficult to defend from a public relations stand-point when a low-income person who wants or needsthe product, but can’t afford its retail price, is going

2

DRUG COMPANY PROFITS: PROBLEM OR SOLUTION?

Source: “Fortune One Thousand Ranked Within Industries,” Fortune, April 17, 2000

0% 10% 20%

Median Returns for Some of the MostProfitable Industries (1999)

PROFIT AS A PERCENT OF REVENUE

public with the complaint. Without the initialoutlays, the product would never have beencreated; and without more outlays, the com-pany won’t continue to create new products.But those facts usually get lost in the discus-sion.

Of course, pharmaceuticals and softwareare not the only products facing this pricingdilemma. Novelist Stephen King can com-mand millions of dollars in advance royalties,which explains why a publisher might charge$25 for one of his novels that only cost a dol-lar or two to print. Similarly, $39.95 for amovie that has just been released in video ismuch more than it actually costs to create acopy of the film. In both cases, companiesmust lay out millions of dollars up front forauthors and actors, and make their return bycharging much more than the marginal cost ofmaking one more copy.

Outgoing Secretary Lawrence Summersunderstands the principle well. In a Mayspeech delivered in San Francisco and entitled“The New Wealth of Nations,” Summersnoted that in an information-based economy,“the only incentive to produce anything ispossession of temporary monopoly power —because without that power the price will bebid down to the marginal cost, and the highinitial fixed costs cannot be recouped.”

Yes, drugs can be expensive — in somecases, very expensive. But if the drug com-panies are allowed to continue their R & Dunfettered, we will see more drugs that, whileexpensive, will make our lives better. Thus,profits are not the problem, they are the solu-tion — ensuring that consumers have accessto advanced pharmaceutical products foryears to come.

It’s the Demand, Stupid. Which brings upan important point: Drug companies aren’t prof-itable because they charge so much; they are profitable becausethey make products that patients and their physicians want.While total spending on pharmaceuticals has been growingrapidly — averaging a 13.7 percent increase between 1995and 1999 — most of that spending is due to an increasedvolume of sales, not higher prices. For example, while pre-scription drug sales grew by 18.8 percent in 1999, 14.6 per-centage points of that growth was due to increased volumeand new products, while only 4.2 percentage points of theincrease was due to higher prices.

The Politics of Drug Prices. Nevertheless, drug companyprofits have become a political issue as both Democrats andRepublicans look for a way to provide seniors with a pre-scription drug benefit. However, it is not clear that there isa prescription drug “crisis” — about 65 percent of seniors

already have some type of cover-age for prescription drugs — orthat either of the primary plansproposed by Republicans andDemocrats would work.

If politicians really want tocontrol prescription drug prices,there is a better way to do it thanby government fiat. It’s calledcompetition. But can prescriptiondrugs, many of which are protect-ed by a patent, act like a real mar-ket? Yes. The drug industry isalready very competitive, with nodrug company having more than7.2 percent of the market. Andchanges in the health care systemand patients’ ability to access infor-mation are making the marketeven more competitive.

Expanding Competition True, thepharmaceutical industry will likelynever be as competitive as someindustries. Several factors, such aspatent protection and the con-sumers’ price insulation throughhealth insurance, will necessarilylimit the industry’s ability to actlike a real market. However, stepssuch as reforming Medical SavingsAccounts that would reduce insu-lation from the cost of health careor eliminating the FDA’s “efficacy”requirement would go a long wayin making the industry more com-petitive. And with that competi-tion would come more choice andlower costs. And if drugs areavailable and easily affordable,who cares how much money drugcompanies make?

Conclusion. The new Congress is committed to lookingat a prescription drug benefit. However, both theRepublican and Democrat plans will create new, costly pro-grams. If Congress is convinced it must do something, itshould create a catastrophic drug benefit plan that wouldonly pay if seniors spent more than, say, $3,000 a year. Sucha plan would provide a safety net rather than an entitle-ment, helping only those confronted with truly catastrophicexpenses.

3

From Research to the MarketplaceSuppose it takes $500 million (the number

usually cited as the average cost to develop anew drug) to develop a new pain pill. At $2 apill — roughly $60 for a month’s prescription —a drug company would have to sell 250 millionpills just to recover its research costs. Thatworks out to nearly 140,000 people taking onepill a day for five years just to break even —and that’s before the pharmacy marks up theprice or the manufacturer makes a profit.

Some of the new specialty drugs that targetuncommon diseases and are therefore spreadover relatively few people, will have to cost alot more. Clearly, we are entering a period inwhich more and more drugs will be available, butsome of them won’t be cheap.

Merrill Matthews Jr. is a visiting scholar with the Institute for Policy Innovation.This article was taken from his recent policy report published by the IPI Center forTechnology Freedom titled Prices, Profits and Prescriptions: The PharmatechIndustry in the New Economy. Copies are available upon request, and also areavailable on our website at www.ipi.org.

4

Support for tax reform in the U.S. is very strong,and has been strong for some time. Virtually everyone, from wage earners to

CPAs and economists understand that our tax code is needlessly complicated, generally unfair, andcounterproductive. The question is not whether we need a change. The question is: What kind of change, andhow do we get there?

Thus far, tax reformers have been stymied in their attempts to build consensus for tax reform. Sothe Institute for Policy Innovation is undertaking a major project to provide a “Road Map to Tax Reform,”which will point tax reformers in the right direction, and identify the potholes, road hazards, and wrongturns that could scuttle tax reform.

But before we head down the road to tax reform, we need to take a careful look at where weare now—our starting point.

A Costly Trip. The U.S. has “The Most Expensive Government in World History,” accordingto Stephen Moore, author of the first paper in the IPI series. This year, federal, state and local govern-ment spending in the U.S. will, for the first time in history, top $3 trillion. It wasn’t always so.Historically, the public sector of the U.S. economy was much smaller than it is today. In 1800, thefederal government spent only $20 per person; this year it spent $6,500. In 1900, the federal gov-ernment consumed less than 5 percent of total economic output; while in 1999 it consumedroughly 19 percent. The roots of government expansionism date back to the days of the GreatDepression and FDR’s New Deal in the 1930s. What might amaze the average reader is thatas recently as the 1920s, the federal government was still quite inexpensive and insignificant,accounting for just about 5 percent of national income. Today, it takes between 20 and 25percent of national income. And government at all levels has swollen from 10 percent to40 percent. In fact, over the next five years the federal government is expected to spendmore money than was spent on World Wars I and II, the Civil War and theRevolutionary War — even after adjusting for inflation. And in peacetime!

Road Hazards. Three factors led to the explosion in taxation and governmentspending:• The first was the advent of the income tax, which soon became a revenue-gener-ating machine when compared to previous sources of income, primarily tariffsand land sales. As Congress demonstrated in the most recent budget cycle, morefunds mean more spending.• The second force behind the growth of government was the two World Warsand the Great Depression. James Madison once wrote, “Crisis is the rallyingcry of the tyrant.” Just consider that before World War I the top tax rate was7 percent. By 1920 it had risen to the once-incomprehensible level of 70percent. Such tax rates began to stifle economic growth, prolonging theGreat Depression. Marginal tax rates that high are a one-way roadgoing the wrong way.•The third development that has led down the path of massive gov-ernment spending is the birth of the modern welfare entitlementstate, which began with the federal government’s first and mostexpensive income transfer program, Social Security, but increasedexponentially in the 1960s when Lyndon Johnson launched theGreat Society.

The Brakes Are Gone!!! Once created, these incometransfer programs proved virtually impossible to restrain.Although welfare reform has been very successful, that leg-islation reformed only the cash grant program. The federalgovernment still transfers billions of dollars every year,imposing a huge tax burden on the average family. Justconsider:

5

• Government now spends about $27,000 a year for every family in America — doublewhat it spent in 1960 and 14 times what it spent in 1900, even after adjusting for inflation.

• The winner in the struggle for budget increases has been domestic expenditures. In 1900 about 1 percent of GDP wasspent on domestic outlays. By 1950, that figure had grown to about 5 percent, and it now stands at 16 percent.

• Today, government consumes almost half of national income. Thus, we work nearly half of our lives to comply withand pay for government.

The Rearview Mirror. To put it simply, we have taken this road of expanding government spending so longand so far that most Americans cannot remember a time when government didn’t play a major role in their pock-

etbooks and their lives. There are at least four negative results from heading down this path:1. Continued expansion has led to a more centralized, bureaucratic and less citizen-responsive government. In

short, government no longer exists to serve the people; the people exist to serve the government. 2. Bigger government has meant less efficient government. If we are spending 16 times more (as a percent of

GDP) on government than we were in 1900, are we getting 16 times the value? Or are we spending moreand enjoying it less?

3. Larger government, higher taxes and more regulations are restricting economic growth. As a result, itwill take a lot longer to reach our destination than it would have had we taken the other path.

4. In exchange for this increased government, citizens are surrendering their economic freedom andindividual liberties. By choosing the leftward path, we almost guarantee that choices in the future

will be severely limited.Time for an Overhaul. America is a vastly different place than it was in 1913, when the con-

stitutional amendment creating the income tax was ratified. It’s a vastly different place than itwas during FDR’s New Deal in the 1930s. It’s even been 35 years since Medicare, the jewel of

Johnson’s Great Society, went into effect. If we were taking a trip today, we probably wouldn’t take an old Model T from 1913,

nor would we take a 1930s model Packard. We probably wouldn’t even want to take a1965 Mustang. All of those methods of travel represent old thinking — or what we might

call the Old Economy. Even if they were right for their time, they have outlived theirusefulness.

Businesses know this. As a result, they are constantly updating, upgrading, down-sizing and streamlining. Not so with government.

Just think about it. Government at all levels will spend $3 trillion this year,and many states still use 19th century technology such as manual punch cards for

elections, as the recent presidential election demonstrated. We need a change!Tax and spending policies that may have been appropriate 30, 60 or 90 years

ago are out of date.Are There Ways to Address These Problems? Yes, by taking the

right path to reform. Stephen Moore argues that we can reduce the size ofgovernment if we term-limit public officials, require a supermajority

(two-thirds) vote to raise taxes and establish a goal of cutting govern-ment taxation and spending to about 25 percent of national income.

If we follow the Road Map to Tax Reform we will maintain a strongand vibrant economy, with opportunity for everyone. Government

will be smaller and our paychecks will be bigger. Best of all, we,not Washington bureaucrats, will be in charge of our own des-

tinies—or should we say destinations?

This article is the first in a series, highlighting IPI’s Road Map To Tax Reform pro-ject. The policy report referenced in this article was written by Stephen Moore,

titled The Most Expensive Government in History. Stephen Moore is Directorof Fiscal Policy Studies at the Cato Institute.Copies of this and all IPI reports are

available on request, and on our website at www.ipi.org.

“Those who can’t do—teach.” At least so goes the popularsaying. In the increasingly controversial area of privacy concernsthe federal government seems to be acting in a similar manner,something like “those who can’t figure out—legislate.”

The privacy debate has raged on Capitol Hill, inside theBeltway, and to a good extent, across the Web last year. Thedebate will get hotter this year as privacy becomes one of thebiggest technology-related issues debated, resulting in some sort oflegislative action regarding privacy protection. This debate willlikely generate far more heat than light as some of thebasic elements are far from clearly understood orcommunicated.

Most do not understand the manyfacets of the privacy debate and closelyrelated issues. Take a simple situationfrom the past season — gift giving.A gift is wrapped by you and pre-sumably stays a secret until thetime of opening by the personintended to receive the gift. Okay,what is the privacy concerninvolved? Is it that there is someassurance that the intended recipi-ent is the one who will open thegift and see the contents orthat it will not be openedearly? No, that is a securityissue. What about that thegift will be in the box? No,that is also security. Howabout to know who thegiver and receiver are?No, not that either. Theonly privacy interest in theentire transaction is that allyou have to do is fill outthe “to” and “from” on thegift tag and then revealnothing more of yourself.

If you can get thisexample down then youare well ahead of most.The daily rhetoric routinelymistakes security issues, thatis, how safe are items stored on-line or on your computer, with pri-vacy. When a hacker attacks a Web page and grabs the contents,which may include your personal data, then what has developedis an issue of security, not a privacy concern. While some may alsoconsider federal law to dictate the level of protection a companyprovides, this issue is fundamentally different from privacy protec-tion. The analogy in this instance would be that the federal gov-

ernment in an attempt to limit burglary required every home topurchase and install a deadbolt lock. A clear federal invasion, anda clear analogy to computer security issues.

One other area of concern is how much customer service thecountry expects and whether Congress appreciates the impact ofthe decreased customer service that will result from privacy legis-lation.

Where collection of information about a consumer is con-cerned, none of this is much different from the way the world ofcommerce has worked forever. Take for example, the general

goods stores of 100 years ago or even a clothing store today.Would a person take offense if a thoughtful salesperson

remembered a customer’s name from a previousvisit and greeted them accordingly? What if that

same salesperson went out of their way to “setback” some of a particular customer’s favoriteproducts so that they could pick them up thenext time they visited? In some cases wecould imagine that customer providing aphone number so that when a limited ship-ment was coming in they could be notifiedto make sure they arrived at the store intime to make a purchase. None of thesescenarios seem odd or intrusive, in fact we

would characterize them as helpful andperhaps as an example of the “goodold days” of true customer service.

Understanding these fairlysimple points places a person wellahead of most of the country inunderstanding the real privacyissue. Of course, one importantpoint is that once voluntary prac-tices are put in place by anyonethey should be followed, or theyreally are not practices. Whencompanies or organizations aban-don voluntary privacy protectionpractices, they should not be sub-ject to federal intervention. Rather,they simply should face abandon-ment by customers whom theiractions harm.

The decisions Capitol Hill andthe White House make this year and the next will have a profoundimpact on individual privacy. Understanding the issues and howthey relate to everyday life is critical if we are to remain in chargeof our own lives, rather than turning over everyday decisions tothe government.

Bartlett Cleland is the Director of the IPI Center for Technology Freedom.

“ The analogy in this

instance would be that the

federal government in an

attempt to limit burglary

required every home to

purchase and install

a deadbolt lock.”

B Y BA RT L E T T D. CL E L A N D

6

IPI Center for Technology FreedomCohosts Washington Event

The IPI Center for Technology Freedom proudly co-hosted a November“scholars and scribes” technology seminar with the Heritage Foundation inWashington, DC. Both organizations addressed critical issues shaping the rolebetween government and the New Economy.

Round one — Panelists from the technology community, including IPI’sown Center Director Bartlett Cleland and Center Advisory Board memberJames Glassman, also host of TechCentralStation.com, charged governmentwith both threatening and facilitating Internet growth. Experts in the fieldnoted the correct government approach in regards to Internet privacy, intellec-tual property, telecommunications, research and development, as well as thetechnology antitrust cases.

Round two — Joined by influential technology media representing USA Today, National Journal’s Tech Daily, Washington Internet Daily, andInvestor’s Business Daily, the combined panel drew an audience representing technology-related legislative, corporate, policy, and media par-ties. IPI’s Visiting Scholar Dr. Merrill Matthews, also a member of Investor’s Business Daily’s “Brain Trust,” shared his insight from both thepolicy and media worlds.

The IPI Center for Technology Freedom continues to play an integral role in shaping the debate on technology and freedom. We arealways eager to spur intellectual discussion and to provide direction in today’s technology debate. Watch for future IPI Center for TechnologyFreedom events in the nation’s capital — and beyond.

Moderator, AdamThierer (HeritageFoundation), andpanelists: BartlettCleland (IPI), James Glassman (TechCentralStation.com) and RobertAtkinson(Progressive PolicyInstitute) at theWashington event.

IPI Media Hit Parade: Tour 2000The Institute for Policy Innovation “went platinum” in

July with its experts and studies reaching millions ofhouseholds. In addition to a Capitol Hill technology semi-nar and three local events, IPI received numerous citationsand interviews in both national and local television, printand radio outlets. Highlights include:

Associated Press, April & June 2000 - IPI’s Gary andAldona Robbins quoted first on the Social SecurityEarnings Test and later regarding their “analyses prized byWashington officials” Forbes, May 2000 - Only three months out, the IPI Centerfor Technology Freedom secures a lengthy reference regard-ing why not to tax the InternetBarron’s, September 2000 - Full-page editorial on drugprices; by IPI’s Visiting Scholar Dr. Merrill MatthewsNew York Times, November 2000 - Editorial citing “TheFiscal Plans of Al Gore and George Bush: A Comparison”Washington Times, Dallas Morning News, July 2000 -Editorial by Gary and Aldona Robbins on abolishing theestate taxSan Diego Union Tribune, Seattle Post-Intelligencer,Boston Herald, July 2000 - Jack Kemp quotes IPI’s statisticson the estate taxInvestor’s Business Daily, May 2000 - Dr. Merrill Matthewson school reform in his monthly “Brain Trust” editorialSan Diego Union Tribune, March 2000 - Full-page economiceditorial written by the Robbins’ in the Sunday Insight sectionNew York Times, February 2000 - IPI analysis charted inmulti-page articleNewsday, September 2000 - Robbins’ on “Retiring theSocial Security Earnings Test”Rush Limbaugh Show, November 2000 - Robbins’ on theGore/Bush tax plan comparisonCSPAN, February 2000 - Aldona Robbins’ Congressional testimony before the House Ways and Means Committee

Drug Study Goes GlobalHot off the press: IPI’s Visiting ScholarDr. Merrill Matthews takes a new lookat the pharmaceutical debate in a recentreport for IPI. His analysis of the issueis so compelling that it is now appear-ing as “advertorials” in publicationsaround the world as a Pfizer Forum.This opinion/editorial ran in TheEconomist, The Financial Times, andNational Review.

IPI Makes WavesAround Election Day

ZD TV, a prime technologynews network, aired a revealinginterview with IPI’s Gary Robbinson Election Day. Mr. Robbins, asenior fellow at IPI, exposed a newtwist to the Microsoft saga — howthe government’s unrelenting chaseof Microsoft has already taken itstoll on American families, individu-als and the economy. Viewers wereindeed surprised to learn that theaverage American has lost $507 ingoods and services, while the econ-omy’s cut equals nearly 45,000fewer jobs.

But that’s not all. FurtheringIPI’s impact during this particularlyimportant political season, IPI’swork comparing the Bush/Gore taxplans received prominent quotes ina New York Time’s editorial theSaturday before the election. Thisopinion piece was mentioned onMonday – right before peopleheaded to the polls — on the Rush Limbaugh Show.

It just goes to show that —once again — IPI’s commitment totax analysis achieved the excellentattention it deserves.

IPI’s Annual Fundraiser at Texas Stadium scoredbig with friends and supporters. Even the Cowboysmanaged to pull off a victory.

Todd Carter of Panda Energy, Congressman DickArmey and Charles Wylie of Sterling Softwareenjoy the game (above).

Norman Miller of Interstate Batteries converseswith Congressman Armey (below).

7

It is true that most pharmaceutical companies areprofitable. Some critics cite those profits as evidencethat drug companies are price gouging. But the realissue is whether drug company profits are comparable with the profits of other New Economy companies or even of such Old Economy companiesas Coca-Cola. Over the past decade, Coca-Cola frequently showed higher annual profits than thepharmatech industry.

The Board of Directors and staff of theInstitute for Policy Innovation (IPI) join me in thank-ing you for your support of IPI during 2000, and foryour interest in our work. Last year saw the birth ofour new Centers: The IPI Center for TechnologyFreedom, the IPI Center for Education Freedom,and the IPI Center for Tax Analysis. We are pleasedwith the accomplishments of these centers in 2000,and are excited about the opportunity to design andimplement free-market public policy solutions ineach of these areas in 2001.

Getting free-market, limited governmentsolutions implemented has been a challenge formuch of the past year, but at IPI we take the longview, understanding that changes like eliminatingthe estate tax, privatizing Social Security, and reform-ing the tax code take time. But we have clearly seenthe debate on these and so many other issues movein our direction in the past few years, and we aregrateful to have had the opportunity to be agents forsuch change.

That opportunity comes from you, by circu-lating our work among your friends and associates,and by using it as ammunition for your letters to theeditor and in your discussions with family andfriends. But, most of all, it comes from your decisionto financially support our work. We thank you foryour support, and ask you to consider doing whatyou can to make sure we hit the ground running in2001, ready for the challenges and opportunities thenew political order will present to us. It could be avery exciting and productive time, and we look for-ward to the chance to help make America better forour children and grandchildren.

IPI Insights© 2001 Institute for Policy Innovation

Direct all inquiries to:Institute for Policy Innovation250 South Stemmons, Suite 215Lewisville, TX 75067972•874•5139FAX: 972•874•5144Email: ipi@ipi.orgWebsite: www.ipi.org

Publisher……………Tom GiovanettiEditor………………. Betty MedlockDesign……………… S/Concepts

IPI Insights is published fivetimes per year by the Institute forPolicy Innovation (IPI), a non-profit public policy organization.Permission is hereby granted toreprint or otherwise use thismaterial with appropriate attribution. Nothing written here should be construed as an attempt to influence the passage of any legislation before Congress.

The views expressed in this publication are the opinions of the authors and do not necessarily reflect the views ofthe Institute for Policy Innovationor its directors.

Looking Ahead in 2001by Tom Giovanetti President, IPI

• Government now spends about $27,000 a year for every family in America — doublewhat it spent in 1960 and 14 times what it spent in 1900, even after adjusting for inflation.

• The winner in the struggle for budget increases has been domestic expenditures. In 1900 about 1 percent of GDP wasspent on domestic outlays. By 1950, that figure had grown to about 5 percent, and it now stands at 16 percent.

• Today, government consumes almost half of national income. Thus, we work nearly half of our lives to comply withand pay for government.

The Rearview Mirror. To put it simply, we have taken this road of expanding government spending so longand so far that most Americans cannot remember a time when government didn’t play a major role in their pock-

etbooks and their lives. There are at least four negative results from heading down this path:1. Continued expansion has led to a more centralized, bureaucratic and less citizen-responsive government. In

short, government no longer exists to serve the people; the people exist to serve the government. 2. Bigger government has meant less efficient government. If we are spending 16 times more (as a percent of

GDP) on government than we were in 1900, are we getting 16 times the value? Or are we spending moreand enjoying it less?

3. Larger government, higher taxes and more regulations are restricting economic growth. As a result, itwill take a lot longer to reach our destination than it would have had we taken the other path.

4. In exchange for this increased government, citizens are surrendering their economic freedom andindividual liberties. By choosing the leftward path, we almost guarantee that choices in the future

will be severely limited.Time for an Overhaul. America is a vastly different place than it was in 1913, when the con-

stitutional amendment creating the income tax was ratified. It’s a vastly different place than itwas during FDR’s New Deal in the 1930s. It’s even been 35 years since Medicare, the jewel of

Johnson’s Great Society, went into effect. If we were taking a trip today, we probably wouldn’t take an old Model T from 1913,

nor would we take a 1930s model Packard. We probably wouldn’t even want to take a1965 Mustang. All of those methods of travel represent old thinking — or what we might

call the Old Economy. Even if they were right for their time, they have outlived theirusefulness.

Businesses know this. As a result, they are constantly updating, upgrading, down-sizing and streamlining. Not so with government.

Just think about it. Government at all levels will spend $3 trillion this year,and many states still use 19th century technology such as manual punch cards for

elections, as the recent presidential election demonstrated. We need a change!Tax and spending policies that may have been appropriate 30, 60 or 90 years

ago are out of date.Are There Ways to Address These Problems? Yes, by taking the

right path to reform. Stephen Moore argues that we can reduce the size ofgovernment if we term-limit public officials, require a supermajority

(two-thirds) vote to raise taxes and establish a goal of cutting govern-ment taxation and spending to about 25 percent of national income.

If we follow the Road Map to Tax Reform we will maintain a strongand vibrant economy, with opportunity for everyone. Government

will be smaller and our paychecks will be bigger. Best of all, we,not Washington bureaucrats, will be in charge of our own des-

tinies—or should we say destinations?

This article is the first in a series, highlighting IPI’s Road Map To Tax Reform pro-ject. The policy report referenced in this article was written by Stephen Moore,

titled The Most Expensive Government in History. Stephen Moore is Directorof Fiscal Policy Studies at the Cato Institute.Copies of this and all IPI reports are

available on request, and on our website at www.ipi.org.

5