But capping prescription drug prices is not the solution. In effect, the proposal amounts to a tax on pharmaceutical companies.
The basic idea is that if drug companies attempt to charge prices above a maximum set by the government, the federal government will simply tax the difference. Although the proposal is seen as a major revenue boost by the Congressional Budget Office, even many liberals fear it could hurt innovation.
The president also had some ideas to help workers: increases to the minimum wage, additional regulations targeting pay gaps, and legislation to give unions the upper hand when organizing new workplaces. These are all controversial measures that, whatever their merits, are likely to increase costs for American businesses – and make the inflation problem worse in the short term.
And then there was his worst proposal of all, at least from an inflation perspective: his promise that the federal government will “buy American.”
The pledge goes far beyond mere reservations for American businesses and apparently requires that all federal purchases be, in the president’s words, “American-made from start to finish, 100% complete.” This sweeping commitment to essentially prohibit the purchase of foreign goods would increase costs for the US government and lead to worsening inflation.
There are smart ways to develop American capability. A general ban on buying foreign goods is not one of them.
In fact, Biden’s best idea of the night was a proposal that would help increase American manufacturing capacity. He was right to tell Congress to pass the Bipartisan Innovation Act.
The bill would do two things: First, it would provide billions of dollars in funding to Congress to help expand semiconductor manufacturing in the United States. It has become apparent during the pandemic that the lack of this capability could hold the US economy hostage.
Second, the bill would provide several hundred billion dollars in funding for basic research. This is the kind of public funding that has the best chance of triggering a real breakthrough and creating the scientific basis for a technology that the private sector can leverage.
However, as useful as this bill is, it is unlikely to do much about inflation anytime soon. Basic scientific research usually takes decades to bear fruit. It is crucial that the United States make these investments, but they must be linked to a broader growth agenda. This is what was missing from the president’s speech.
Related to Bloomberg Opinion:
• Buy American provisions won’t make country stronger: publishers
• Evidence for minimum wage is mixed at best: Tyler Cowen
• Can Mark Cuban help you pay less for your prescription drugs? : Lisa Jarvis
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was previously vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.