PhRMA: The Most Notorious Rent-Seeker

Our talk in class of rent-seeking brought reminded me of what some consider the most flagrant manifestation of rent-seeking, activities of the pharmaceutical lobby. The pharmaceutical lobby, formally known as the Pharmaceutical Researchers and Manufacturers of America(PhRMA), spent $25.4 million on lobbying activities in 2017, which is a 30% jump from their expenditures in 2016. PhRMA drastically increased their lobbying expenditures in response to President Trump’s hardline stance on drug pricing. They claim to need to price drugs as highly as they do in order to cover the costs of innovation and accurately reflect the value of the drug. The administration, along with most Americans, finds these claims outrageous and drug prices unnecessarily high.

In this example, the rent that pharmaceutical companies are seeking is extremely valuable. It not only includes the economic profit from higher drug prices, but also any additional economic profit gained when healthcare regulation and trade policy favor their industry. Given that pharmaceutical companies earn billions of dollars from blockbuster drugs under current regulatory conditions, the rent (economic profit) they stand to gain is much greater than the amount they expend on rent seeking activities. While $25.4 million is clearly a lot of money, it is relatively small compared to the rent in question. Therefore, I would predict that the percentage rent dissipation, total investment in rent seeking activityrent, would be quite low. In relation to other industries PhRMA is redirecting a lot of resources toward rent seeking activity. However, when taken in the context of the pharmaceutical industry, the resources they are redirecting towards rent seeking are not unreasonable given how valuable the rent they stand to gain is. While PhRMA has too much money and control in politics, their headline-grabbing rent-seeking expenditures are not as wasteful as we all assume.