Publicly Funded Inequality

WASHINGTON, DC – One of the factors driving the massive rise in global inequality and the concentration of wealth at the very top of the income distribution is the interplay between innovation and global markets. In the hands of a capable entrepreneur, a technological breakthrough can be worth billions of dollars, owing to regulatory protections and the winner-take-all nature of global markets. What is often overlooked, however, is the role that public money plays in creating this modern concentration of private wealth.

As the development economist Dani Rodrik recently pointed out, much of the basic investment in new technologies in the United States has been financed with public funds. The funding can be direct, through institutions like the Defense Department or the National Institutes of Health (NIH), or indirect, via tax breaks, procurement practices, and subsidies to academic labs or research centers.

When a research avenue hits a dead end – as many inevitably do – the public sector bears the cost. For those that yield fruit, however, the situation is often very different. Once a new technology is established, private entrepreneurs, with the help of venture capital, adapt it to global market demand, build temporary or long-term monopoly positions, and thereby capture large profits. The government, which bore the burden of a large part of its development, sees little or no return.

One example, flagged by the economist Jeffrey Sachs, is Sovaldi, a drug used to cure hepatitis C. As Sachs explains, the company that sells it, Gilead Sciences, holds a patent for the treatment that will not expire until 2028. As a result, Gilead can charge monopoly prices: $84,000 for a 12-week course of treatment, far more than the few hundred dollars it costs to produce the drug. Last year, sales of Sovaldi and Harvoni – another drug the company sells for $94,000 – amounted to $12.4 billion.