Gingrich Says He Doesn't Regret Supporting Medicare Drug Plan Which Is Now a $7.2 Trillion Unfunded

(CNSNews.com) -- Former House Speaker New Gingrich (R-Ga.), a likely 2012 presidential candidate, told CNSNews.com today that he does not regret supporting the enactment of the Medicare prescription drug plan which now presents the federal government with a $7.2 trillion unfunded liability.

An unfunded liability is a benefit the federal government has promised to pay that is not matched by tax revenue to fund it and thus represents an anticipated increase in the national debt.

So are you really saying that pharma stocks are not particularly profitable, because they are priced too high?

I am saying that profitability is measured by the rate of return, i.e., profits divided by some base B. When you want some managerial subtleties such as how well the assets are used, you use company's assets as B. When people speak of profitability in popular terms --- "How much money does this company make?" --- that means how much its owners make, and B is therefore equity of the firm. Accordingly, profitability is earnings per share divided by the price of a share or, which is the same thing, the reported earnings of the company divided by the entire market capitalization. The last time I looked, pharma companies are not particularly profitable.

I have also mentioned that under normal free-market conditions, no industry can be consistently more profitable than others because of the free flow of capital. Suppose farma companies do become more profitable for a couple of quarters. Then you will sell your holdings in railroads and buy pharma stocks. This increased demand drives the price of pharma stocks higher and selling drives the price of railroads lower. Profitability of the former drops and of the latter rises. This continues until the (risk-adjusted, etc.) profitability of both become equal. So, yes, an industry can be more profitable than others in the short run, but that cannot be sustained over long periods of time. A report "Pharma industry has a very profitable 2010" may well be true, but not a report of the form "Pharma industry makes a killing, gouges consumers" etc.

And it is latter kinds of reports that you read in the newspapers. When gas was $4 and it was easy to anger the populous against the "evils of capitalism," they would constantly report "Exxon made record $10B in profit!" Well, it's not much if you consider that people ---- hundreds of millions of Americans and others --- invested $200B to make that profit. This is only about 8% return on their money: a few years back you could make 5% on your bank savings account without any risk and without doing any work. If newspapers said, "Exxon made 8% on its investment," people would yawn. It's so much easier for the commie newspapers to throw in a seemingly huge number like $10B --- that'll sure make 'em little people angry at the "capitalist pigs." This is nothing but manipulation by the newspapers.

That's essentially what I tried to say in the previous post. Sorry if I did not manage to make that clear.

I think you were unfairly shooting down the OP’s argument by defining profitability by ROE for a public company...

I think I was careful to mention that there is not single measure of profitability and it matters whose profitability we are talking about.

I do believe that, when the public discusses whether pharma or oil companies make "fair" or "unfair" profits, the talk is about the "killing" that the companies' owners make. If so, this is return on owners' investment, i.e, equity.

when, as you note, stock prices should adjust to equalize with the return available from other stocks and assets, risk adjusted.

The tendency to equalize does not invalidate or make the measure impractical. Consider air in your room. If left alone, its temperature will equalize across the room. But that does not make temperature inappropriate or impractical as a measure of energy, right?

If I misunderstood your argument, please clarify.

Simple business margins...

I am sorry but I don't understand which margins you have in mind here.

are probably a more fair way of comparing profitability, since they do tend to differ by industry, which is what the OP was getting at.

That depends on what we are trying to measure. Again, media tells us, essentially, that owners of pharma make more money than others. How do you measure that? The only way I see here is to compute what those owners have made relative to what they invested.

I am not sure who OP is. My post was in reply to a post that linked to an article which gave profits and no ratios at all, and did so for a single year. That is both inaccurate and unfair: one cannot measure someones productivity by choosing a sinology minute in a working day, right? The media, the public and the policy-makers accuse pharma of gouging the consumer. That is a general statement, which must therefore be supported by averages rather than what happens on a single year. When oil companies were bleeding losses, I don't anyone suggesting that "the consumer is gouging oil companies."

So, if you want to establish whether there are unusual profits, it seems that multi-year profits relative to investment is an appropriate measure. To prove that pharma owners have unusual profits, one can take those profits for the last 5-10 years, divide by the investment into that industry, and show that this ratio is greater than the corresponding ratios for other industries.

Again, if I misunderstood your point, please clarify.

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