Written by Jim Welsh
How often have you had this experience? You’re watching a show on TV and a commercial comes on and you notice the smiles on the faces of everyone in the commercial. Everyone is active and moving around, often outdoors enjoying an activity whether it’s walking on a beach or playing a sport. As you watch the scenes unfold, you hear a voice that sounds like the person is smiling and having the best day of their life. Life really is good.
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And then the words the voice is saying begin to register.
“The side effects can include shortness of breath, liver damage, stroke, a small number of cases of paralysis have been reported, excessive gastro intestinal bleeding, blindness which sometimes is permanent, heart failure, sudden death, and the loss of taste and memory.”
Bummer!
The information on the side effects of drugs is mandated by the Food and Drug Administration (FDA) which is a good thing. As noted on the FDA’s website, the Food and Drug Administration’s Strategic Action Plan for Risk Communication is an initiative to tell consumers how the agency makes decisions on the safety and effectiveness of FDA-regulated products.
This is how the agency’s Center for Drug Evaluation and Research evaluates the safety and effectiveness of drugs.
The Regulation of Drugs
How the Facts Are Collected:
- The first step for a company seeking approval to sell a new drug is to perform laboratory and animal tests to learn how the drug works and if it will be safe enough to be tested in humans. The company submits an Investigational New Drug Application (IND) for FDA’s review prior to testing in humans.
- The company performs a series of clinical trials in humans in three phases, which FDA monitors, to test if the drug is effective and safe.
- Next, the company sends its data from all these tests to FDA’s Center for Drug Evaluation and Research (CDER) in a New Drug Application (NDA). A team of CDER physicians, statisticians, toxicologists, pharmacologists, chemists and other scientists review the data and proposed labeling.
- If this review establishes that a drug’s benefits outweigh its known risks for its proposed use, the drug is approved for sale.
- After the drug is on the market, the FDA monitors its performance in a number of ways. One of those ways is the through MedWatch, the agency’s safety information and adverse event reporting program, which receives reports of suspected adverse reactions (side effects of medicines) from consumers, health care practitioners and pharmaceutical companies. And the agency has access to databases that collect information on prescription drug use and health outcomes. These data help FDA staff identify and understand side effects of medicines.
- If an unexpected drug-related health risk is detected, a Drug Safety Communication may be issued to consumers and healthcare professionals. A statement is added to the drug label about the new safety concern to ensure continued safe and effective use of the drug. Occasionally, approved drugs may be withdrawn from the market for serious safety risks if it is determined that the overall risks outweigh any benefits the drug may provide.
The impact of the Federal Reserve on the economy affects every working American directly in their daily lives and affects their future. It could be argued that the Federal Reserve has a greater impact than Congress or the president on the lives of every American since the economy touches everyone directly or indirectly. Members of the Federal Reserve Open Market Committee (FOMC) are nominated by the president and approved by Congress. Although they can only serve one term on the FOMC, that term is for 14 years, far longer than any president and most members of Congress.
Compared to any drug approved by the FDA and used by consumers, the Federal Reserve affects far more people. Despite this widespread impact, there is no formal evaluation on the potential negative side effects of monetary policy. The Federal Reserve and other central bankers have been allowed to conduct monetary policy without any supervision, even though the Fed, ECB, and BOJ have veered into experimental policies since 2008 without any prior precedent. The Chairperson of the Fed is required to appear before the Senate and House Banking, Housing, and Finance Committees twice a year. Listening to the statements and questions of the esteemed members of Congress incites a mixture of comedy, concern, and disbelief on how little these folks understand about economics and the impact of monetary policy.
The Federal Reserve’s intervention in 2008 and 2009 by cutting rates to near zero percent and the initiation of its first Quantitative Easing program were appropriate and probably prevented a complete financial crisis and possible depression. The Fed provided the drugs needed to stabilize the financial system and restart the economy’s heart beat. But when the Fed began to focus on asset prices, they started down a road that increased wealth inequality, while keeping interest rates near zero percent for seven years created a number of dislocations that were and continue to be particularly harmful for retirees and pension funds.
Imagine those who worked hard for 40 years and were frugal enough to save $1 million for their retirement. In 2007, they would have expected to earn more than 5% on their savings, which would generate more than $4,000 a month. Combined with a modest monthly check from Social Security, they envisioned a comfortable retirement. But after the Fed cut rates to near zero percent and held rates that low for 7 years, earning just 1% on a 5-year Certificate of Deposit was a reach. Suddenly, their lifetime of saving was only providing them $10,000 a year rather than $50,000.
It is important to remember that the Fed’s experimentation with negative real interest rates began in 2002 after the Fed lowered the federal funds rate to 1.25% in November 2002 and to 1.0% in June 2003. Negative interest rates occur when the inflation rate is above the level of the federal funds rate. The Fed increased the funds rate from 1.0% starting in June 2004 until it reached 5.25% in August 2005. Other than the period from November 2004 and May 2008, the federal funds rate has been below 2.0%. During the past 16 years, the funds rate has been higher than 2.0% for just 3.5 years.
The percent of those age 65 and older who are still in the work force increased from less than 3% in 2000 to 4.5% in 2011, when the first wave of Baby Boomers turned 65. Since 2011 it has soared by 30% to 6%, double what it was in 2000. Baby Boomer demographics are certainly playing a role, but the Fed’s policy of negative interest rates has been a contributing factor. Many retirees are working part-time jobs to fill the gap between what Social Security and their savings provides. Not the Golden Years many of these folks envisioned while they were working and saving for retirement.
The Fed’s low-interest rate policy appears to have suppressed wage growth as corporations spent trillions on stock buybacks rather than increase worker’s pay. Average Hourly Earnings for Production and non-supervisory employees has increased to 2.5%, about where it was in 2014, but just 60% of the post World War II average. Mediocre wage growth is a big reason why GDP growth has been so tepid during this recovery. The cost of living for many consumers has been climbing faster than wages, especially for health care, cell phones, cable connectivity, and rent.
The Fed’s QE programs drove longer term interest rates down. While this helped housing, tighter lending standards by mortgage lenders in the wake of the financial crisis offset most of the benefit. Lower long term rates did make it feasible for corporations to borrow money to buy their stock and buy they did. Since mid 2013, companies in the S&P 500 have averaged more than $120 billion per quarter in stock buybacks. Since the market bottom in March 2009, corporations (Non-financial companies) have been the biggest buyer of stocks when compared to global investors, Households, and Institutions. The Fed wanted to boost asset values, and although the Fed never purchased stocks directly, their low interest rate and QE policies enabled corporations to act as their proxy.
In total, S&P 500 corporations have purchased more than $3 trillion worth of their stocks since 2009, which has significantly reduced the number of shares outstanding.
With fewer shares outstanding, earnings per share have increased by 265% since 2009. This is the largest increase in earnings per share in history. Sounds pretty good and seems to justify most of the 371% increase in the S&P 500 since it bottomed at 667 in March 2009. However, revenue during the same period only rose by 32%. This underscores how much of the increase in earnings is the result of stock buybacks and shrinkage in outstanding shares, as opposed to the sale of goods and services.
