Green Room

The Myth of Price Controls

posted at 3:12 pm on October 21, 2009 by

Ed Morrissey did a first-class job of schooling Democrats on the difference between price and costs this morning, in the course of demolishing their reliance on price controls to cut “costs” under the ObamaCare plan. Price is not the same thing as cost, and as Ed reminds us, the Nixon Administration’s love affair with price controls succeeded primarily in ruining the unfortunate industries subjected to them. If it costs you $100 to produce something, and the government tells you the maximum price you can charge is $99, your business model is doomed. After all, private industries can’t make up for shortfalls by raising taxes or irresponsible deficit spending, as the government does.

My own view of price controls is even dimmer, because I maintain the entire concept is a fraud. The government cannot “control” the price of anything.

Most of us took some basic economics in high school or college, sandwiched between the sex education classes, environmentalist sermons, and lectures on the racist imperialism of American history. The part of Econ 101 that sticks in the mind of the average student is the law of supply and demand. Price sits at the intersection of supply and demand. If demand increases, but supply remains constant, the price will rise. This is how the market distributes a limited supply of a highly desirable product, such as health care.

Competition brings price down by increasing supply. In the case of health care, price could be most effectively reduced by increasing the supply of doctors and other medical resources, along with encouraging robust competition between medical organizations and health insurance companies. Reforms such as allowing insurance companies to compete across state lines would naturally enhance competition.

Price is also iinfluenced by cost – every business needs to cover its costs before it can make a profit. Tort reform and similar measures would bring price down by making it possible for competitive insurance companies to charge less without compromising their profits. More lively competition within a market causes price to respond more quickly when costs are reduced, because every business is eager to attract more customers by undercutting its competitors.

The fundamental error of socialist economics – the one lesson they adamantly refuse to learn – is the absolute reality of the law of supply and demand. It is not simply one way of allocating resources, to be discarded in favor of more “compassionate” or “socially aware” systems. It is a law, written in iron, silver, and sweat.

Government can distort price, but it can never control it. Control implies precision, with results that bear some resemblance to objectives. No exercise in “price controls” anywhere on Earth, in all of history, could be fairly described this way. When the government tries to push prices around, it squashes that perfect “X” of supply and demand, or pulls it like taffy. Supply decreases, or demand skyrockets. Government power can never change price without twisting the rest of the economic equation out of shape.

Most forms of government intervention simply force other people to pay the price, without really changing it. Nothing is more expensive than “free” single-payer government health care – it extracts huge payments from a relatively small group of heavily burdened taxpayers, and creates a dependency class which receives benefits in excess of the minor taxes they pay into the system. This inevitably causes the overall price to increase, because it hinders competition. Consumers have little incentive to do comparison shopping when someone else is paying the bills, and the total amount of those bills is hidden within massive tax payments to fund a huge government with thousands of functions. Reckless deficit spending does the same thing, except the heavily burdened taxpayers are currently in kindergarten, unable to protest the quicksand of inflated dollars we are mixing for them.

Even if consumers wanted to comparison shop, they would have little ability to do so, since the government controls the market by paying the bills – and it reacts violently to any attempt by consumers to resist its authority. Consider the fines and jail terms built into the Democrats’ health care proposals, for those who refuse to purchase government -approved health insurance. This kind of price shifting, and the baffling complexity of the system hiding true prices from consumers, has already inflated both the cost and price of health care – and it will get much worse, if the country is foolish enough to accept any version of the Obama health care proposals.

Rising costs and fixed prices equal reduced profits, which in turn will reduce supply. Who will be eager to invest heroic efforts in a system with restricted compensation, or compete for a few droplets from anemic profit margins? Even as Obama feeds Americans an endless stream of lies about how they’ll be able to keep their own health insurance under his plan, the more candid Democrats tell friendly audiences that the “public option” is expressly designed to destroy private health insurance… and it will. It’s easy to set a price no private industry can compete with, if you can paper over your losses with billions of tax dollars.

When the government starts jerking prices around, there are only two ways to stretch economic reality to fit: inflate supply by reducing quality, or limit demand through rationing. That’s why anyone foolish enough to believe in the myth of price controls is doomed to a long wait in an understaffed office, before bored government clerks usher them in for review by the death panels.

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Comments

Absolutely right. Healthcare is a limited commodity, and it will be rationed one way or another. Price has pretty well shown itself historically to be the best option. People trot out sad stories about people who couldn’t afford the healthcare they needed, and I do sympathize with that concern. But putting the government in control of the system will not magically increase the supply of healthcare – it will just give us a new, more inefficient, less free way of rationing care.

kc8ukw on October 21, 2009 at 3:26 PM

My suspicion: Liberal supporters of ObamaCare or similar government programs do in fact know that rationing will be the result. But they are appalled that the current rationing takes place on an economic basis — as they would put it, discriminating against the poor. So they favor rationing based on some mythical government agency (staffed by people like themselves, naturally), which would do the rationing “more fairly” by fiat. All their talking points and campaigning are just to get the program put into place.

jwolf on October 21, 2009 at 4:11 PM

Exactly. Government can and frequently does distort prices. It does so with regulation every bit as much as with price controls and taxes. Indeed, regulation distorts prices more than these other government measures in some industries, health care and energy being key ones.

One thing we absolutely must not forget is that the price we pay for health care today is already distorted by government regulation. Only part of what we spend on health care goes to the actual services we receive. The rest goes to the costs of regulation, the major elements of which are cost-shifting, between overpaying and underpaying patients, and administration of the regulations.

The price of health care in the US today is the result of heavy regulation. It is not the result of unregulated market factors. The market has to price in the cost of regulation to keep medical services available to us.

J.E. Dyer on October 21, 2009 at 5:57 PM

Tort reform and similar measures would bring price down by making it possible for competitive insurance companies to charge less without compromising their profits.

Tort reforms like damage caps are price controls on the injured. If someone sustains an undisputed 1 million malpractice injury and can only sue and collect 300K, others, who aren’t injured, get the 700K benefit. Damage caps impose 100% of the burden on the injured.

If tort reform is a good idea, why not make doctors absolutely immune from suit? Wouldn’t that bring down the cost of health care dramatically? Doubtless, doctors will have absolute immunity when they are impressed into nationalized healthcare so we shouldn’t have to wait too long.

casel21 on October 21, 2009 at 6:16 PM

Another stellar post by Dr. Zero, as well as great comments. I have a couple of other points to add.

#1 There is an additional layer of costs that will be tacked on to our current health care system with either plan, and it is one few mention. The cost of the myriad government agencies which will oversee, administer, and regulate the programs. These could be from brand new agencies, or from already existing ones whose budget merely expands to cover its new duties. The costs from the latter are very easy to hide from the bill’s overall “cost” to the taxpayer.

As of yet, I have not seen a complete estimate of the administrative costs (i.e. number of people to hire, office space required, etc), as we would see from even a basic business plan. These costs are non-trivial and usually rise much faster than inflation as well.

#2 I do not believe the CBO factored in the cost of borrowing the $871 Billion at competitive rates, I don’t even want to calculate the interest payments alone over 10 years.

#3 Liberals in general reverse the direction in their minds that prices are “built”. So, instead of [Costs + Desired Profit + Taxes = Price] they think [Price – Costs = Profit (that then gets to be taxed). So in their heads, all three are flexible – if they lower the price, costs will necessarily be reduced (like executive pay) if the company X wants to make a profit (that they will then get to tax the crap out of).

This also explains why they believe the tax burden on industry can be raised at their whim. To them, it has no bearing on price to the consumer.

RedDotRedState on October 21, 2009 at 6:29 PM

With regard to selling at or below cost, you might mention that they’ll be okay cuz they’ll make it up in volume.

-Obamanomics 101

ericdijon on October 21, 2009 at 8:18 PM

Doctor Zero, whoever you are, you are a truly gifted writer!
Godspeed!

nater1976 on October 21, 2009 at 11:40 PM

You capitalist you! (And I mean that with great admiration.) Great essay.

(nitpick: iinfluenced)

publiuspen on October 22, 2009 at 6:48 AM

Tort reforms like damage caps are price controls on the injured. If someone sustains an undisputed 1 million malpractice injury and can only sue and collect 300K, others, who aren’t injured, get the 700K benefit. Damage caps impose 100% of the burden on the injured.

If tort reform is a good idea, why not make doctors absolutely immune from suit? Wouldn’t that bring down the cost of health care dramatically? Doubtless, doctors will have absolute immunity when they are impressed into nationalized healthcare so we shouldn’t have to wait too long.

casel21 on October 21, 2009 at 6:16 PM

Let’s just say that the ways by which lawyers and juries arrive at the damages awarded to individuals are suspect at best.

TheUnrepentantGeek on October 22, 2009 at 10:42 AM

First, the Law of Supply and Demand is not a law. If it were, when I went to Walmart and bought 2 bundles of bananas, the second would cost more than the first. The mechanics of Supply and Demand are a choice, a mechanism to transfer wealth from those that have little to those who have plenty.

Secondly, the elasticity of price is not considered at all in this writing. Free markets work great for televisions because I don’t need one. I can get a radio or a computer or 100 awesome frisbees. Health care and, for example, water, have very inelastic prices. I need health care and water, so that gives price control more to the supplier than the consumer. Hence why we don’t have water competition. The cost is subsidized by the rich. Same with schools and police departments. Perhaps we should open up the fire department to the free market as well?

Listen I’m not against capitalism. I’m a business owner. But when it comes to what our society has deemed the necessities of life, “regulations” become more important. The more inelastic the price, the more we must all come together to make sure everyone gets what they need.

The Calibur on October 22, 2009 at 11:02 AM

The Calibur, do you give away the products of your business to someone who wanders into your shop and demands it, because it’s something they (a one-man “society”) have “deemed the necessities of life?”

Of course not. You’d never last in business if you did; it comes perilously close to the “work for others for no recompense” definition of slavery.

So why shouldn’t the right of a doctor to price his own labor be protected by that same rationale?

Blacksmith on October 22, 2009 at 11:08 AM

Blacksmith on October 22, 2009 at 11:08 AM

Well for the record I sell antiques. Logic would tell you and most would agree that you can live without them. Health care is entirely different and leads to the elasticity of price concept in economics or the freedom of entry and exit. Competition works great in my market. If my prices are too high people can go to another market or get out of the market all together. Health care doesn’t work that way cause you’ll like…..die and stuff.

Labor price is also only one (and I consider minor) “problem” in the health care market. We could lower their costs by subsidizing their school costs and giving them lower cost loans for their start up costs.

The Calibur on October 22, 2009 at 11:16 AM

Let’s just say that the ways by which lawyers and juries arrive at the damages awarded to individuals are suspect at best.

TheUnrepentantGeek on October 22, 2009 at 10:42 AM

The big problem has always been the non-economic damages (“pain and suffering”), which have become synonymous with “the lawyers’ cut”.

Count to 10 on October 22, 2009 at 11:21 AM

The Calibur on October 22, 2009 at 11:02 AM

Your willful misunderstanding is jaw dropping.
The supply and demand curves are statistical and approximate in nature: they don’t apply to your purchase of a single banana, but the average price payed in all purchases of bananas. Additionally, the price for any good is going to have an adjustment time, with the market only clearing when viewed at time scales much longer than that time.

Count to 10 on October 22, 2009 at 11:27 AM

Doctor Zero:

This was outstanding, a beginner’s course in economics that even those who currently believe in the Democrats’ health care fantasy can understand.

…or, maybe not.

You’re welcome anytime over at JTF.

giacomo on October 22, 2009 at 11:38 AM

Doc Zero,

You are batting a 1000. I swear the average Dem/Liberal is just clueless as to how the markets work. We need a 2×4 to get it into their skulls that what they want to do will have the exact opposite of what they say will happen.

Keep up the good work, I wait in anticipation for your next article.

Scuba Dude on October 22, 2009 at 11:43 AM

Healthcare is a limited commodity,

kc8ukw on October 21, 2009 at 3:26 PM

Everything is a limited commodity. There are no exceptions.

MarkTheGreat on October 22, 2009 at 11:46 AM

Tort reforms like damage caps are price controls on the injured.

casel21 on October 21, 2009 at 6:16 PM

Complete and utter bull droppings.
Under tort reform, the injured are compensated for their losses, but only to the extent that they can demonstrate that these losses actually exist.

MarkTheGreat on October 22, 2009 at 11:49 AM

First, the Law of Supply and Demand is not a law. If it were, when I went to Walmart and bought 2 bundles of bananas, the second would cost more than the first.

The Calibur on October 22, 2009 at 11:02 AM

With trillions of banana’s up for sale, you honestly believe that one more, or one less is going to have a signicant impact on prices?

As to the rest of your marxist claptrap, deleted because it was to stupid to be worth responding to.

MarkTheGreat on October 22, 2009 at 11:51 AM

The Calibur, do you give away the products of your business to someone who wanders into your shop and demands it,

Blacksmith on October 22, 2009 at 11:08 AM

Of course not, liberals want govt to take things from others, not from them.

MarkTheGreat on October 22, 2009 at 11:52 AM

Count to 10 on October 22, 2009 at 11:27 AM

Your willful arrogance is stifling.

It’s not statistical at all. There is not equation of supply and demand. You can’t put in a variable for price and supply and derive demand. So therefore, it’s not statistical.

If Supply and Demand were a law, Walmart would have an inventory-price adjustment system for their bananas and every time you bought one they’d get more expensive. Gas stations would change the price while their customers are in line. But they don’t.

Because it’s a choice.

The Calibur on October 22, 2009 at 11:53 AM

There is no such thing as a totally non-elastic price.

MarkTheGreat on October 22, 2009 at 11:53 AM

As a fellow business owner, I have to say that I was stunned by the comments from The Calibur about how the law of Supply & Demand should apply to an individual transaction. Count to 10 responded best by saying:

The supply and demand curves are statistical and approximate in nature: they don’t apply to your purchase of a single banana, but the average price payed in all purchases of bananas. Additionally, the price for any good is going to have an adjustment time, with the market only clearing when viewed at time scales much longer than that time.

Well said Count.

Do I want everything to be subject to a free market? Of course not. By that definition, our Military would be a function of supply & demand. Frankly, I want our Military funded by all of us for the common good.

I don’t personally see Health Care as the same thing as something like the Military. I believe that as we see increased demand for health care, we would see innovative providers meeting that demand IF we would allow some common sense free-market principles to take hold.

For what it’s worth, I think one of the major problems in health care is the fact that the consumer of the service is so disconnected from the payment for those services.

mctowler on October 22, 2009 at 12:00 PM

MarkTheGreat on October 22, 2009 at 11:53 AM

Good thing, considering I never used the term non-elastic. I used the term inelastic.

Nice try though.

The Calibur on October 22, 2009 at 12:00 PM

mctowler on October 22, 2009 at 12:00 PM

I didn’t say it should I said it does not which implies that it’s not a law, it’s a choice.

The Calibur on October 22, 2009 at 12:02 PM

Hey Doc Zero, two questions:

1) You don’t by chance live in the state of VA do you?
2) If so, would you consider running for office? Of course, that presupposes that you aren’t an elected office holder right now, but I had to make some assumptions.

Physics Geek on October 22, 2009 at 12:02 PM

If Supply and Demand were a law, Walmart would have an inventory-price adjustment system for their bananas and every time you bought one they’d get more expensive. Gas stations would change the price while their customers are in line. But they don’t.

I’m really trying to understand your thinking here Calibur. I *think* what I’m reading is that you’re making the case that Supply & Demand isn’t a natural law in the same way that gravity is a natural law. i.e. Gravity is something that can’t be changed…if I drop a ball, it will fall to the earth, therefore it’s a law that is applied every time. But, with the bananas or gas example, the prices do not change per transaction so therefore the “law” of supply & demand is not a law in the same way. Am I understanding your point of view?

mctowler on October 22, 2009 at 12:07 PM

mctowler on October 22, 2009 at 12:07 PM

Well it’s not supported by observations in the market place obviously. It’s a notion, not a law. It’s an excuse. So I’m saying calling it a law and relying on it to make an economic argument is a bad idea.

The Calibur on October 22, 2009 at 12:13 PM

Health care has a delayed system of supply increase due to the time it takes to train physicians. First you go through college, then pass exams into med school, then go through med school and find out if you want to actually practice some form of medicine. Your want to practice will be based on the debt load you are carrying from 6-8 years of school, what the market prospects are, what the regulations are, and, hopefully, finding something you are good at that you want to practice that can help you to pay off your debts, show some profit and otherwise survive as a business. Regulations increase the cost of businness start-ups, and health-care has the cost of insuring the practitioner against lawsuits for malpractice.

To bring down the cost of medical practice one must increase the supply, which means decreasing the debt load of schooling, decreasing the incremental cost of regulation and restricting the spiraling cost of malpractice insurance. The things that government can control on these vectors are: reducing regulations, capping malpractice suits to actual damages and setting them right (which would include permanent and debilitating damages) and removing ‘pain and suffering’ awards that are subjective, and doing something like offering a full tax write-off for dollars spent to repay college debt.

When you increase regulations, do not cap malpractice awards, and otherwise try and control ‘costs’ by forcing insurance companies and physicians to ‘shoulder more of the burden’ until it is unprofitable to practice medicine, that has a negative long-term effect on supply both of the current physician pool and future practitioners. The more we think that legislative intent can equate to regulatory nirvana to save lives and costs, the more we are stuck with rising costs, more intrusive regulations and getting fewer people to practice medicine as we drive the incentive to become physicians (or even part of the full medical community including nurses, mid-wives, etc.).

You can have high quality health care.
You can have lots of health care.
You can have cheap health care.

Choose two out of three. The third one responds to the other two.

ajacksonian on October 22, 2009 at 12:14 PM

Wage controls of the 70’s were a primary reason that employer paid health insurance became more prevalent. You couldn’t increase someone’s pay but you could increase their benefits.

roux on October 22, 2009 at 12:27 PM

Calibur: If you want to call the “Law” of Supply & Demand something else (a principle, if you will), that’s fine. But to say that it’s “not supported by observations in the marketplace” just makes no sense to me based on the following statement from you:

Competition works great in my market. If my prices are too high people can go to another market or get out of the market all together.

That my friend is the law principle concept idea of Supply & Demand in action so it IS supported by observations in the marketplace.

I agree with you that part of the discussion of Supply & Demand involves price elasticity. And, one can debate whether or not Health Care is a basic right that the government should supply. But, you’ve completely lost me when you say “calling it a law and relying on it to make an economic argument is a bad idea.”

Supply & Demand IS a basic economic law principle concept idea and I think one of the problems with the political class is that they refuse to consider it when making decisions. I’m just stunned that you’re saying that relying on supply and demand to make an economic argument is a bad idea. Stunned.

If you want to make choices for your antique business while ignoring Supply & Demand, go ahead. Charge a higher price than the market can bear. That is a choice, but there are consequences, by your own admission. Just like there are consequences to jumping off of a 10 story building. In the case of your business, the “law” of supply & demand will have is to kill or severely damage your business just like the law of gravity will have similar consequences if you choose to jump off of a building. The consequences of ignoring the law of gravity won’t happen immediately, just like raising your prices won’t shut your business down the moment you do it. BUT, the law of gravity and the law of supply & demand WILL catch up with you.

mctowler on October 22, 2009 at 12:37 PM

Listen I’m not against capitalism. I’m a business owner. But when it comes to what our society has deemed the necessities of life, “regulations” become more important. The more inelastic the price, the more we must all come together to make sure everyone gets what they need.

The Calibur on October 22, 2009 at 11:02 AM

Those “necessities” have a way of growing over time. And why, exactly, must “come together to make sure everyone gets what they need?” Because you say so? Because I must, for some reason, live my life to fulfill the needs of others?

It’s not the cooperation I mind – it’s the compulsion behind it. I am, after all, someone who gives to causes willingly and helps people with no noticeable benefit … all without government regulations to bludgeon me into a semblance of virtue. It’s mind blowing, I know.

TheUnrepentantGeek on October 22, 2009 at 12:45 PM

mctowler on October 22, 2009 at 12:37 PM

“Charge a higher price than the market can bear.”

That is the key. Supply and Demand principles show the highest price you can get away with. Take oil for example. If supply goes down and demand goes up, oil prices rise although a) labor prices may stay constant b) extraction costs may stay constant. It’s a choice. If it were a law you could take barrels of oil and number of barrels demanded and derive a price.

When I sell an antique that I have a duplicate of, I do not raise the price of the other. When I buy antiques at auctions, the price of duplicate items does not increase as the sale goes on. I keep my prices low, despite demand or supply, as a matter of principle. Because it’s a choice.

The Calibur on October 22, 2009 at 1:00 PM

This whole healthcare reform is the political out for Democrats who wouldn’t do anything about Medicare, but now want to wedge it into the healthcare reform so they don’t have to be held responsible for the previous intransigence.

It was always said that eventually the young would question why they should pay for a system from which they got nothing .. well now, they will be forced to pay but for something with a different label attached.

J_Crater on October 22, 2009 at 1:09 PM

TheUnrepentantGeek on October 22, 2009 at 12:45 PM

Of course the necessities grow over time. So do equality and civil rights. We find out we need protection, water, educations, and jobs. We come together (government) and provide these things because it’s easier together than it is alone. Any corruption or misrepresentation is the fault of those that construct the system and those that function within it. That’s us. So we get disenfranchised and upset. We express our views and go to action. Consensus builds and actions are taken and minds change over time.

Should you be forced to pay taxes for the police station or should it be a choice?

The Calibur on October 22, 2009 at 1:09 PM

Should you be forced to pay taxes for the police station or should it be a choice?

The Calibur on October 22, 2009 at 1:09 PM

I reject the premise of your question. This process of making up new necessities is nothing but a cover for wealth transfers – state sanctioned theft.

That you’d mention protection and jobs in the same breath as necessities that must be provided for by government action is revealing.

TheUnrepentantGeek on October 22, 2009 at 1:45 PM

TheUnrepentantGeek on October 22, 2009 at 1:45 PM

Of course you reject the premise. It’s not an easy question. Much easier to reject than to answer. You have your opinions on what taxes should be spent on and others have different opinions. Welcome to democracy.

The Calibur on October 22, 2009 at 1:54 PM

Of course you reject the premise. It’s not an easy question. Much easier to reject than to answer. You have your opinions on what taxes should be spent on and others have different opinions. Welcome to democracy.

The Calibur on October 22, 2009 at 1:54 PM

. . .

If there’s a coherent answer to being called on a flawed premise in there somewhere, I can’t imagine what it is.

TheUnrepentantGeek on October 22, 2009 at 2:44 PM

As well written, thought out and comprehensive as Ed penned, and yourself as well Dr. 0, there are some hidden costs in any transactional process. Sometimes called soft costs they only recently have gotten much more than short shrift in the majority of business classes. Although recognized by business owners and larger, cranially well-endowed corporations, government and particularly government officials (politicians and bureaucrats) most likely haven’t the slightest clue that they exist.

But that bureaucracies exist demonstrate as well as any evidence that those costs must be accounted for. Yet they’d be the first to deny that they are a cost center, not a profit center. Controlling costs, and keeping them in perspective to price, is often the difference between profitability and bankruptcy. Some of the smartest, most successful businessmen will tell anyone who will listen that there is no substitute for understanding this principle better than the competition. Without competition, what would be the point.

Robert17 on October 22, 2009 at 6:59 PM

because every business is eager to attract more customers by undercutting its competitors

Umm?

Jeff2161 on October 24, 2009 at 5:36 PM