The Myth of Price Controls
posted at 3:12 pm on October 21, 2009 by Doctor Zero
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.