Government and “Costs”: A Simple but Significant Truth
posted at 4:01 pm on March 16, 2010 by J.E. Dyer
Doctor Zero’s latest, excellent as always, reminded me of something I haven’t declaimed on for a while.
It’s this: government cannot bend a cost curve down. Government cannot “control costs” or “contain costs.” Government can do one of the following, and only one of the following:
1. Leave the market alone and let it set prices. Under these conditions, inherent costs will be unaffected, except when technology changes how things are done in a given business. But costs will be undertaken voluntarily, by both buyer and seller, based on the incentive or disincentive of price.
2. Regulate the business and drive prices up (trade policy and tariffs fit here, although we mainly think of things like environmental and employment regulations, and taxes). Regulation drives prices up. It has no other effect. Regulation increases costs. It therefore drives prices up. It does this no matter how much we favor the regulation in question or consider it necessary. Regulation makes goods and services cost more. If we’re lucky, this upward pressure on prices is offset by the downward pressure of technological advances and economies of scale. If we’re not, we pay more.
3. Set artificial price caps by law, and create shortages. It is literally impossible to make more of something available while decreeing that its price must be capped. Neither private enterprise nor government can achieve this imaginary feat. Nothing government can do gets around the iron law that a capped price reduces the incentive to produce something. Production is usually reduced below the level of what people would be willing to buy. This happens very, very quickly if a business or product is both regulated and price-capped. All businesses are regulated in the US today; price-capping their products would work very fast to induce shortages (and kill businesses and jobs in the process).
4. Set artificial price floors by law, and discourage buying. We haven’t tried that in the US since the first years of the New Deal, but it did the same thing then that it would do now: force manufacturers and retailers with unsellable inventory out of business.
5. Subsidize the industry to mask its true costs on the accounting ledger, as government does with commercially non-viable enterprises like “alternative energy” and embryonic (as opposed to adult) stem-cell research. The result here is invariably a subsidized dependency that becomes a political constituency.
If the object of our desire is a decline in costs, government has two options. It can take action 1 and let market forces drive costs, and prices, down over time. If government has already taken action 2, it can back off from some or all elements of the regulation, and release its upward pressure on cost and prices. There is, however, no option for government to “bend the cost curve down.” This is a lie we need to stop telling ourselves.