Free Markets, Free People


The Lure Of Price Controls

It is a dream all central planners have – the ability to change the laws of economics to the extent that the planner can decide on what a “fair price” might be and market dynamics will adjust themselves to the price and all will be unicorns and rainbows.

Of course we know from our experience with that application in various areas that the market doesn’t adjust to price and it is never unicorns and rainbows when price controls are applied. In fact price controls consistently spawn pretty predictable market reactions and, depending on how vast the price controls are, have the ability to bring down whole economies, or at least put them into a shambles. The latest price control paradise is Zimbabwe where a wheelbarrow full of Zimbabwean currency may be enough to buy an egg in the morning but not in the afternoon.

I bring this up because there’s a growing call for lawmakers to consider price controls for health care insurance, as demonstrated yesterday in the LA Times.

In the drive to bring health coverage to almost every American, lawmakers have largely rejected restrictions on how much insurers can charge, sparking fears that consumers will continue to face the skyrocketing premium increases of recent years.

The legislators’ reluctance to control premium costs comes despite the fact that they intend to require virtually all Americans to get health insurance, an unprecedented mandate — long sought by insurance companies — that would mark the first time the federal government has compelled consumers to buy a single industry’s product, effectively creating a captive market.

Nancy Pelosi has articulated the price control “dream” for health insurance – “a cap on what you pay and no limit on what you get back” if I recall correctly. Of course what she doesn’t say is not even Medicare does that and it has about 43 trillion in unfunded liabilities at this point. But understand that at the bottom of Pelosi’s statement is the reality of imposing price controls – you can’t have a “cap” on what you pay without them.

Thomas Sowell touches on the real intent that sort of Pelosi-talk:

Liberals especially tend to think up all sorts of good things we want — a “living wage,” “affordable housing,” “universal health care,” and an ever-expanding wish-list of things that everyone should receive as “rights” — with little or no awareness of the economic repercussions of turning that wish list into laws.

He then provides a little primer about price control:

Prices are perhaps the most misunderstood thing in economics. Whenever prices are “too high” — whether these are prices of medicines or of gasoline or all sorts of other things — many people think the answer is for the government to force those prices down.

[...]

Prices are not just arbitrary numbers plucked out of the air or numbers dependent on whether sellers are “greedy” or not. In the competition of the marketplace, prices are signals that convey underlying realities about relative scarcities and relative costs of production.

Those underlying realities are not changed in the slightest by price controls. You might as well try to deal with someone’s fever by putting the thermometer in cold water to lower the reading.

What most who believe they can thwart the laws of economics and use price controls never seem to understand is that economic law requires the price mechanism in order to properly allocate goods. Without it, some other mechanism must take its place. Those are usually found in forms of evasion. One evasion is deterioration of quality. The old saw “you get what you pay for” is never more true than under price controls. The time allocated to a doctor visit might get shorter and shorter in order for the doctor to see enough patients to meet his and his practice’s financial needs. That could also mean he can’t afford the newest equipment or diagnostic tools. Consider what price controls would mean to a pharmaceutical company and its incentive to create new and better drugs.  Or a medical implements company, etc.

Another evasion may be alternate markets – you pay a physician a yearly fee and don’t use the price controlled system in place – that has already begun in anticipation of this.  Doctor’s networks are springing up all over the country. Of course with a mandatory insurance requirement, you’d still have to pay into the price controlled system. But that sort of evasion takes doctors out of the price controlled market and creates another shortage with which that market has to contend.

And, of course, there’s queuing. If the price imposed is low, the tendency for those paying is to use it more frequently. There’s no penalty for doing so. That leads to a shortage (in the case of medicine, doctors still only have 24 hours in a day and can still see only a finite number of patients during that time) of available appointments and thus it extends the time before you can see a physician.

Some would call these “unintended consequences” of price controls. But they’re certainly not unknown consequences. They’re consequences on display all over the world in systems which do, in fact, impose such price controls.

Sowell concludes:

Costs don’t go away because you refuse to pay them, any more than gravity goes away if you refuse to acknowledge it. You usually pay more in different ways, through taxes as well as prices, and by deterioration in quality when political processes replace economic process.

But the lure of the free lunch goes on.

With the same disastrous results it has always had.  Yet our would-be central planners seem obvious to the fact.  That’s one reason government debt is at the horrendous level it is today and headed for even higher levels.

~McQ

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9 Responses to The Lure Of Price Controls

  • Here is an excellent link to the Von Mises institute. 4000 of price control failure. The definition of insanity it to do the same thing and expect differing results.

    link:
    http://mises.org/story/1962 http://mises.org/story/1962

  • an interesting view on just how long people have been ignoring this very incoveninet truth:

    http://www.cato.org/pubs/journal/cjv14n2-7.html

    “Finally, the very survival of the state was at stake. At this point, the Emperor Diocletian (284-305 A.D.) took action. He attempted to stop the inflation with a far-reaching system of price controls on all services and commodities. [10] These controls were justified by Diocletian’s belief that the inflation was due mainly to speculation and hoarding, rather than debasement of the currency. As he stated in the preamble to his edict of 301 A.D.:

    For who is so hard and so devoid of human feeling that he cannot, or rather has not perceived, that in the commerce carried on in the markets or involved in the daily life of cities immoderate prices are so widespread that the unbridled passion for gain is lessened neither by abundant supplies nor by fruitful years; so that without a doubt men who are busied in these affairs constantly plan to control the very winds and weather from the movements of the stars, and, evil that they are, they cannot endure the watering of the fertile fields by the rains from above which bring the hope of future harvests, since they reckon it their own loss if abundance comes through the moderation of the weather [Jones 1970: 310].

    Despite the fact that the death penalty applied to violations of the price controls, they were a total failure. Lactantius (1984: 11), a contemporary of Diocletian’s, tells us that much blood was shed over “small and cheap items” and that goods disappeared from sale. Yet, “the rise in price got much worse.” Finally, “after many had met their deaths, sheer necessity led to the repeal of the law.”

  • I love this post. Just popping in to say keep up the good work. You might just have another regular reader. I took an economics class last semester and it changed my life. I think every democrat and republican should require themselves to take a few economic classes before ever entering politics.

  • Add this piece to the price control regime …

    The offending provision is on Pages 80-81 of the unamended Baucus bill, hidden amid a lot of similar legislative mumbo-jumbo about Medicare payments to doctors. The key sentence: “Beginning in 2015, payment would be reduced by five percent if an aggregation of the physician’s resource use is at or above the 90th percentile of national utilization.” Translated into plain English, it means that in any year in which a particular doctor’s average per-patient Medicare costs are in the top 10 percent in the nation, the feds will cut the doctor’s payments by 5 percent.

    It’s good to see that the government won’t be getting in between you and your physician … NOT.

  • price controls for health care insurance…..In the drive to bring health coverage
    ++++++++++++++++++++++
    Here we go again, universally flipping the words “insurance” and “coverage” back and forth as if each means the same thing.
    They don’t and never did.
    Its a ping pong game, keeping the herds eyes moving and distracted all the time.
    This stuff would be hilarious if it wasn’t pathetic.

  • Price controls — it’s done wonders for Zimbabwe.

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