Price controls don’t work
October 27, 2009
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One of the key elements of the proposals for reforming America’s health care system is the use of price controls, which have been employed by Medicare. Since 1984, the government has established, in its sole discretion, a schedule of fees they pay to hospitals and doctors for their services. Hospitals are paid 80% of the scheduled fee that is set by the government, regardless of the actual cost to the provider. That’s price control, and the result is that the Medicare program now has an unfunded liability in excess of $11 trillion.
Unfortunately, price controls have never worked, ever, as far back as 4,000 years ago in Babylon. And, they failed in ancient Greece and again during the third century B.C. in Egypt. Although the death penalty was imposed for failure to observe price control laws in ancient Greece, they were routinely ignored, which caused shortages that led to a black market.
In 301 B.C., the Roman emperor, Diocletian (244-311A.D.), issued an Edict on Maximum Prices, in an attempt to curb the inflation that was caused by his overspending. The law was quickly ignored.
Price controls are invariably imposed by leaders who are woefully ignorant of the most basic economic principles. This mistake has been repeated throughout history, and today’s crop of American politicians fit the pattern perfectly. Does anyone really believe that Nancy Pelosi, Harry Reid, president Obama or other like minded politicians are so brilliant that they have the ability decide how much everything should cost, including executive compensation?
What such leaders invariably fail to take into account is that people react to laws and regulations and modify their behavior accordingly.
An early example of this occurred when ancient Egyptian farmers “became so infuriated with the price control inspectors that many of them simply left their farms. By the end of the century the ‘Egyptian economy had collapsed as did her political stability.’”
In a November 2005 post to the Mises Daily, Thomas J. DiLorenzo noted: In Babylon, “the Code of Hammurabi was a maze of price control regulations.
Price controls invariably lead to black markets, where people do business “off the books,” which in turn causes shortages.
The health care proposals that are currently working their way through Congress all rely on some form of price controls in the mistaken belief that it will reduce costs. But prices are not costs, although they do include them. In order to reduce costs, it would be necessary for the government to set prices at every level of production and distribution, which is virtually impossible, considering the billions of buy-sell decisions that are made throughout a society literally every day. There are plenty of good examples of the failure of this sort of thinking, but the most notable, of course, is the Soviet Union, which collapsed after about 70 years.
In a November 2005 article, economist Thomas Sowell commented:
People who want the government to control the prices of pharmaceutical drugs seldom, if ever, raise the question of what actually happens in places and times when government has controlled the prices of pharmaceutical drugs.
Canada and other countries do it. What consequences have there been?
One major consequence is that Canada and other countries do not create nearly as many of the new life-saving pharmaceutical drugs as the United States does. These other countries live off the results -- the medicines -- produced by the enormously costly research that "obscene" pharmaceutical profits finance in America.
Other instances of the impacts of price controls include the Revolutionary War, when George Washington’s army almost starved to death because of controls on food that were imposed by Pennsylvania and other colonial governments. And, in 1793, French politicians passed the “Law of the Maximum,” which imposed price controls on grain and other items and caused starvation in some French towns.
After World War II, the Americans imposed price controls in Germany, which were lifted in 1948 by Germany’s Economic Minister.
In 1979, Jimmy Carter’s price control policies caused oil and gas shortages and in the 1990s, California’s energy crisis was caused by price controls on retail prices (but not on wholesale prices).In spite of clear evidence that price controls have never worked as planned, Obama and Congress continue to press for a health care plan that will make substantial use of them.
If they succeed, they will have unintended consequences that are likely to cause major shortages of health care services and will ultimately lead to rationing.Thomas Sowell’s November 2005 article concluded, “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.”
© 2009 Harris R. Sherline, All Rights Reserved
Read more of Harris Sherline’s commentaries on his blog at “www.opinionfest.com”
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Anyone who thinks the government will, should, or is capable of controlling prices on anything is truly ignorant, gullible, and lacking in any economic understanding whatsoever.
Its wishful thinking at best and tailor made for people give up their rights and go begging to Uncle Sam for a few crumbs.
