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Price Controls Don’t Work

November 20, 2009 at 5:38 pm

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.

Price controls have never worked, ever, as far back as 4,000 years ago in Babylon. 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 also failed in ancient Greece and again during the third century B.C. in Egypt.
In Greece, price control laws were routinely ignored, in spite of the death penalty being imposed for failure to observe them.

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 people who are woefully ignorant of the most basic economic principles, a mistake that has been repeatedly made throughout history. And, the current crop of American politicians is no exception. Does anyone really believe that Nancy Pelosi, Harry Reid, president Obama or the like minded politicians in Congress are so brilliant that they have the ability decide how much everything should cost?

What such leaders invariably fail to take into account is that people react to laws and regulations and modify their behavior accordingly.

DiLorenzo also noted an early example of this 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.”

The health care proposals that are currently working their way through Congress all rely on some form of price control in the mistaken belief that it will reduce costs. However, 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 examples of the failure of this sort of thinking, the most notable being the Soviet Union, which collapsed after 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 towns.

In 1971, President Nixon’s wage and price controls failed to lower the rate of inflation at the time and were abandoned in 1974.

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.”

November 20, 2009 | Filed Under Ancient Greece, Babylon, Canada, Code of Hammurabi, Diocletian, Harry Reid, Medicare, Mises Daily, Nancy Pelosi, Obama, Soviet Union, Thomas J. Dilorenzo, Thomas Sowell, health care, price controls

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Price Controls Don’t Work

November 20, 2009 at 5:38 pm

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