Thin-skinned, vain, prone to seeing conspiracies — Barack Obama now broadens his Richard Nixon impersonation with the imposition of price controls. Obamacare is the gift that keeps on giving — giving us higher real taxes, a bigger deficit, a bloated federal state, and now, if past is prologue, significantly lower quality and less innovation in the field of health care. As some of the smarter critics predicted, Obamacare, butt-ugly as it was in legislative form, is turning into a real beast in the hands of the executive-branch geniuses charged with implementing it and dreaming up the new regulations to make that possible.
This might be a good time to revisit the history of price controls, which the CBO has helpfully compiled here. Short version: They do not work. They undermine quality and quantity. And they do not even control costs in the medium to long term. From the Nixon era:
The apparent success of the controls program was reversed in late 1972 and 1973 when large and rapid increases in the prices of food and farm products were followed by increased prices of petroleum and energy products. . . . Due to these rapidly rising prices, market disruptions, and shortages, public support for the controls program eroded rapidly in 1973.
As decontrol took place during Phases III and IV and for at least a year after the program ended, there was a “price explosion” during which inflation was greater than it had been at any time in the post-World War II period. Contributing to this explosion were shortages (or the withholding of supplies), hoarding, inefficiencies due to the controls program, and anticipation of its ending. . . The explosion would have been less severe had earlier structural and macroeconomic policies of the government addressed the underlying causes of inflation rather than the accompanying symptoms.
Heckuva job, Tricky.
Price controls cause shortages — that is Econ 101, but this is a White House that has declared a War on (Social) Science, at least when it comes to fundamentals such as supply and demand, which is apparently believes are the invention of a right-wing think tank somewhere in Arlington. I have spent part of the morning debating people who are very upset that George W. Bush may have entertained heterodox views about evolution (I do not know that he did), but, given a choice, I will take the government that has insufficient appreciation for advanced biology over the government that has insufficient appreciation for fundamental economics.
And there is good precedent for that: What did the emperor Diocletian think about price controls? Bruce Bartlett knows.
Your argument is supremely unconvincing.
These are not simply "price controls", in the general sense, but rather, specific restrictions on a specific product that happens to exist in an oligopolistic environment of highly imperfect competition.
Taking a CBO report from 1977 about the generalized use of price controls and using it as an argument from authority against the President's much more surgical proposal does not logically compute.
Williamson may describe his position as "Econ 101", and he's right to do so -- it's not usually until the upper-division economics classes that one encounters the uncertainty and complexity wrought by imperfect competition, complex market structures, and positive and negative externalities. His simplistic position is, indeed, that of an Econ 101 student.
That said!
I myself am fairly skeptical that the policy Obama is proposing is a good one, if only because the insurance industry is expert at wriggling out of attempts to constrain their behavior, so the policy may produce distorting effects even without achieving its stated goals.
I suppose it will be up to someone other than Mr. Williamson to construct a plausible case against it, though.
Reply to this commentLinkReport AbuseTelevangelist, you'll note that most of those wage and price controls were not generalized in some amorphous way, but applied to specific products and industries -- even to specific firms. So it seems plausible that price controls on insurance premiums will unfold in a way not entirely dissimilar to price controls on gasoline or apartment rents.
If you're going to attempt condescension, you're going to have to do better than hackneyed stuff like "supremely unconvincing." Try harder.
Reply to this commentLinkReport AbuseI'm not being condescending, Mr. Williamson -- I'm telling you honestly what I think of the quality of your work.
To say that "it seems plausible that price controls on insurance premiums will unfold in a way not entirely dissimilar to price controls on gasoline or apartment rents" demonstrates a serious lack of understanding of how the particular contours of the market for health insurance differentiate it from other goods.
The fact that you would think that price controls on a globally traded fungible commodity (gasoline) or a location-rooted physical resource (apartment rents) -- two of the most dissimilar sorts of goods imaginable (both from one another, and from health insurance) -- make for an effective point of comparison to how hypothetical price controls on insurance premiums would function is, frankly, baffling.
Not to mention the massive changes within the health care industry itself since 1977.
There's a strong case to be made here, and you're failing to make it. As you would say, "try harder".
Reply to this commentLinkReport AbuseTelevangelist,
Something else to throw in the mix: price controls can quickly result in social unrest once populations expect they have a government-dispensed "right" to certain prices for goods and services. Some small recent examples:
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Question of the Day: What might make you think we're immune from this kind of rioting?
Reply to this commentLinkReport AbuseHmm, and here I thought Kevin made a "supremely convincing" argument. :P There's only one way for the federal government to attempt to control rising medical costs and that is through the ham-handed attempt to regulate the prices at which those services are delivered.
If you read the Bruce Bartlett article, it is surprising how history is following Karl Marx's saying, "History repeats itself, first as tragedy, second as farce." When the Romans first tried price controls, they punished anyone who violated them with death. Now, when health insurers raise rates "excessively" (you must be a bureaucrat to know what "excessively" means), insurers are first publicly scrutinized and eventually will forced out of business. If that's how you want the economy run, then keep Obama in office.
Karl Marx had another saying as well, "Democracy is socialism." Maybe I was wrong to study neoclassical and Austrian economics and should have become a Marxist instead. :P
Reply to this commentLinkReport AbusePrice controls for healthcare are only bad for the rich. For the poor, they are either good or irrelevant. Allow me to explain.
We do not have a potentially unlimited supply of health care. To the contrary, the supply is limited, even though the demand is, potentially, unlimited. Consequently, health care can be expensive. The limited resource goes to those with the means to pay for it. Thus, the poor, without the money, currently cannot obtain the resource (except in limited circumstances). Those with money can obtain the resources.
Unless, of course, there is price control. In which case, more of the poor will be able to obtain the resource, and less will be available to the rich. However, if the price control is only over "health insurance," the richest amongst us will not suffer, as they will just pay cash, not use health insurance. The consequence is that the upper middle class will have less health care, and the lower middle class and the poor will have more (unless, of course, doctors decide the prices are too low and provide no healthcare at all).
The bottom line is that government, not the market will decide on the way a resource is distributed. It will not lead to shortages because supply is lower, but because demand at the cost is so great that it cannot be supplied.
The real debate here is not whether there should be price controls. The real debate is whether health care should be available based upon ability to pay or whether some other metric is better. If it is the former, price control is bad. If it is the latter, price control might be a good solution.
The market has failed. There is not enough supply right now. Either we live with that and allow the best medical care to go to those able to afford it, or we devise a solution for distribution that is not related to the ability to pay.
Reply to this commentLinkReport AbuseSetting aside all the angels dancing on the head of that pin, let us hope the Executive Branch enforcement process doesn't take the same path of *ferocity* that Diocletian did!
Reply to this commentLinkReport AbuseHealth care price controls certainly do work. They just work in a manner not envisioned by some readers.
Consequence 1: In response to price controls, the market fails to innovate. We all agree here, right?
Consequence 2: Due to lack of medical innovation, people in poor health die sooner.
Consequence 3: Since most of the people in poor health are elderly retirees who draw on Social Security and Medicare, the life expectancy of this group is diminished.
Consequence 4: Due to the diminished life expectancy of the elderly, entitlement programs that pay them benefits once again become solvent.
Consequence 5: Due to the restored solvency of such entitlement programs, taxes on investment capital and younger workers can be reduced.
What's not to like?
Reply to this commentLinkReport AbuseLibs like Sebelius (“help rein in the kind of excessive and unreasonable rate increases that have made insurance unaffordable for so many families”) always want to blame the health insurance industry for high healthcare costs. But look at the profit margins for:
Accident & Health Insurance 8.2%
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Health Care Plans 5%
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If companies in these sectors are run by rapacious evil profit-seeking tycoons, then why are their margins so much lower than most other segments?
My advice to profit-hating libs is to start their own non-profit health insurance companies. What are they waiting for? If they can provide the same service with lower premiums by eschewing profits, go for it!
P.S. If BHO ever took an economics course in his life, I'd like to see the proof of it.
P.P.S. The reason for high health care costs is very simple: nobody wants to die, and will pay almost anything for a cure. Nobody says to the ambulance driver "Take me to the cheapest hospital in town!"
Reply to this commentLinkReport Abuse"The fact that you would think that price controls on a globally traded fungible commodity (gasoline) or a location-rooted physical resource (apartment rents) -- two of the most dissimilar sorts of goods imaginable (both from one another, and from health insurance) -- make for an effective point of comparison to how hypothetical price controls on insurance premiums would function is, frankly, baffling."
It shouldn't be baffling at all. The goal of price controls is to prevent prices from increasing about some stated level. It matters not what the good is, as the end result of price controls is the same: a lowering of supply at price X when that good is demanded at Y. We have never had price controls in insurance, but in every other product where we had price controls - gas, apartments, steel, wheat, corn, gold - the end result has been the same: increased prices, lowered amount of goods demanded, and misery to boot.
"Price controls for healthcare are only bad for the rich. For the poor, they are either good or irrelevant. Allow me to explain."
Price controls have *never* benefited the poor. Period. You have rent-controlled apartments in Berkeley and Upper Manhattan, but those are two of the most exclusive neighborhoods in the country. If you happened to be poor AND owned the apartment prior to the rent control you were in luck. If you happened to own your own gas station during the oil embargo of the 70s you could treat yourself AND your friends to gas. If health insurers are prevented from allowing their prices to rise to reflect all of the new mandates they must cover, they will necessarily begin to withdraw from the market and service a more exclusive clientele (which can already pay for medical care without any insurance).
Reply to this commentLinkReport AbuseWhat's next, WIN (Whip Inflation Now) buttons?
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Reply to this commentLinkReport AbuseChris,
As I pointed out, to the poor, price controls on health insurance are either good (they get health care) or irrelevant (they continue to receive little health care).
The posts here are typical of those in favor of laissez- faire. They want the market to control, but they do not make provisions for the poor. That is ok when we talk about flat screen televisions or BMWs. But is it ok when discussing health care?
Many believe that it is not ok. If you are one of them, what is the solution? If not, well, perhaps you have little compassion. I believe that one fictional character once asked "are there no prisons? are there no workhouses?"
Reply to this commentLinkReport AbuseI love how people assume that healthcare in its current form is a market system. It is not a market in any way.
1) States regulate the type of coverage that is allowable.
2) Medicare and Medicaid already impose price controls for services.
3) No hospital is allowed to turn away life threatening conditions.
All of these government imposed restraints distort the market. One can make legitimate arguments that that is necessary, but a necessary result is that supply will not meet demand especially because of item 1 and 2. So to blame the market for low supply is utterly foolish because we don't have a market system right now.
Reply to this commentLinkReport Abuse"As I pointed out, to the poor, price controls on health insurance are either good (they get health care) or irrelevant (they continue to receive little health care)."
As I mentioned in my last post if poor had access to a product prior to the price control then they would be in luck because the price control would probably not negatively impact them. However, as Kevin mentioned above, that is only in the short-run; over the medium and long-run price controls begins to price out the very people the price control was supposed to help because the costs to suppliers are rising, they cannot price that into the price of the good and therefore supplies less of the good or service.
Our problem, by the way, is not a shortage of demand for healthcare, but a shortage of supply of doctors. Now we have the administration stating it is going to regulate how much the insurance companies can charge, which is the only way that many people pay for access to care. Nothing good will come of that.
"They want the market to control, but they do not make provisions for the poor. That is ok when we talk about flat screen televisions or BMWs. But is it ok when discussing health care?"
Yes, it is. In my opinion people who *think* they need access to great medical care don't actually need it. I've been uninsured since February and during that time I have only strengthened my belief that people are hoodwinked into demanding healthcare, even though they probably never use the service more than a total of a few months out of the year. Every insurance market has fully developed to take into concerns the needs of the poor and those with pre-existing conditions *except* health insurance. That is because our debate is focused on ensuring healthcare is a right as opposed to a privilege like other things in life.
Reply to this commentLinkReport AbuseChris,
Interesting. You would try to solve the problem by increasing the supply. An interesting concept. I wonder whether it could be done effectively. I do note that there are training problems. For example, there are a dearth of openings in nursing schools, despite a plethora of jobs.
As for your personal situation, consider yourself lucky you do not have a chronic disease, cancer, or other malady. Personally, I don't think bankruptcy and destitution should result were someone in your position were to get cancer, but I think that would be the case without insurance or without independent wealth.
Reply to this commentLinkReport AbuseAllan, you state:
"We do not have a potentially unlimited supply of health care."
I ask, who is going without healthcare because there is not enough of it? The fact is, NO ONE is going w/o healthcare because it is not available (supply), except geographically. People do go w/o healhcare because they believe they can not afford the insurance to pay for it. THAT issue is subject to cure by market forces in the insurance industry if allowed to play out. Health insurance in states that impose a lot of insurance policy mandates costs more than in states that don't impose such requirements. An example of such a mandate is the requirement that insurance MUST cover a three day stay following child birth. That's nice, not medically necessary in the vast majority of deliveries, but nice. Could I get a lower premium if I choose to stay just one day? Yes, but as a consumer, I'm not allowed that choice.
If you want to lower the cost of health insurance, start by reducing the burden of government imposed mandates.
Reply to this commentLinkReport Abuse"Interesting. You would try to solve the problem by increasing the supply. An interesting concept. I wonder whether it could be done effectively. I do note that there are training problems. For example, there are a dearth of openings in nursing schools, despite a plethora of jobs."
For one, it's not an interesting concept. All the Obama administration is doing is concentrating on the demand for healthcare. People can't pay so the obvious solution is to limit price increases and give subsidies, right? But what happens when there are not enough doctors to treat people and not enough hospital beds to treat everyone? You bring up a point about the supply of nurses. I flip that on its head; nurses are not the primary care providers for people, doctors are. What many hospitals are doing is trying to give more medical duties to nurses that was formerly the purview of doctors. This is another side effect of using price controls: Trying to use substitutes in place of the original product. Again, the problem we have is a shortage of doctors. Question: How many doctors do you think this country needs to provide care to 300+ million people?
"As for your personal situation, consider yourself lucky you do not have a chronic disease, cancer, or other malady. Personally, I don't think bankruptcy and destitution should result were someone in your position were to get cancer, but I think that would be the case without insurance or without independent wealth."
I suffer from migraines, my wife has complicated migraines, I have two kids who get sick, I've been unemployed for about three months, and I'm behind on every bill I'm liable for. I don't want socialized medicine in any instance. If I got cancer, I'd resign myself to death. Those who want to live should resign themselves to paying as much as possible for the luxury and in the end that may not even be enough. After all, all kinds of rich people still die with cancer.
Reply to this commentLinkReport AbuseYes, but we already have supply controls, which is what is causing the rise in prices we are witnessing.
Don't believe me? Medical schools and licensing requirements constrict the supply of medical professionals. Inflation in education costs further restrict the flow. Finally liability insurance problems causes existing doctors to seek out less challenging medical fields, reducing supply for GP and OB/GYN.
More price controls just through gas on the fire.
Reply to this commentLinkReport AbuseOur current health care issue today is largely driven by this perceived right that we live forever and in good health, and if anything ever happen to us, all medical tests and procedures should be used to make us live forever.
This is a complete unrealistic and irrational expectation. This has also contributed to the limitless demand.
But someone has to pay. And we don't want to. Because we are also entitled to an iPhone, iPad, HBO, dining out 4 nights a week, a new car, etc, etc. So health insurance has provided a vehicle where we can have the good health, and have all the other luxuries that life has to offer. It's magic! Some else pays!
So when someone comes along (insurance companies) and tells us we can't have it all, we look to government to protect us. Hence, price controls.
But let's face it - the money will run out someday. Someone's money, someday. In the 1800's, the individual ran out of money. Today, the insurance or government does. So what happens then?
Reply to this commentLinkReport AbuseTelevangelist: Whatever.
If I decide on a price at which it is profitable to supply a good, and then you point government guns at me and tell me I have to provide it for less than that - then I'll provide less of the good. If you disagree, you have to demonstrate why the differences in this case actually affect that fundamental dynamic.
I strongly dislike the debating tactic where you throw out a bunch of irrelevant details and then claim these show how much more nuanced you are, without showing what actual substantive difference they make.
Allan: "The poor" are an irrelevant distraction. The poor were already eligible for Medicaid. Like any safety-net program you can argue about where the eligibility line should be drawn but nothing fundamental is implicated here.
Obama is trying to create a new middle class entitlement. He would like to do this the way it is done everywhere else, namely to simply point government guns at taxpayers and use that to fund a government controlled health system, but he doesn't think he can get that through, so he's opting for the next best solution: point government guns at the insurers and tell them they have to provide their good at a lower price. When, like night follows day, this results in a shortage, Obama will say this shows the need to go to his really preferred solution. By then, he hopes, the middle class will be so scared of having to pay for their healthcare that they'll roll over.
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