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Price-Control Failures, Then and Now

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08/29/2019

As Congress mulls price controls on doctors and hospitals in the form of the Lower Health Care Costs (LHCC) Act, lawmakers must learn from history. Luckily, the message is abundantly clear: price controls have proved disastrous across the world throughout time, and this instance will be no different.

The LHCC was initially introduced to the US Senate after President Trump announced that he sought solutions to the problem of surprise medical billing, which occurs when insured patients get rushed to out-of-network hospitals. The bill would attempt to solve this problem by limiting all out-of-network healthcare costs, not just those of surprise medical bills, to a price-capped, median in-network rate.

Our elected representatives in Washington, it seems, haven’t brushed up on their history. By all historical accounts, this policy is bound for catastrophe, and it’s due time our congressmen learned why.

Third-Century Rome

Ancient Rome stands as one of our earliest examples of the failure of price controls. Before its fall, Rome was beset by a welfare state with more recipients than providers. According to the ancient historian named Lactantius, “The number of recipients began to exceed the number of contributors by so much that, with farmers' resources exhausted by the enormous size of the requisitions, fields became deserted and cultivated land was turned into forest.”

Soon, Rome was forced to debase its currency to the point that its silver coins contained just 0.02% of the precious metal. As a result, prices soared, threatening the economy of the entire empire. Emperor Diocletian attempted to stop the fiscal hemorrhaging with a system of price controls on 900 commodities and 130 grades of labor and freight rates, imposing a death penalty on violators.

The result was widespread shortages. “[M]uch blood was then shed over small and cheap items,” Lactantius wrote, adding, “many had met their deaths, sheer necessity led to [a] repeal of the law.” To say that price controls were ineffective in Rome would be an understatement, but that was then, and this is now. Could modern economies have succeeded where our forebearers failed?

21st Century New York

Enter New York City rent controls in 2019. The city’s rent stabilization laws, designed to provide widespread, affordable housing, were recently the subject of a lawsuit. Landlords across the city, disgruntled by the imposition of rent control, argue that their constitutional rights are violated daily.

These laws force landlords to provide properties to tenants under “rent-stabilized” leases, also known as price controled leases. This rent-stabilization continues until the tenant, or the tenant’s family members, decide to move out. In one absurd example, a couple leased an apartment in 1975, and today the couple’s granddaughter lives in the apartment at half the market rate.

Additionally, property owners are routinely forced to give tenants exorbitant bribes to force them out of their own buildings. One property owner paid a couple paying $1,500 in rent per month a bribe of over $1,000,000!

Modern Venezuela

Elsewhere, in Venezuela, home of the world’s largest oil reserves, price controls have resulted in shortages of everything from toilet paper to meat. The nation’s budget deficit is -29.95% of its GDP. Doctors and lawyers have been reduced to routinely smuggling petrol across the border into Colombia. Meanwhile, surgeons often witness deaths due to a lack of medicine and medical equipment.

Ultimately, price controls always fail because they undermine the integrity of economic markets, which set prices according to public perception.

Again, price controls were among the culprits.

Mises on Price Controls

Ludwig von Mises aptly elucidated this phenomenon. In his April 1950 address to the University Club of New York, Mises explained the folly of the government’s attempt to increase the availability of milk by fixing the product’s price.

In Mises’s example, price controls on milk lead to price controls on the factors necessary for the production of milk. And when the factories increase their prices elsewhere to make up for the loss in revenue, more price controls are needed. This process will continue ad infinitum. Before long, the government is forced to fix the prices of all consumer goods and factors of production — just to control the cost of milk. “This is no longer capitalism; it is all-around planning by the government, it is socialism,” Mises stated.

And now, the US government is attempting the very same tactic to control the costs of healthcare. It’s no surprise then, that the LHCC has been compared to policies like single-payer. Both policies use systems of price controls, and both would result in the socialization of the healthcare industry. While the LHCC does attempt to solve the very serious problem of surprise medical billing, instituting socialism within the medical field is too high a price to pay.

While healthcare in the United States sometimes imposes hardships on individuals in cases like surprise medical billing, free-markets systems inevitably lead to better outcomes in the long run. Interference by the federal government in the healthcare market will only worsen and complicate issues while creating shortages and stymieing innovation for decades to come.

Norm Singleton is President of Campaign for Liberty.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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