Price Controls Disorganize the Market Economy
There’s a lot of talk in Washington these days about “fake news.” Misinformation is a serious concern. If people believe misinformation and act upon it, bad things can happen. Yet for all the concern about misinformation in the news, neither side of the aisle seems concerned about misinformation in the economy. In fact, both sides routinely advance policies that do nothing but generate economic fake news. These usually come in the form of price controls and they too make bad things happen.
When most people think about prices, they probably only think about a particular price for a good or service they need or want and whether or not they have enough to pay that price. People need to do more thinking about what a price actually represents. When people are surprised by prices, they start doing calculations in their head. How could this thing that is only made of a dollar’s worth of material cost $10? How come you can buy a five bedroom house in the Atlanta suburbs for the same price as one bedroom condo in Alexandria, Virginia? Why are there plumbers with high-school diplomas making more money than people who spent years studying in universities?
The answer to all of these questions is the same. Prices are not the sum of the parts of a good or service, although such can definitely influence a price. Prices are information about the entire economy. The amount of information in a price is almost endless. Prices certainly provide clues as to what went into creating a given thing, but they also tell us how much of something is demanded versus supplied. Prices send signals to the market that allow for people and firms to allocate resources to their most efficient uses. Newsflash: we need more plumbers than liberal arts majors.
Prices can also tell us where problems are occurring. If prices go so low that people start losing money providing a certain thing that is a signal that resources should stop being wasted to provide that thing. People don’t value it as much as the cost of producing it. If prices become so high that people can barely afford that thing that is a signal that producers should produce more of it. People really want it or need it. If these prices never change, that is a sign that something is stopping the problem from being fixed and oftentimes that thing is bad public policy.
Since prices are information, the news isn’t always good for some people. This naturally leads to people calling on the government to do something. Yet, because not enough people understand what prices are, politicians included, the solutions offered by government too often focus on the price itself and not what the price is telling us.
Neither side of the aisle is innocent of price ignorance.
When Democrats don’t like the price of low-skilled labor, they raise the minimum wage. But minimum wages mainly just eliminate employer benefits, kill jobs, and raise prices across the economy—all harming low-skilled workers who are supposedly being helped. No one likes the idea of low wages, but they still convey critical information. They tell workers that unless they have very few skills or very little experience, their work will be more valued by society elsewhere, either in another job or another geographic area.
Obscuring this information with minimum wages means more people will look for fewer jobs in a certain area while other needed positions go unfilled. Raising the minimum wage does nothing to change the underlying fact of low wages: too many people in a certain area possess too few skills. We can have a debate about how to address that issue, but changing the price of labor only gets us further from a solution.
Republicans are equally guilty of price ignorance. A current example is a proposal by the Trump administration to peg domestic drug prices to an index of price controls found in foreign countries.
While the minimum wage is a price floor and this is a price ceiling, neither solve underlying problems. Price ceilings tell producers to stop creating things that people are demanding. This is why countries with drug price controls have significantly lower levels of access to new drugs and investment in pharmaceutical research than the U.S.
Drug prices in the U.S., which admittedly can be astronomical, are trying to tell us something. What that is exactly is certainly up for interpretation. Perhaps these prices are telling us that access to drugs is too restricted by regulation. There’s no debate that getting drugs approved by the FDA is a tedious, expensive, and usually unsuccessful endeavor. Further, drug access is significantly restricted through prescription requirements and companies thus can’t spread out their development costs over a high volume. Plenty of public policy issues abound on prescription drugs, but imposing price controls doesn’t solve any of them.
It’s fine to be upset with the price of something. Oftentimes that price is trying to tell you there is actually something to be upset about. However, simply changing a price and expecting it to solve your problem is more foolish than getting your news from The Onion.