The ‘Populist’ Push for Price Controls Spells Danger for America’s Economy

Most Americans apparently agree on at least one thing. Unfortunately, it’s something dangerous: price controls.A new Wall Street Journal poll finds remarkable bipartisan support for government limits on prices, with 93 percent of Democrats and 83 percent of Republicans supporting capping prescription drug prices. Nearly four in five voters support capping credit card interest rates at 10 percent. And large majorities favor capping child care charges for working families.The Journal describes these policies as “populist.” That’s fair, although populism means something more specific than just being supported by the people (or the consumer). Political scientists generally define populism as a political approach that pits ordinary people against an elite group that’s seen as serving its own interests. Populism can therefore come from the left or the right, which helps explain today’s strange alliances.Senators Bernie Sanders, a Democratic Socialist, and Josh Hawley, a Republican, agree on a 10 percent credit card interest rate cap. Senator Elizabeth Warren, a Democrat, can champion limits on child care costs while President Trump creates a government website directing consumers toward discounted prescription drugs. Different political tribes are embracing the idea that if something costs more than most people think it should cost, the government should make it less expensive.Yet if the idea is to advocate for ordinary people against powerful interests, an irony lurks.First, few people are as powerful or more self-interested than those in government. As Ronald Reagan famously observed, “The nine most terrifying words in the English language are: I’m from the government, and I’m here to help.” It’s not just because the government has the power to coerce — to take resources as glibly as it hands them out. It’s that government officials have an incentive to promise voters things for free, and those promises are impossible to fulfill. Reagan knew how easily government intervention and bureaucracy can complicate economic issues and hurt those it set out to help.The price controls that so many Americans now clamor for are perhaps the best example. Behind their support is an assumption that prices are just the product of the desires of powerful and heartless sellers. The reality is quite different.Prices are the manifestations of countless decisions by buyers and sellers, each acting on individual knowledge no one else has. No buyer’s budget and needs, and no seller’s costs and offerings, are identical. Only a free market can account for this and decide whether a price sticks. Creating laws to cap prices doesn’t make scarcity go away. It just shows up as empty shelves instead of a market-determined price.Consider credit cards. A 10 percent interest rate cap sounds lovely. Many Americans pay twice that. Why not simply tell banks that’s the limit? Because an interest rate isn’t an arbitrary number. It is the price of credit that reflects funding costs, administrative expenses and, not least, expected default risks.Congress can cap the rate, but it can’t cap the risk. When the price a lender can charge falls below what the risk costs, lending stops. Lenders turn down applicants, cut credit limits and close accounts. The borrowers the cap was supposed to protect still need the money. They end up at the payday lender or the pawn shop instead. In other words, interest rate caps hurt the economically vulnerable people they are supposed to help.The same problem is even more stark with child care. The service is expensive because caring for small children requires a lot of labor and demand is high, especially when governments subsidize it through vouchers and tax credits. Meanwhile, state and local authorities restrict child care supply through staff-to-child ratios, credential mandates, zoning bans on home-based providers, costly building codes and more. No wonder prices are so high.Capping those prices won’t help. If providers cannot cover their expenses at the mandated price, some will reduce capacity. Others will close. The parents lucky enough to secure a remaining slot might pay less. Others will find no available care. The government cannot decree the additional workers and facilities necessary to fill the gap it created.Prescription drugs are more complicated, but the basic trade-off remains. Reducing drug prices can benefit patients today, at least on the surface. However, developing new drugs is extraordinarily expensive and risky. Expected future revenues help determine how much companies invest in research. Thus, capping prices eventually reduces the number of new drugs that reach the market. Over time, fewer lives are saved.That example also illustrates why price controls are such seductive politics. Their benefits are highly and immediately visible, while their costs are often harder to spot.Politicians can legislate lower prices; they cannot legislate away scarcity, other costs or risks. If populism really means standing up for ordinary people, then its policies should be judged not by popularity but by how they affect ordinary people. And for the average American, price controls hurt.Creators.com

The ‘Populist’ Push for Price Controls Spells Danger for America’s Economy

The ‘Populist’ Push for Price Controls Spells Danger for America’s Economy

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