Putting Sand in the Gears of the Price Mechanism

To make a halfway rational decision about a purchase, one needs to know its price.  That commonplace idea now seems lost on many Americans.  But it's difficult to know the true and complete price of things when at every turn the price mechanism is undermined.  The most serious undermining of the price mechanism comes from government.

Government is always and everywhere trying to either tamp prices down or prop prices up.  A case in point is federal agriculture subsidies, as in milk, sugar, and corn (ethanol).  The price of an Amtrak ticket is lower than it would be were it not for federal subsidies.  The price of tickets for professional sports events are affected by government subsidies, such as cities paying for the maintenance of professional ball parks.  Congress affects prices when it slaps tariffs on imported goods.  Occasionally, government just sets a price, as in the price of entry-level labor with minimum wage laws.  Government can forbid that prices change, as in the price controls seen back in the 1970s.  The U.S. Post Office is going down the tubes because Congress won't allow it to raise the price of stamps.

The Federal Reserve affects prices when it targets or sets certain key interest rates.  The Fed also impacts the price of stocks with quantitative easing (i.e., printing money).  The Fed's new round of QE, announced Thursday, is aimed in part at driving down mortgage rates -- the price of money.  Don Luskin of TrendMacro expressed his doubts about the Fed's latest move in two segments Thursday night on The Kudlow Report (videos here and here).  Price stability is one of the Fed's dual mandates, but it should be the Fed's only mandate.

For the price mechanism to work properly, consumers must be free to either buy or not buy.  But if government mandates that people buy, or commands that only one version of a product be available, then freedom of commerce is destroyed.  Without this freedom, there is no market -- not even a "captive market."

You may have just recognized a feature of ObamaCare, the individual mandate, which requires that folks who pay income taxes buy health insurance.  Such a requirement can only make the prices of health insurance and medical care rise.  Prices would rise less if there were a variety of insurance policies available, all with different prices.  But our D.C. overlords have decided that all of us will have the same policy with the same benefits.

Another way government undermines prices is when it estimates a price, such as the price for a new entitlement program.  Such estimates are usually wildly "optimistic."  This was certainly the case with ObamaCare.  At $2.6 trillion, the revised price estimate is almost three times the original.  The flawed original estimate resulted from Congress feeding the Congressional Budget Office incomplete information (garbage in, garbage out).  Congress fed the CBO bad data in order to keep the original price estimate below $1T.  Had the CBO been given better data, allowing them to make a more accurate estimate of price, ObamaCare couldn't have passed.

In 2010, HHS Secretary Kathleen Sebelius tried to influence prices with what some called "thuggery."  At The Washington Times, Cato Institute's Michael Cannon wrote:

Mrs. Sebelius threatened insurers for claiming Obamacare will increase premiums by as much as 9 percent. Yet there were no threats issued against the Rand Corporation when it estimated Obamacare will increase premiums for young adults by an average of 17 percent beginning in 2014, or against Milliman Inc. when it likewise estimated premium increases of 10 percent to 30 percent for young adults. ... Mrs. Sebelius knows that Obamacare's largest premium increases are yet to come. Mrs. Sebelius may be intimidating insurers now to prevent them from blaming those much larger premium increases on Obamacare.

The same day at Hot Air, Ed Morrissey wrote:

Today, both Michael Barone and the Wall Street Journal attack the White House and Sebelius for their "thuggery" in attempting to silence straightforward and rational criticisms as well as perfectly predictable increases in premium rates from accelerated mandates. ... The WSJ offers an explanation of this reaction, which is that the Obama administration clearly doesn't understand risk pools.  When one increases the cost in risk pools, premiums go up.  Imposing new mandates on coverage increases costs.  What's so difficult to understand about these premium increases? Nothing, if one understands the industry and its pricing mechanisms[.]

The above set-tos with nurse Ratched occurred because bureaucrats think that they alone know what prices should be rather than millions of Americans interacting in a market.  An editorial at The Wall Street Journal: "Politicized rate-setting [i.e., pricing] is the new reality of the U.S. health insurance market."

Perhaps the most insidious way that government undermines the price mechanism is through debt.  If the feds had to operate under a balanced budget, they couldn't afford to pay the price for the nearly $3.8T government they're currently buying.  If the feds could neither borrow nor print the money needed to pay for their $1.3T current deficit, they'd have to drastically cut their spending -- and that would affect prices across the board.

One reason more and more Americans neither know (nor care) about certain prices is because they aren't paying -- at least not directly.  The price mechanism is undermined when someone else -- some third party -- pays.  In today's America, the biggest third-party payer is government.

The 47 percent of Americans who don't pay federal income taxes may not think much about the price of government.  It's only human nature; if one isn't paying, one thinks less about what one is getting.  The appalling waste in federal programs mainly galls those who pay for it -- taxpayers.  The coming election is turning out to be a battle between those who know the price of government (because they pay for it) and those who don't pay for government and consequently don't know its price.

The price America must now consider is the price of four more years.  What is that price?  Inasmuch as Obama and the Democrats have done their best to undermine the price mechanism in America, especially with "free" stuff, it may be difficult to know.  But part of that price will surely be more debt.  That's a price your descendants will be expected to pay.  You might think of your descendants as third-party payers.  But the dearer price of four more years is national decline -- served up on a plate.  Bon appétit!

Jon N. Hall is a programmer/analyst from Kansas City.

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