Why Are Republicans Caving to Socialist Price-Setters?

If you look around, it's hard not to conclude that we are in an especially critical political moment. The Democrats, half driven to madness by anti-Trump rage and freed to state their true convictions by Trump's unsettling of the status quo, headed straight to the Loony Left.

The Republican picture is more complicated. Many Republicans have gone along with the Trump era less with fervor than out of fear. And the economic logic of Trump's populist instincts is mixed. Trade is a special area where more aggressive maneuverings can achieve important aims even if they cause temporary, short-term harm.

But one instinct that has been seeping from the socialist left into the Republicans side in the Trump era ought to be expelled forthwith. It is the temptation to use price controls to set the world as one wishes it would be.

A price control is the government setting prices to some arbitrarily desirable rate by fiat.

In the 1970s, it was gas prices. Today, it's drug prices. The Nixon-era experience is worth remembering, since it vividly demonstrated the abject failures of price controls as economic policy.  

Responding to an OPEC embargo that had driven higher prices, the Nixon and Ford administrations instituted price freezes for gasoline.

Normally, a spike in prices creates the incentive on the supply side to produce more of a given good, since more profit is available. And on the demand side, there is an incentive to conserve, since the good costs more.

There are other ways to pay besides prices, though, and the foremost among them is time. Gas stations, unable to raise prices, realized they could sell their entire daily stock in only a few hours, and began closing early. This led to the infamous blocks-long lines for gas of the era, as consumers desperate not to miss the short window they could buy gas would endure countless hours of wasted time sitting in line.  

Meanwhile, black markets for gasoline quickly emerged, with prices well above the former market-set rates. 

The resulting catastrophe was not yet over, since by the time President Carter finally submitted to economic sanity, the large price spike that had been suppressed resulted in economic instability, volatility, and inflation, and arguably caused the deep recession of 1979-1980. 

Needless to say, it wasn't an idea that fared well. 

Fast-forward to 2019, and there are several proposals gaining steam to institute price controls on pharmaceutical drugs that suffer the same pitfalls that plagued Nixon's gas price freezes and every other attempt to set prices by fiat.

One idea, put forward by the Department of Health and Human Services, would anchor U.S. drug prices to the price controls set by socialist European nations with single-payer health care systems. 

This idea has been named the "International Pricing Index", which is deeply misleading insofar as the "prices" these countries pay are not market-set rates, but government-set rates.

The proposal does illustrate one key distinction between drug price controls and gas price controls, which is that drugs are part of the health care sector, which is subject to all manner of government manipulation already, with the U.S. being more-or-less the last bastion of economic sanity left as it relates to the sector's functioning.

Even the socialist price controllers understand this dynamic. Recently, wild-haired socialist Bernie Sanders led a field trip to Ontario where he led Americans to (illegally) purchase Canadian drugs subject to price control rates. The Canadians, however, have been broadcasting their concern, telling the American press they do not support Americans buying drugs from Canada. 

Why? Because their price controls are an indulgence that exists only as long as there is still a large incentive for drug companies to produce and manufacture drugs in the first place. The incentive exists mostly because of the United States, the world's largest and most important drug market.

Another proposal currently in the mix came from the Senate Finance Committee, where the Republican Chairman Chuck Grassley inexplicably seems to be taking his cues from the liberal ranking senator, Ron Wyden (D-OR). 

Wyden's spin on price controls ended up in the final version of much larger drug bill that was just reported by the committee, but not before a rebellion from the committee's Republicans nearly derailed the price-control effort. 

The proposal is to fine companies if they raise the price of a drug faster than inflation. This perversely creates an incentive to raise prices every year, to ensure you don't miss your alloted price increase for the year, in case you need to raise prices due to supply chain constraints, etc. It also does nothing to stop a company from spreading its price increase on one drug across its entire product line.

Price controls inevitably lead to rationing, shortages, black markets, and many other symptoms of the disorder created by trying to force economic irrationality on a market. The end result is anguish. The recent resurgence of this idea is worrying, and should be quickly extinguished. Price controls don't work. It's only because we haven't tried them in a few decades, owing to their disastrous consequences, that we seem to have forgotten that.

Denison Smith is the chairman of Longevity Health Foundation, a new start-up devoted to lowering health care costs through research and education. He is a former assistant attorney general for the state of Idaho, staffer for Sen. James McClure (R-Idaho), and trustee of the Reason Foundation.

If you look around, it's hard not to conclude that we are in an especially critical political moment. The Democrats, half driven to madness by anti-Trump rage and freed to state their true convictions by Trump's unsettling of the status quo, headed straight to the Loony Left.

The Republican picture is more complicated. Many Republicans have gone along with the Trump era less with fervor than out of fear. And the economic logic of Trump's populist instincts is mixed. Trade is a special area where more aggressive maneuverings can achieve important aims even if they cause temporary, short-term harm.

But one instinct that has been seeping from the socialist left into the Republicans side in the Trump era ought to be expelled forthwith. It is the temptation to use price controls to set the world as one wishes it would be.

A price control is the government setting prices to some arbitrarily desirable rate by fiat.

In the 1970s, it was gas prices. Today, it's drug prices. The Nixon-era experience is worth remembering, since it vividly demonstrated the abject failures of price controls as economic policy.  

Responding to an OPEC embargo that had driven higher prices, the Nixon and Ford administrations instituted price freezes for gasoline.

Normally, a spike in prices creates the incentive on the supply side to produce more of a given good, since more profit is available. And on the demand side, there is an incentive to conserve, since the good costs more.

There are other ways to pay besides prices, though, and the foremost among them is time. Gas stations, unable to raise prices, realized they could sell their entire daily stock in only a few hours, and began closing early. This led to the infamous blocks-long lines for gas of the era, as consumers desperate not to miss the short window they could buy gas would endure countless hours of wasted time sitting in line.  

Meanwhile, black markets for gasoline quickly emerged, with prices well above the former market-set rates. 

The resulting catastrophe was not yet over, since by the time President Carter finally submitted to economic sanity, the large price spike that had been suppressed resulted in economic instability, volatility, and inflation, and arguably caused the deep recession of 1979-1980. 

Needless to say, it wasn't an idea that fared well. 

Fast-forward to 2019, and there are several proposals gaining steam to institute price controls on pharmaceutical drugs that suffer the same pitfalls that plagued Nixon's gas price freezes and every other attempt to set prices by fiat.

One idea, put forward by the Department of Health and Human Services, would anchor U.S. drug prices to the price controls set by socialist European nations with single-payer health care systems. 

This idea has been named the "International Pricing Index", which is deeply misleading insofar as the "prices" these countries pay are not market-set rates, but government-set rates.

The proposal does illustrate one key distinction between drug price controls and gas price controls, which is that drugs are part of the health care sector, which is subject to all manner of government manipulation already, with the U.S. being more-or-less the last bastion of economic sanity left as it relates to the sector's functioning.

Even the socialist price controllers understand this dynamic. Recently, wild-haired socialist Bernie Sanders led a field trip to Ontario where he led Americans to (illegally) purchase Canadian drugs subject to price control rates. The Canadians, however, have been broadcasting their concern, telling the American press they do not support Americans buying drugs from Canada. 

Why? Because their price controls are an indulgence that exists only as long as there is still a large incentive for drug companies to produce and manufacture drugs in the first place. The incentive exists mostly because of the United States, the world's largest and most important drug market.

Another proposal currently in the mix came from the Senate Finance Committee, where the Republican Chairman Chuck Grassley inexplicably seems to be taking his cues from the liberal ranking senator, Ron Wyden (D-OR). 

Wyden's spin on price controls ended up in the final version of much larger drug bill that was just reported by the committee, but not before a rebellion from the committee's Republicans nearly derailed the price-control effort. 

The proposal is to fine companies if they raise the price of a drug faster than inflation. This perversely creates an incentive to raise prices every year, to ensure you don't miss your alloted price increase for the year, in case you need to raise prices due to supply chain constraints, etc. It also does nothing to stop a company from spreading its price increase on one drug across its entire product line.

Price controls inevitably lead to rationing, shortages, black markets, and many other symptoms of the disorder created by trying to force economic irrationality on a market. The end result is anguish. The recent resurgence of this idea is worrying, and should be quickly extinguished. Price controls don't work. It's only because we haven't tried them in a few decades, owing to their disastrous consequences, that we seem to have forgotten that.

Denison Smith is the chairman of Longevity Health Foundation, a new start-up devoted to lowering health care costs through research and education. He is a former assistant attorney general for the state of Idaho, staffer for Sen. James McClure (R-Idaho), and trustee of the Reason Foundation.