Paul Stivers, 10/8/2024
There are at least two socialist policies that are very damaging to an economy. The first is to give too many people too much money that they didn't work for. The second is to impose a limit on the price that a company can charge for a product or service. I will expand on the corrosive effects of both policies and propose alternative methods of financial relief.
The effect of this policy is well illustrated by the article on Food Price Inflation.
Price fixing wreaks havoc on a free economy. The fallacy is that the government can force companies to limit their prices without any adverse effects. The forced losses have to be made up somewhere or investors and companies will exit the business. Here are two examples.
Let's consider a law that limit's rent on a 2-bedroom apartment to $1,500/month. Helpful, right? Not really. If landlords own 2-bedroom apartments for which supply and demand dictates a free market price of $2,000/month, then the government is essentially stealing 25% of that apartment from the landlord and giving it to the renter. This disincentivizes investment in rental real estate. If the landlord owes a mortgage approaching 75% of the value of the property then the incentive is for the landlord to walk away from the loan and let the bank foreclose on the property. The renter of course would be out of a home, the banks will lose money, the landlord loses money, and there won't be many new landlords entering the rental market. The result is a decrease in inventory and exacerbation of the problem. An excellent example of this is what happened in Argentina with the imposition and then elimination of rent control 1.
Part of the Inflation Reduction Act 2 that President Biden signed into law and for which Vice President Harris cast the deciding vote is to impose limits on two Medicare drug costs in 2025.
1. Limit the price of insulin to $35/month.
2. Limit the total out-of-pocket cost for Medicare covered drugs to $2,000 per year.
Similar to rent control, if a customer's out-of-pocket drug expenses are $3,000 and the government limits the insurance company to charging $2,000 then the government is essentially stealing $1,000 from the insurance company and giving it to the customer. The situation is the same for price fixing of any individual drug. The fallacy is that this can be done without ramifications. The company will simply increase prices elsewhere to cover the loss. If all prices within the business are controlled then investors will simply exit that business in favor of businesses that are not price controlled. So price fixing just pushes the costs elsewhere, or if ubiquitous then it destroys the business.
People on Medicare D are now receiving letters from their providers informing them that their premiums will increase by as much as $35/month (the current federally allowed yearly increase) in 2025. My policy will go from $5.20/month in 2024 to, you guessed it, $40.20/month in 2025, an almost 8x increase 3. Others are receiving letters that their plan will be discontinued or that benefits have been reduced 4. Providers are also cutting back on commissions to Medicare consultants 5. This will cause a reduction in what are now free services by consultants and/or potential consulting fees charged to the customer. This has yet to fully play out.
A cash handout has a much different effect on the economy than a tax cut. A cash handout requires no work to be done and therefore is an incentive to produce less. A tax cut allows people to keep more of the money that they worked for and therefore is an incentive to produce more. Therefore a tax cut adds to the supply side and reduces prices. A money handout conversely reduces the supply side and increases prices.
As already described, limiting the price of goods and services to below market value doesn't work. I'll propose that any consideration of obligatory price discounts rightly belongs in the realm of federal subsidies. This preserves a free economy, can be a reimbursement subsidy, and makes the costs transparent and more predictable. Politicians however are understandably reluctant to propose subsidies because voters understand that this means either raising taxes to pay for it or increasing the federal deficit. Democratic politicians prefer instead to sell the popular among democrats, envy-driven (companies make too much money anyway, right?), magic-wand idea of price fixing as a solution. This makes the politicians out to be heroes while the companies are left to distribute the cost to their customers, the same customers that the politicians claim to be helping, and further painting the companies as villains. A subsidy would distribute the cost to all taxpayers, thereby actually helping the subgroup of interest. This would also encourage a healthy discussion about whether the subsidy makes sense in the broader scheme of federal budget priorities.
Again, price fixing often leads to catastrophic and unforeseen consequences 1. As a related note, it's good to remember that corporations are not isolated, abstract entities. They are mostly publicly traded companies that are owned in part by everyday Americans via their retirement plans and other equity vehicles.
1.
https://www.businessinsider.com/rents-apartment-supply-argentina-price-controls-buenos-aires-2024-9
May be paywalled.
Also Google: Argentina eliminated rent control
There's lots of articles.
2. Statement from President Joe Biden on Medicare Open Enrollment.
3. Customers can of course choose a new plan but plans with lower premiums will likely offer less benefits in 2025 than they did in 2024. Again, the losses from price fixing have to be made up somewhere.
4. Google: What are the downsides to the Inflation Reduction Act's effect on Medicare?
Should generate an AI overview.
5. According to emails from my Medicare consultant.