The Real Reason Government Can’t Do Anything Well

Why do people complain about government?  Why do conservatives say that everything the government does is inefficient?  Why do some people want to privatize Social Security, Medicare, Medicaid, the Department of Education, and the post office?  Why do a lot of people advocate for smaller government?  One thing: price controls.

Price Controls

When government gets involved in something, they often do it because there’s a perceived problem in the “free market” (see my recent post about rent control).  The price of something is too high for the poor or the needy.  The government then rides in on its white horse, sun gleaming off its freshly-polished, shining armor, and imposes… price controls.  In order to make this product affordable for everyone, they reason, we must enforce a price on this product that everyone can afford.

Then, if the prices of the raw materials used in that product go up, then the government needs to step in and set price controls on those raw materials, too.  Everyone wins, right?  The people who buy the product win, because they can now afford the product.  The government wins, because they get to tout that they “saved the day.”  The producers of the product win, because… oh, wait, they don’t win.  So they stop producing the product.

This is the downfall of price controls.  Price controls create scarcity.  Scarcity leads to rationing.  When a producer of a product no longer makes a profit on the product that they produce, then they stop producing that product, and instead make another product that isn’t limited by price controls.  Or, as an alternative, they find a new market for their product, at a price that they make a profit at (i.e. an overseas market, or a black market).

How does this work out in reality?  Well let’s look at a few instances in which price controls are used today:

Rent Control
I’ve already covered this area in another post, but the bottom line is that the amount of affordable housing in rent-controlled area goes down (hello, scarcity), and the amount of unaffordable housing (i.e. not rent controlled) increases.

Medicare
We’re seeing today the effects of price controls on health care.  Medicare reimbursement rates are set by the government (i.e. price controlled), and are constantly being lowered (or not being raised at the rate of inflation), and so more and more doctors are declining to care for Medicare patients (what is this called again?  Oh yes, scarcity).  The doctors are choosing to no longer produce the product that they cannot make a profit on, and are instead requiring that their patients have other insurance.

ObamaCare (and other health care policies)
“Wait a second… ObamaCare doesn’t set prices,” you might say.  Not directly.  But indirectly, it does.  Follow me, here.  ObamaCare has many new mandates as to what an “allowed” insurance plan must cover.  In order to become a part of the state health care exchanges, they must show that they cover everything that’s required.  To do this, they increase their cost of insuring people.  In order to continue to make a profit, they need to increase their prices to their customers in order to offer these new coverages.  But, they can’t increase their rates over a certain percentage per year, or they won’t be “approved” to be on the health care exchange.  This is how ObamaCare implements price controls.  See this blog post from the MedHealth News & Updates website.

Minimum Wages
Minimum wage laws are also a form of price controls, though it comes in the form of a price floor, rather than a price ceiling.  Minimum wage is the minimum amount an employer can pay an employee.  How does this correlate to scarcity?  It contributes to a scarcity of jobs.  In this case, jobs are the product being produced by the employer.  If an employer has $50,000 to spend on extra help, they can provide 3 jobs at a minimum wage of $7.75/hr, or they can provide 4 jobs at $6.00/hr.  There are downsides to both scenarios.  Obviously, the upside of having no minimum wage in this case would be that one more person has job.  Another upside is that more is produced in the business, which means that there’s probably more revenue and profit, and maybe the business owner can raise each employee’s pay faster than otherwise.  The downside in this scenario is that each employee is paid less.  So, I guess your position on the minimum wage would depend on whether you wanted everybody to be paid more, or whether you wanted more employment overall.

There are other forms of price controls in government, including subsidies (on ethanol, on oil, etc.), utility prices, and production quotas.

The bottom line: when the government implements price controls, they are imposing an undue burden on producers, and create a scarcity of those products.  If the government didn’t intervene, this scarcity would not occur.

Question: Can you think of any other areas in which the government imposed price controls?  Can you think of a situation where it worked? To leave a comment, click here.

  • Syler Cider

    Your statement of “…they can provide 3 jobs at a minimum wage of $7.75/hr, or they can provide 4 jobs at $6.00/hr” is misleading.
    Without a minimum wage, the company would probably try to create 50 jobs at $1/hr. Don’t believe me? Look at what the wages were before a minimum wage was enacted in 1938.
    Who cares if we have 100% employment when a majority of the workers’ wages are below the poverty line?

    Name one industrialized country that doesn’t have a minimum wage? Did you say Sweden, Denmark, Germany, Normay, etc.? Everyone of those countries without a minimum wage allows for collective bargaining (i.e UNIONS), which the US seems to be trying to get rid of.

    Other countries without minimum wage and NO collective bargaining:
    Brunei: ruled by one family for 600 years.
    Djibouti: 40-50% unemployment.
    Guinea: 50% unemplyment
    Somalia: need I say anything?!

    Now, Liechtenstein is an interesting example of a state with no minimum wage and no collective bargaining but with a great standard of living. Of course, they only have about 35,000 people and they are known as a tax haven. So, trying to emulate their tiny economy with that of a huge nation like America’s, would be impossible.

    • http://bobewoldt.com Robert Ewoldt

      Syler, good thoughts. I think the problem you run into is this: would there
      be 50 people that would be WILLING to work for $1/hr in America? Probably
      not. In states like Montana and North Dakota, there’s so few people
      unemployed that employers have to raise the amount that they’re willing to
      pay in order to find people to work for them. It’s a natural market-driven
      thing. So, while I agree with you in principle (companies would probably
      pay less if there were no minimum wage), I disagree that the United States
      would become Somalia if there were no minimum wage and no unions. I don’t
      work for minimum wage, and I don’t belong to a union. AND my company is not
      taking advantage of me. We’ve arrived at a wage that is both advantageous
      for me and for the company.

      Thanks for your thoughts.

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  • Ktkelly11221950

    Your stupid, you want people to work or nothing so you can make more money. but they can’t afford to buy the things they are producing. I’m not against someone or a company making a profit. but they don’t need to make 300 or 400%. While the person making their product for them lives in a slum.

    • http://bobewoldt.com Robert Ewoldt

      You think companies make 300 and 400% profits? And you call me stupid?

      One of the largest companies in the world, Exxon Mobil, makes a profit of 8.4%; my company, also in the Fortune 500, makes a 1.7-1.8% profit.  And Microsoft, probably one of the most profitable companies in the world, makes a profit of 23%.  Another of the world’s most profitable, Google, makes a profit of 21.4%.