Hillary-ous Economics

“Fool me once, shame on you. Fool me twice, shame on me.”

Hillary’s economic policy proposals are testing this old saw on the American public. She now proposes to flout the laws of economics a second time. Maybe she hopes the people on whom her candidacy most depends—poorly educated and ill-informed working people—won’t notice.

Hillary’s economic mistakes are classic. She proposes to order the economy about like one of her campaign managers. No doubt if things go completely sour, she’ll upbraid the economy and fire it.

Hillary’s most recent mistake is a proposal to freeze interest rates for struggling homeowners. Interest is nothing more or less than the price of a loan. So her interest-rate freeze is a price control. Well-established economic theory and a century of experience show that price controls don’t work.

Any introductory course in economics explains why. Price controls distort the natural balance between supply and demand that is the essence of a free-market economy. They are the proverbial monkey wrench thrust into a delicate machine in order to slow a single cog.

For readers with the background and patience to read them, I’ve summarized the reasons why price controls don’t work in more detail below. Every basic college economics course teaches them.

But you needn’t have a firm grasp of economic theory to understand why price controls don’t work. All you need to know is a little economic history. Lenin tried price controls. Stalin and his successors did, too. Mao tried them. Our very own Harry Truman, Richard Nixon and Jimmy Carter tried them. None worked, and all had unintended consequences.

For us Americans, the most fascinating failure was Nixon’s. A conservative Republican, he had opposed price controls all his life. But he imposed them nevertheless, out of political expediency. They failed. As one report notes, “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.” The conclusion of Nixon’s own economic advisor is worth repeating: “we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer.”

Hugo Chavez is trying price controls right now. That’s why the shelves of markets and groceries in Caracas are empty despite Venezuela’s oil wealth. He’s doing us all a service in proving once again, to this generation, that the laws of economics still hold true.

“What’s the big deal?” you might ask. Aren’t even the Republicans freezing interest rates right now? Yes, they are. But there’s a big difference in duration. The Republicans propose freezing interest rates for thirty days, to allow private markets to adjust. That’s a temporary emergency measure, not a price control. Our huge economy is resilient enough to withstand an interference that short. But Hillary proposes to freeze interest rates for five years.

Just think how much and how quickly interest rates have changed over the last five years. Then you’ll understand why a freeze that long is bad economics. Our credit economy can stand a brief “time out;” it can’t survive being handcuffed for half a decade in a time of rapid global economic change.

Hillary’s other hilarious economic proposal would “solve” our health-care crisis with “mandates.” It would force people who don’t want health insurance to buy it.

The notion behind this plan is that rising health-care costs aren’t responsible for our health-care crisis. “Free riders” are. Supposedly there are many, many people who can afford health insurance but won’t buy it because they don’t think they’ll get sick. If they get sick, they go to emergency rooms, driving up health-care costs for the rest of us. There are so many of them, the story goes, that if we just force all of them to buy insurance, cost increases will disappear and we will all enter health-care Nirvana.

If you want a “fairy tale,” this is it. The health-care “free rider” is Hillary’s version of the Republicans’ “welfare queen”—the mythical woman who used fraudulently procured welfare payments to get rich. Like health-care free riders, welfare queens were a neat bit of demagoguery, a powerful metaphor with no empirical support.

The notion of so many people free riding is inherently implausible for a whole host of common-sense reasons, including the aversion to risk that pervades our culture. But Hillary gets away with her implausible claim because no one has any idea how many—or how few—health-care free riders there are in fact.

How would you measure the number of supposed “free riders” accurately? Would survey takers go into hospital emergency rooms and ask patients, “Are you here because you gambled with your health and refused to buy health insurance even though you could afford it?” Wouldn’t that be like asking voters whether they refused to vote for Senator Clinton because she’s a woman or for Senator Obama because he has African genes?

Can you think of any reliable way to measure this so-called “free rider” phenomenon accuately? I can’t. Nor, apparently, can economists. There is a lot of speculation and guesstimation, but no hard evidence either way.

Without hard data, no one can definitively challenge Hillary’s claim that free riders—not free-market cost increases and the high price of innovation—are responsible for our health-care crisis. She thinks she can fool the public and win the election with an inherently implausible claim which there is no practical way to prove or disprove conclusively.

There’s a word for that: demagoguery. She wants us to believe that there is such a thing as a free lunch, and that only she can provide it.

Our purblind media have fostered the myth that there is no significant difference between Senators Obama and Clinton. Nothing could be further from the truth. Obama understands economics. Clinton does not. Her economic proposals demonstrate that point beyond dispute. In a time of rapid economic decline, that difference ought to be decisive, if only voters could see it.

We jeer at Hugo Chavez and his economic demagoguery. But we have a serious candidate for president engaged in the same enterprise. It’s so easy for a candidate to say, “Just give me all that power and I’ll command your problems away.”

Yet life is not so easy, even for a president. A president must be smart, not just commanding. You have to understand the economy before you can fix it.

King Canute once tried to command the tides. He failed. Every leader from Lenin to Nixon to Carter to Chavez who tried to command the economy failed.

Command economics in the Soviet Union and Communist China reduced great powers to third-world status. If we voters are gullible enough to elect a leader with third-world economic ideas, a third-world economy is what we’ll get. No one will think that’s hilarious, least of all working people, who are always the first to get hurt.

Why Price Controls Don’t Work

Three things happen under price controls. First, private firms go out of business as the costs they pay for things like labor and raw materials go up and they can no longer make a profit by selling products at controlled prices. To avoid this outcome, the government has to subsidize the losses incurred by the controlled businesses. Or the government can take over the affected businesses entirely and run them itself, paying for the continuing losses out of its general revenue. That, in essence, is the story of the Soviet Union and Communist China.

If the price controls are not too severe, the private market can still function. But the private market will produce less of the controlled commodity at the controlled price. Producers, who still have to make money to survive, have to follow the inexorable law of supply and demand, on the cost side. They produce less output, causing shortages compared to what a free market would provide. In Hillary’s case the effect will be a shortage of credit, driving up interest rates in the non-subprime-mortgage part of our economy.

The government can try to get around the laws of economics by controlling more and more. Nixon did that by trying to control wages (producers’ cost of labor), in addition to prices. He failed. That’s also what our Fed does in lowering general interest rates. But more control always has unintended consequences. For the Fed, inflation is one.

As the government begins to control more and more of the private economy, it enters a vicious circle. More control means more unintended consequences, which require more control. After a while the nation begins to look like the Soviet Union or Mao’s China. We all know how those experiments turned out.

There’s also a simpler way to understand why price controls fail. If a productive firm is inefficient, in a free market more efficient firms eventually will replace it, perhaps producing lower prices. But if a productive firm is efficient, forcing it to lower prices will force both it and its efficient rivals to lose money.

If the losses continue, even the most efficient firms will die. In order to keep them in business, someone has to pay for the losses that price controls force them to incur. Investors can pay by throwing their money down a rathole (unlikely!). Government subsidies can pay—which means you and me, through taxes. Or the buying public can pay, through shortages, rationing, poor quality, and delay. That’s what happened in the Soviet Union, with empty grocery stores and long waits for basic commodities like toilet paper.

There are no other alternatives. Someone or something must pay the difference between the controlled price and the (higher) costs of production. This result follows from economics’ most basic law: there is no such thing as a free lunch.

Hugo Chavez is dumb enough not to understand economics and not to learn from history. He is running the same failed experiment again. Do we want our next president to follow his lead?


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