Government Intervention to Impose Price Controls: Recipe for Economic Disaster


Late last year, I was asked on a podcast what one fear I had for 2023 that was out-of-consensus and not expected by markets, but a non-zero probability which if it came to pass would have a huge impact. I said ‘wage and price controls.’ In August of 2022, I had actually done a podcast of my own called “Bad Idea of the Year – Wage and Price Controls.”

My fear wasn’t entirely academic, because there had been several obvious “running up the flagpole” articles by not-well-respected economists, in the Washington Post and NY Times, and comments by various policymakers all trying to sell the idea that price controls had worked historically.

That’s absolutely wrong, a perversion of history, and no one with any actual sense believes that price controls make any economic sense. But they might make, for some people, political sense (I’d flagged this a year before that, in August 2021, in this blog) and that’s what scared me.

For most of this year, blessedly, such dumb talk wasn’t heard. Until today, that is, when the Biden Administration announced that if they think prices are too high for patented medicines, they’ll seize the patents and license the medicines to third parties to make them instead. No, I’m not kidding. The government claims that their rights, under a 1980 law designed to make sure that drugs co-funded by the government would not sit in a patent library but rather be used, include the right to seize the property if they don’t like the price being charged.

There is very little chance of this policy actually coming into effect since the legislative intent of the original law is clear, but if the ‘right’ judge hears the case then it might have to be appealed to the Supreme Court. At that level, it seems clear based on my understanding of Civics 101 that the Fifth and Fourteenth Amendments should prohibit the unlawful seizure of private property and the government wouldn’t be permitted to reallocate patent rights but, on the other hand, historical precedent seems to allow the government to dictate the price charged if they don’t like it. That historical precedent, of course, is the history of wage and price controls. Which, as I’ve noted, was a historical disaster every time it was tried.

For what it is worth, file the chart below as away as a reference point for what constitutes “price gouging” in this Administration. The y/y change in the for Prescription Drugs is at the nosebleed level of 3.14% y/y. For those of you keeping score at home, that is lower than the level of (4.0% y/y). Prescription drug inflation hasn’t been above core inflation by any meaningful amount since 2014-2017.


Source link