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The Therapy Sessions
Wednesday, December 15, 2004

The price control boogey man

A Reason Behind Every Shortage, an excerpt from a post at Economics with a face:
"As an economist, whenever I hear the word 'shortage' I wait for the other shoe to drop. That other shoe is usually 'price control.' " --Dr. Thomas Sowell

This morning NPR had a segment on a major fuel shortage in Iraq. Currently, lines at some gas stations are up to 4 miles long. One man interviewed, who had been waiting in line for three days, bluntly stated "How do you explain this? I don't know."

NPR tried to offer some explanations itself but Mike Shuster, who authored the segment, was for the most part clueless about the causes. Searching for an answer he blamed the insurgency's targeting of the oil infrastructure along with corruption by state officials who have been moving their families and friends to the front of the lines. He even quoted an army official who had the gall to blame the Iraqis themselves for hoarding fuel (here's a hint... that's an effect, not the cause of the problem).

For a brief moment Shuster got close to the true source of the crisis by noting that the price on the black market was 10 times the price that Iraqis "preferred" to pay at the government stations. Unfortunately, the insight stopped there. The words "price control" were never mentioned.

Having the quote from Sowell in the back of my head, I was certain some sort of price controls had to be involved. With a little research I found this article from the The Future of Freedom Foundation. While it is dated a year ago, it states that at the time the price of gasoline was set by the U.S. at around 5 cents a gallon. I assume the price is now controlled by the interim Iraqi government but the evidence suggests that not much has changed.

Yes, price controls cause shortages. Everybody knows that.

But price controls with drugs will work! This is a near religious belief on the left (and apparently, with NPR reporters).

They do it in Europe, they scream. See, it works!

No, it appears to work: the United States is paying the costs of innovation.

Innovation isn't that important, they sniff. It's overrated.


Suppose I tell you the United States can enact full health care coverage to every American, with a catch: every therapy or drug must be from the technology that was commonly available just 25 years ago - in 1980.

We could afford it. It would be cheap - after all, almost all the drugs would now be generics. Operations that were high tech back then are now routine.

But there would be no statins for your high cholesterol. The drugs that make transplants safer wouldn't be there. Several key anti-cancer drugs would not be available to you. Many antibiotics would not be there (good luck with your infections). There would be no vaccines to protect your children from the flu or menigitis. None of today's arthritis medications. Few drugs for allergies. No drugs for depression. The state-of-the-art heartburn drug would be Tagamet.

What was considered high tech in 1980 has a horse-and-buggy ring to it today. It has always been this way: if it weren't for the pharmaceutical industry, doctors would still be bleeding people with leeches.

We have a tendency to focus on the costs, while ignoring the benefits.

Of course, it is easy to be jealous of the Europeans, freeloading off the American system. They get the best medicines, at cut-rate costs.

But Americans follow their course our everyone's peril: somebody has to create the future.

And the innovators get stuck with the bills.

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