The Unfortunate Rise of ‘Lunkhead Economics’ in Nevada
A remarkable theme has emerged in recent Nevada legislative sessions, the current one included: Lawmakers have increasingly proposed to fix prices by decree for all manner items necessary to daily life.
In 2017, lawmakers first proposed to disallow life-saving medications for diabetes patients to be sold above prices fixed by legislative decree, even if some calamity prevented orderly distribution such that higher prices would be necessary to attract new supplies to the state. Fortunately, that proposal was later amended into a pricing transparency law.
In 2019, proponents followed by imposing similar requirements the following session on medications for asthma patients.
Since these initial attempts, lawmakers have again embraced price controls full-bore. In the current session, lawmakers have proposed to go beyond the transparency measure to fix the prices for many prescription drugs. They’ve also proposed to fix prices for emergency health care services and housing rental.
These attempts to control prices by decree fly in the face of a broad consensus among economists from Right to Left that prices communicate important signals that coordinate human activity.
They tell people what, when and where things need to be produced in order to meet the emerging needs of society. Rising prices for specific products or in particular regions indicate that more productive resources should be allocated to those areas and simultaneously provide the impetus for action because they reveal profit opportunities.
Price controls, by contrast, can lead to important goods disappearing from society.
Nobel Laureate economist Friedrich Hayek became famous for pointing out how freely floating prices are necessary to coordinate the diverse activities of human beings. His insights were so powerful that even the most left-leaning academics now embrace them.
Former Clinton and Obama economic advisor Larry Summers, for instance, said Hayek’s lesson on prices is “the single most important thing to learn from an economics course today” and that it is “the consensus among economists.”
That’s why price controls have been disastrous throughout history. In the 1970s, the Nixon Administration imposed price controls on gasoline, which almost instantly led to massive supply shortages that disrupted American life.
Price controls on housing rent lead to fewer units being built and exacerbates housing crises. Many states impose price controls on needed commodities like ice or generators during times of emergency, making these items harder to find. For people who need to keep their insulin medications cold, for instance, these price controls can be life-threatening.
Given the wide consensus among economists and the very real and catastrophic impact that price controls can wreak on society, it’s puzzling that price controls have suddenly become an item of serious consideration in the Nevada Legislature.
In 1980, losing presidential contender George H.W. Bush became famous for criticizing Ronald Reagan’s references to the Laffer Curve.
The Laffer Curve – named for economist Art Laffer who once sketched the concept on a napkin – is now a commonly accepted premise in tax policy that says governments will collect no revenue at either a 0 percent or a 100 percent tax rate. At a 100 percent tax rate, individuals will completely abandon the activity being taxed. Government revenues are maximized somewhere in the middle and an important corollary is that higher tax rates can sometimes mean less revenue because fewer individuals will engage in the underlying activities.
Bush incredulously referred to this as “voodoo economics.”
Supposed voodoo economic policies have proven themselves over time. The European Central Bank now uses the Laffer Curve to evaluate policies in the European Union member states, and it guides policy debates as far away as India.
The current rise of price-fixing schemes here in Nevada, however, represents a different kind of economics, in that it conflicts directly with every basic tenet on which economists from the political right and left both agree.
To borrow from George Bush’s phraseology, one might call this approach “lunkhead economics.”
It flatly ignores centuries of both academic theory and empirical evidence. Its champions fail to envision the marketplace as a large group of individuals each with unique needs and desires and possessing differing productive skills and resources who rely on the emergence of prices to coordinate a wide range of disparate activities to meet their collective needs.
Instead, the champions of lunkhead economics stand over society like a dolt with a hammer and bang down on the prices they dislike. No thought is given to the disarray this causes for the millions of individuals who participate in the affected markets.
Nevadans could do better by turning away lunkhead economics and its practitioners in favor of policies that recognize the complexity of markets.
Policymakers should understand that price fixing creates disruptive supply shortages and sometimes exerts the costliest of tolls upon the affected communities – the loss of human life.