Price Controls: A Populist Promise with Hidden Costs
Bipartisan support for price controls on drugs, credit cards, and childcare raises concerns about unintended consequences.
4 min read
Most Americans appear to agree on at least one issue: price controls. A new Wall Street Journal poll reveals remarkable bipartisan support for government intervention in pricing, with 93% of Democrats and 83% of Republicans backing prescription drug price caps. Nearly four in five voters support capping credit card interest rates at 10%, and large majorities favor limiting child care costs for working families.
Populism and the Politics of Price Control
The Journal describes these policies as ‘populist,’ a term that generally refers to a political approach that pits ordinary people against an elite group seen as serving its own interests. Populism can emerge from either the left or the right, which helps explain the current unusual alliances. Senator Bernie Sanders, a democratic socialist, and Senator Josh Hawley, a Republican, both support a 10% credit card interest rate cap. Similarly, Senator Elizabeth Warren can champion limits on child care costs while former President Donald Trump created a government website guiding consumers to discounted prescription drugs. This demonstrates how different political factions are embracing the idea that if something costs more than most people think it should, the government should make it less expensive.
The Irony of Populist Price Controls
However, if the goal is to advocate for ordinary people against powerful interests, an irony emerges. Few groups are as powerful or self-interested as those in government. As Ronald Reagan famously observed, ‘The nine most terrifying words in the English language are: I’m from the government, and I’m here to help.’ This is not just because the government has the power to coerce—taking resources as easily as it hands them out. It’s also because government officials have an incentive to promise voters things for free, and those promises are often impossible to fulfill. Reagan understood how easily government intervention and bureaucracy can complicate economic issues and hurt those it aims to help.
The Reality Behind Price Controls
The demand for price controls is rooted in the belief that prices are simply the result of the desires of powerful and heartless sellers. In reality, prices are the result of countless decisions made by buyers and sellers, each acting on individual knowledge that no one else has. No buyer’s budget and needs, and no seller’s costs and offerings, are identical. Only a free market can account for this and decide whether a price sticks. Creating laws to cap prices does not make scarcity go away; it just manifests as empty shelves instead of a market-determined price.
The Case of Credit Card Interest Rates
A 10% interest rate cap sounds appealing. Many Americans pay twice that. Why not simply tell banks that’s the limit? Because an interest rate is not an arbitrary number—it is the price of credit that reflects funding costs, administrative expenses, and, most importantly, expected default risks. Congress can cap the rate, but it cannot cap the risk. When the price a lender can charge falls below what the risk costs, lending stops. Lenders turn down applicants, cut credit limits, and close accounts. The borrowers the cap was supposed to protect still need the money. They end up at the payday lender or the pawn shop instead. In other words, interest rate caps hurt the economically vulnerable people they are supposed to help.
The Challenge of Child Care Costs
The same problem is even more stark with child care. The service is expensive because caring for small children requires a lot of labor and demand is high, especially when governments subsidize it through vouchers and tax credits. Meanwhile, state and local authorities restrict child care supply through staff-to-child ratios, credential mandates, zoning bans on home-based providers, costly building codes, and more. No wonder prices are so high.
Capping those prices won’t help. If providers cannot cover their expenses at the mandated price, some will reduce capacity. Others will close. The parents lucky enough to secure a remaining slot might pay less. Others will find no available care. The government cannot decree the additional workers and facilities necessary to fill the gap it created.
Prescription Drugs and the Cost of Innovation
Prescription drugs are more complicated, but the basic trade-off remains. Reducing drug prices can benefit patients today, at least on the surface. However, developing new drugs is extraordinarily expensive and risky. Expected future revenues help determine how much companies invest in research. Thus, capping prices eventually reduces the number of new drugs that reach the market. Over time, fewer lives are saved.
This example also illustrates why price controls are such seductive politics. Their benefits are highly and immediately visible, while their costs are often harder to spot. Politicians can legislate lower prices; they cannot legislate away scarcity, other costs, or risks. If populism really means standing up for ordinary people, then its policies should be judged not by popularity but by how they affect ordinary people. And for the average American, price controls hurt.
Source: PJ Media
