Price controls are always a bad idea

In one of his recent speeches in which he was arguing for some form of regulating health insurance premiums, President Obama said:

Health insurance companies ration coverage according to who can pay and who can't.

This is a common complaint not only with the insurance companies, but with the market itself. It's wrong in a very subtle but crucial way. The market rations goods and services according to who is willing to pay for them, not who can. If I don't want to pay for lobster dinner at a local seafood restaurant, the local seafood restaurant will not serve me lobster dinner even if I can technically afford it. Why is that distinction important? Because if you're aware of it, you will also be aware that it's possible that the fact that lots of people don't buy lobster dinners may be due to factors other than the price of lobster dinners being too high (whatever "too high" means).

The trouble is that the market prices of some goods or services are so high that some people cannot afford them even if they'd be willing to pay for them if they had enough money. But if the government thinks this is the problem (and in the case of health insurance, it certainly is), then price controls are a terrible way of solving it. All that price controls do is generate more shortages of supply while somewhat shifting the burden of those shortages. For example, in Poland under Soviet rule, prices of most goods and services were set by the government, which of course set them well below market rates. The result was that most thus priced goods and services were inaccessible to anyone, even those people who were willing and able to pay their market prices.

I agree with Obama that there are too many people going without health insurance right now. But in order to change this effectively, the government has to leave the prices alone and instead subsidize those who cannot afford to buy health insurance on their own.

That's what would happen in a perfect world; but it's easy to see why it won't happen in ours. Even though they are so much superior socially, politically subsidies do not stand a chance against price controls. That's because, from the government's point of view, price controls are both 1) cheaper and 2) easier to sell propaganda-wise. Point (1) is true because, while the costs of price controls are born by all taxpayers, the costs of subsidies are born directly by the federal budget. (In an aggregate sense, subsidies are actually much cheaper, but to the government this won't matter.) Point (2) is true because voters are likely to think that high prices of something are caused by the fact that providers of that something are extracting enormous profits from selling it. Now in a competitive market this is almost never the case--but it's much easier to win support by confirming what people already think rather than trying to change their minds.