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Obama Embraces Nixonomics

The folly of imposing wage and price controls

Steve Chapman
February 25, 2010

Barack Obama has often modeled his policies on Franklin Roosevelt. Lately, though, he's been coming across more as Richard Nixon Lite.

In 1971, fed up with the steady rise of wages and prices, Nixon had a big idea: Attack inflation by imposing strict controls on wages and prices. A federal board was created to establish guidelines and enforce compliance, on the assumption that government officials were wise enough to decide the correct price for millions of products and the right wage for millions of workers.

The main result was to prove the folly of such intervention. Nixon's own chief economist, Herbert Stein, admitted that the administration eventually had to give up because the program was "a total disaster." Among the unwanted side effects: "Cattle were being withheld from market, chickens were drowned, and the food store shelves were being emptied."

Motorists had to wait in line for hours to buy gasoline. At one point, Americans faced a nationwide shortage of toilet paper. Yes, toilet paper. Oh, and the inflation rate didn't fall. It rose.

So how does Obama intend to make health insurance affordable? He wants the federal government to regulate premiums from coast to coast. He unveiled the proposal shortly after a California company owned by WellPoint raised charges on some individual policies by as much as 39 percent.

Obama will not stand for it. Under his plan, says the White House, "if a rate increase is unreasonable and unjustified, health insurers must lower premiums, provide rebates, or take other actions to make premiums affordable."

I have a better idea. If a rate increase is unreasonable and unjustified, customers can head for greener pastures. Among the several dozen competing insurers in California, some presumably will leap at the chance to grab their business. If other companies decline to offer lower rates, however, it's a surefire sign that the increase is both reasonable and justified.

The administration thinks WellPoint has no reason to raise prices because it had billions in profits last year. But the company says it lost money on individual policies in California, because medical prices rose and many customers dropped their coverage, leaving the company with a sicker and more expensive clientele.

Obama may fantasize that WellPoint will keep furnishing its product forever while stoically swallowing losses. It's more likely to devise ways to curtail benefits, make it harder for applicants to qualify, and raise the hassle factor so unprofitable customers go elsewhere. If things get bad enough, it can abandon the market -- leaving consumers to pay the low rate of nothing while also getting nothing.

Such ostentatiously noble but naive schemes are becoming the pattern in Obama's economic policy. A law he signed last year regulating credit card companies, which took effect this week, was supposed to save consumers huge sums. But it has suffered a bruising collision with the real world.

The Associated Press reports that in recent months, "credit card companies jacked up interest rates, created new fees and cut credit lines," while shutting down many accounts entirely. The law, says AP, "has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive."

This administration, like Nixon's, has also elected to override the private sector when it comes to setting pay scales. Last year, attacking Wall Street bonuses as "shameful" and "obscene," Obama issued an order limiting executive pay to $500,000 a year at companies getting taxpayer help. He even appointed a pay czar to decide compensation for managers in that sector.

His approach presumes the government can deduce the correct level and structure of pay for hundreds of jobs in a complex industry. It can't, any more than it can know the correct price for gasoline or toilet paper. That's the function of markets, which adjust as needed to keep supply and demand in balance.

When the government starts fixing wages or prices, it practically guarantees economic malfunctions. Not to mention that it deprives citizens of the right to choose the terms on which they are willing to do business with each other, which happens to be a key to liberty as well as prosperity.

All this is bound to end in tears. Obama has forgotten the lesson of Nixon's experiment: You can tell a farmer what to charge for a chicken. But you can't keep him from drowning the bird.

This column first appeared at Reason.com.

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