The 1970s were a time of change in America, and in world history. On television, George Jefferson, the Smothers Brothers, and Archie Bunker were household names, but the hallmark of the decade was political chaos on the global stage. The changes caused many economic problems in our nation that were symbolized by long gas lines and inflation. A great economic lesson from the 70s was that wage and price controls were a mistake and lead to more hardship for average Americans.
The Nixon Administration imposed wage and price controls that mirror the Biden administration’s current attempts to set prices of prescription drugs. It did not work then, and it will not work now. The Biden Department of Health and Human Services (HHS) way of implementing price controls will be just as affectual as Nixon’s botched attempt, in that it will not be. President Richard Nixon set a government mandated price ceiling on what a company can charge for a product. The Biden Administration has targeted 10 prescription drugs covered by Medicare for price controls.
The misnamed “Inflation Reduction Act,” has empowered the Internal Revenue Service (IRS) to offer a price cap with the punishment that the drug manufacturer would be hit with a tax if they do not agree. That tax will be passed on to consumers in the form of higher prices and less access to the drugs. The process is that the government mandates a price and if the drug maker does not agree to the price, the IRS hits them with an escalating tax that tops out in the form of a 95% excise tax. This is a doubling of the cost of the drug for all consumers when the Administration is promising to lower the price of prescription drugs. In addition, this drug will not be covered through Medicare, which will limit the number of patients who will have access to the drug.
Threatening to hike prices by almost double is not the way to reduce prices for consumers.
When President Nixon imposed wage and price controls, there ended up being massive lines of cars to get gas and when consumers made it to the front of the line, they were confronted with empty gas pumps and a sign that read: ‘Sorry … no gas.’ When you look at the 1990 gas crisis after Iraq seized Kuwait oil fields and the 2008 economic meltdown that led to oil scarcity, gas prices jumped but there were no gas lines. Markets work. When prices go up, there is a great motivation for suppliers to produce more. In most historical instances, high gas prices are followed by lower prices because of an increase in supply. Markets are a better ally to consumers than government bureaucrats setting prices and causing economic chaos. Price controls have the opposite impact on supply.
If the government is setting prices arbitrarily low, corporations lose a reason to create or supply products. If they set the price too high, then they create “crony capitalism” that will lead to a situation where only the wealthy can live well. When there are low prices set by government, corporations stop using resources for research and development and must pour money into Washington, D.C. for lobbying to get government off their back.
In the context of prescription drugs, discouraging research and development, is bad for consumers. The pharmaceutical industry says the impact of the Biden Administration’s mandated prices “ignores the nature of the research and development (R&D) process, discouraging continued R&D after a medicine is FDA approved and deeming some types of medicines as not worth the real-life impact they can have on patients.”
At its core, this proposal challenges the fundamental premise that markets function optimally, asserting that government-mandated prices invariably inflict harm upon consumers. This is an excise tax that harkens back to the flawed strategies of the 1970s to use the power of government to control private sector prices. Using the excise tax power is usually used to discourage the use of alcohol and cigarettes. It is also applied to gas to raise massive amounts of money to build necessary infrastructure like roads and bridges. However, the present Administration's contemplation of applying excise tax to prescription drugs warrants scrutiny.
The unintended consequence could potentially dissuade individuals from accessing life-saving medications, a disconcerting prospect exacerbated by the tax and absence of Medicare coverage. The collateral damage, in this instance, is disproportionately borne by elderly patients. The underlying lesson seemingly overlooked by the Biden Administration is the cautionary tale of the 1970s—a decade marked by a series of policy missteps that should serve as a resounding reminder against repetition. The enduring truth is that markets are dynamic, resilient entities, and a retrospective embrace of failed policies from yesteryear is a perilous trajectory we should collectively avoid.
Lane Koch is a former congressional staffer and Executive Director of the non-profit Grassroots Girl, a group focused on mentoring women professionals and candidates.
