The FDA Makes Ancient Remedies Unaffordable

This article, written by senior resident fellow at the Ludwig von Mises Institute Mark Thornton, was originally published by Mises on Oct. 24.

I recently experienced severe pain in my feet, particularly in the big toes. In my imagination it felt like my feet had been run over by a truck and that several of my toes had been broken. But I knew that was not the case, and that the pain came on slowly at first, and then spread to other parts of my feet until I could barely walk.

My first approach was to take some ibuprofen to relieve the pain and swelling. When this did not resolve the matter, I thought perhaps a new pair of soft shoes might work. That idea also failed, and with a little internet research I realized I had a classic case of the gout. I was soon off to see my doctor to determine what the problem was and to get it solved with the powers of modern medicine.

The doctor confirmed that I had the gout. I was not pleased to find out, that in my case, the gout was probably brought on by another drug that I had been taking daily, against my better judgment. However, I was pleased to learn that I would no longer have to take it, that as part of my treatment I was being prescribed an ancient and natural drug, and that I would only have to take this drug “as needed.”

I was off to get my prescription filled at the pharmacy when a thought came to mind: if this drug was as natural and ancient as advised by my doctor, why did I need a prescription in the first place? Upon inspection the prescription was for Colcrys, the brand name of the drug colchicine. Furthermore, when I picked up my prescription the price was much higher than I anticipated given that it was a natural drug. When questioned, the pharmacy technician replied that the actual price was much higher and that my insurance paid for more than three-quarters of the bill. The cash price (without insurance) was $198.99 which is $6.63 per pill if taken daily, or nearly $20 per dose if used to treat flare-ups.

An extremely high price for an ancient natural drug? I knew I had a new case to solve and that the solution was probably the same old answer.

After conducting some research on Wikipedia, I learned the following: Colchicine can be used to treat gout, Behcet’s disease, pericarditis, and the Mediterranean fever. It has been in use as a medicine for over 3,000 years. After serving as ambassador to France, Benjamin Franklin brought colchicum plants back to America in order to treat his own gout. Modern science has further refined the drug for better medicinal use.

Colcrys has been used to treat gout for a very long time, although the Food and Drug Administration (FDA) had not approved Colcrys specifically for the treatment of gout prior to 2009. Alternative drugs, such as Allopurinal, are also used to treat gout and related ailments. Until recently, you could treat your own gout using one of these medicines for pennies a day.

In the summer of 2009, the Food and Drug Administration approved Colcrys as a treatment for gout flare-ups and the Mediterranean fever. The FDA gave pharmaceutical company URL Pharma an exclusive marketing agreement for selling Colcrys in exchange for completing studies on Colcrys and paying the FDA a $45 million application fee.

This deal effectively created a patented drug with no generic alternative. Therefore it gave the company a monopoly for the duration of the agreement. URL Pharma immediately raised the price from less than a dime to nearly $5 dollars per pill. Comprehensive medical insurance does substantially reduce the price to consumers, but it does not reduce the cost. Insurance only spreads the cost-burden across policy holders.

At the same time, doctors are encouraged by pharmaceutical companies to employ more expensive and profitable treatments. As a result the overall cost burden increases. Evidence suggests that doctors are prescribing Colcrys in large volumes to treat gout flare-ups and as a long-term preventative measure.

Once again government has taken something that was both cheap and beneficial and turned it into a monopoly that hurts the general public and drives up the cost of medical care to the benefit of Big Pharma.

Mises: Why Are Jurors Expected To Work For Below-Market Wages?

This post, written by Pepperdine University professor of economics Gary Galles, was originally published by the Ludwig von Mises Institute on Oct. 18.

Jury duty garners complaints from those who have been drafted into service, but it seldom gets media attention. Other than when there is a celebrity involved (e.g., when Oprah Winfrey was chosen for a murder trial), juries seem to enter public discourse only when there is a sensational case, such as the upcoming trial for Aurora theater shooting suspect James Holmes.

Even when juries get noticed, it is not the inefficiencies and the waste of juror time that get the attention, yet the large number of jurors to be called for sensational cases (6,000 for the Holmes trial) often makes those problems more obvious than usual.

Serious inquiry highlights the single most effective reform available: ensuring a sufficient number of qualified jurors by paying them what their time is really worth. Because jury system problems primarily arise from treating jurors as if their time has little or no value, paying jurors instead of drafting them would produce real advantages over our current system, not just in lower costs to society, but in better dispensing dependable justice.

The greatest inefficiency of current jury service is its huge waste of juror time (e.g., 165,000 of 6 million Californians who performed jury duty actually served on a case last year). But with juror services essentially costless to judges and lawyers, they have little reason to reduce the waste. If jurors were paid something that reflected the true value of their time, they would be utilized far more effectively.

Another problem is uncomfortable and unpleasant jury facilities. With drafted jurors, there is little incentive to accommodate their preferences. If they had to be recruited voluntarily, like other employees, they would be willing to work for less under more pleasant conditions, and courts would provide for more juror comfort and convenience to cut the cost of wages.

No-shows are another major problem which increases both costs and administrative difficulties. Courts have to guess how many draftees will actually appear, wasting many jurors’ time on many days, and wasting court resources when there are too few jurors. Jurors paid a market rate for their time would show up like other employees whose jobs depend on it, reducing such waste.

Underpriced jurors cause other problems. Facing below-market costs for juror time, some courts limit jurors’ ability to take written notes, leading to delays, mistakes and avoidable jury room disputes over what was actually said. Similarly, jurors are often restricted in submitting questions to clarify their understanding, or to discuss the trial during breaks, causing confusion and wasted juror and court time. If jurors had to be paid a competitive wage, such time-wasting practices would be trimmed.

If jurors were paid, attorneys would be pushed to use plain language rather than legalese to facilitate more efficient communication. Tighter time constraints would be imposed to force attorneys to make their points more quickly and clearly, and to avoid repetitive questions (a pet peeve of jurors). Paid jurors would also spur other efficiencies, such as speeding up jury selection (e.g., by limiting peremptory challenges).

Paying jurors would also induce jurors to become more educated on the law, evidence, and procedure, reducing the chance of mistrials and the resources now devoted to ensuring jurors understand and follow the rules.

Offering sufficient inducement to attract “professional” jurors would also make justice more reliable as professional jurors would seek to cultivate a reputation as reliable and unbiased.

Currently, the primary incentive of many drafted jurors is to finish their involuntary servitude faster. That offers little assurance of attentive jurors or evenhanded rulings (not to mention creating big payoffs to jury consultants for finding “leaners” who can change the outcome in their direction). In contrast, paid jurors’ incentives would be more like those of current mediators, which litigants increasingly find preferable to court trials.

Mediators must be thorough and evenhanded if they want to continue in that role, because they must remain acceptable to both sides involved. Obvious bias or sloppiness would end their careers. Those wanting to continue to serve as paid jurors would similarly want to be fair and balanced, to preserve that possibility. Since, as according to California’s courts assert, “the duties of a juror are as important as the duties of a judge,” these incentives are crucial.

Jurors are the only resource our justice system treats as essentially costless, though, as with a military draft, the very real costs are really “paid” by the draftees. Our current system is made slower, more wasteful and more inequitable because the costs imposed on jurors, which all too often are a serious financial and personal hardship for many, are essentially ignored.

Americans’ right to a jury trial does not imply that drafting jurors is the best way to provide that right. A paid volunteer juror system would be an important positive reform, bringing us closer to providing the “liberty and justice for all” that is the goal.

Mises: Gun Prohibition Means More Demand for Guns

This article, written by University of Louisville associate professor of economics Audrey D. Kline, Ph.D., was originally printed by the Ludwig von Mises Institute on Oct. 8.

Much has been written about the economics of gun control, including Kjar and Robinson’s 2009 article that noted the lack of basic economic application to the issue, and that there are ample substitutes available to individuals intent on killing people. Although gun violence “dropped dramatically nationwide” over the past two decades, the majority of homicides are still committed with a firearm. Moreover, the FBI has reported that the murder rate in the U.S. has steadily declined for the majority of the past 20 years as gun ownership has surged to an all time high. Unfortunately, mass shootings have not followed that trend. Data shows the incidence of mass shootings is relatively unchanged over the past two decades. News reports certainly make it seem more common but in reality, mass shootings are still extremely rare. Nevertheless, we can easily recall recent shootings such as the Newtown, Connecticut shooting, and more recently, the Naval Yard shooting. In fact, a simple Google search of “mass shootings in 2012 and 2013” produces an overwhelming number of results, with the first being “Mass Shootings in America: A history, 1999 through 2013.” The article notes that since Columbine, there have been 29 additional mass shootings in the U.S. through the Sandy Hook tragedy in Newtown. We’ve had more shootings since then.

Mass shootings continue despite new laws enacted following Sandy Hook. In fact, calls for increased regulation of the gun industry and its proponents is nothing new — it crops up every time there is a tragedy. As noted recently in the Washington Times, attempts to enact “meaningful” legislation on gun control have been going on for 20 years.

Is there a correlation between the incidence of mass shootings and the attempts by lawmakers to outlaw large capacity magazines and certain types of semi-automatic rifles; discussions of new gun laws; and new laws requiring the fingerprinting of gun buyers and creation of a gun owner “registry”? Are Obama’s repeated pleas for more regulation of the gun industry contributing to a relatively inelastic demand for guns and complementary gun accessories? Evidence suggests that might be precisely the case.

No president in contemporary history has been as insistent on passing gun-control legislation as President Obama who signed 23 executive orders related to gun control following Sandy Hook, and continues to lobby for more “action” after every mass shooting. No president in contemporary history has had the number of mass shootings that President Obama has had, either.

Since Sandy Hook, new laws have passed in many states, including Colorado, where two senators in favor of gun control recently lost their seats in a recall vote. Gun manufacturers and manufacturers of complementary products (Magpul Industries, manufacturer of high capacity magazines, for example) operating in such states have looked into and are planning relocations of their businesses to more gun-industry friendly states. The economic impact of losing the gun industry in some of these states will devastate the local community as well as creating a significant loss in tax revenues. These facts seem to be irrelevant in the larger battle on gun control.

Combined with these state and local gun control efforts, President Obama’s repeated calls for increased regulation in effect create a supply shock in the industry. Every time President Obama speaks about outlawing “assault-style” rifles (more accurately known as semi-automatic rifles or modern sporting rifles), gun stores get busy, prices rise, firearm sales spike, and ammunition flies off the shelves faster than one can reload. Higher prices have not slowed sales at all, signaling a relatively inelastic demand, at least in the short run, following a shooting incident and the now predictable call for increased regulation.

Walmart continues to restrict ammunition sales to not more than three boxes per person per day — that is, if you can find anything on the shelf. After Sandy Hook, Walmart sold out of semi-automatic rifles in at least five states, and the price of AR-15s as well as high capacity magazines skyrocketed to nearly double the MSRP at many local gun shops and online gun sellers. Still, buyers found empty shelves for months.

Could it be that the more discussion the nation has about gun control, and the higher the perceived threat of impending legislation that reduces one’s right to bear arms, the greater the likelihood that consumers will seek to buy more guns and more ammunition? Clearly, such public discourse, at a minimum, promotes more gun sales in the short run.

Witness the record purchasing of guns in Maryland the past few weeks before new gun laws went into effect. The Baltimore Sun reports a seven-fold increase in year-over-year sales figures for gun buying, with sales in excess of 1,000 guns per day. Further, The Wall Street Journal and Bloomberg have both noted the “Obama effect” on gun sales. A review of background check statistics kept by the FBI since November 1998 shows a significant increase in year-over-year firearm background checks beginning in 2010 through August 2013, with the current year showing nearly 2.5 million more background checks through August than for all of 2012. 2012 had the largest number of firearm background checks recorded at just over 19.5 million, over 3 million more than the year before.

President Obama might find he can gain a better track record with reducing the incidence of mass shootings by backing away from his repeated cries for more regulation of the gun industry, thereby lessening the supply shocks that are selling guns, high capacity magazines, and ammunition in record numbers, and producing record profits for the industry. This is yet another case where government interference in the market produces a very unintended result. In this case, however, the stakes could be much higher than just supply and demand.

Andrew Napolitano Explains The Supreme Court’s Worst Decisions

The following post originally appeared on the Ludwig von Mises Institute’s website. It is based on a conversation the Institute had with Judge Andrew Napolitano about the Constitution and the American political system.

Mises Institute: Why is understanding constitutional law and its history important? The text of the document is pretty short, so can’t we just read it for ourselves and know what it says?

Judge Andrew P. Napolitano: The Constitution proclaims itself to be the Supreme Law of the Land. It was written to create, define, and restrain the federal government. If history is prologue, it is important for all concerned about the overreach of the government today to understand how we got to where we are today; and the history of that is essentially a study of the history of the debates over the implementation of the powers set forth in the Constitution.

As for reading the Constitution in order to understand it, that is no doubt what its authors intended. However, as is well known, the big government impulses of those in government have rendered most of the plain language in the Constitution meaningless. Thus, it is nearly impossible to comprehend the meaning of the Constitution without understanding about 200 Supreme Court cases interpreting it.

MI: When it comes to Supreme Court cases, what do you think were some of the most damaging to the cause of liberty?

APN: Without sounding cynical, my answer is: Almost all of them. Here is a short list of the most constitutionally offensive cases: Marbury v. Madison, which establishes the federal government as the final judge of its own power; McCullough v. Maryland, which establishes the primacy of the federal government over the states and establishes the concept of implied federal power; Dred Scott v. Sanford, which establishes the principle that a class of human beings can be defined as non-persons because of an immutable characteristic of birth; Wickard v. Filburn, which permits the Congress to regulate personal, private, and even trivial behavior; Korematsu v. United States, which permits the attribution of guilt and the infliction of punishment based on an immutable characteristic of birth; Roe v. Wade, which permits murder based on the age of the victim; and National Federation of Independent Business v. Sebelius, which permits the Congress to tax any event or non-event it wishes.

MI: Are there any easy fixes? Could we just tweak the text of the Constitution in certain places to greatly improve things? If so, what would you change? If not, why not?

APN: Because the Constitution is only as effective as an instrument to guarantee liberty as is the fidelity of those in whose hands it has been reposed for safekeeping to its underlying principles, the short answer is: Have a majority of Supreme Court justices committed to the plain language and original intent of the document, and the preservation of the natural law? However, if I were free to do so, I’d change “We the People …” to “We the States …” I’d define the regulation of interstate commerce as “keeping the movement of goods between merchants across interstate borders regular,” I’d add “explicitly” to the Tenth Amendment, and I’d repeal the 16th and the 17th amendments.

MI: In recent months, the issue of nullification has become important, and it has been actually happening. Colorado, for example, has nullified federal laws about marijuana. Moreover, there have been efforts surrounding provisions of the National Defense Authorization Act, and historically, numerous states essentially nullified the federal law behind the national ID card. Are these efforts on firm constitutional ground?

APN: They are on firm historical ground, and firm constitutional ground as the Constitution was understood by those who wrote it.

MI: We’ve been talking about the 1787 Constitution of course, but there was one that came before it, written in 1776, and known as the Articles of Confederation. Many libertarians point to the newer constitution, say it was not an improvement, and that it replaced the more de-centralist Articles. In light of this, should we still be defenders of the current constitution, and if so, why?

APN: I have spent my entire professional career defending the Constitution; and that can be likened to playing catch with jell-o or shoveling against the tide. The Articles of Confederation permitted the states to become tyrants, and the Constitution — as interpreted over the centuries — has permitted the federal government to become tyrannical. The resolution of this dilemma will require the entry into all three branches of the government of persons committed to natural law principles. That means they’d believe in the primacy of the individual over the state and the intrinsic inability of government to do anything beyond enforcing the natural law.

Mises: Mainstream Economists Prove Krugman Wrong About Austrian Economics

This post, written by John P. Chochran, originally appeared on the Ludwig von Mises Institute website on September 11.

Paul Krugman has recently been critical of Friedman (and Phelps), the Phillips curve, and the Natural Unemployment Rate (NUR) theory in the process of arguing that due to the recent Great Recession, the accompanying financial crisis, and Bush-Obama-Fed Great Stagnation, Friedman has vanished from the policy front. Krugman makes this claim despite the fact there is an on-going vigorous debate on rules versus discretion with at least some attention to Friedman’s plucking model. While maligning Friedman’s contributions, Krugman manages a slap at Austrians and claims a renewed practical relevance for Keynes:

What I think is really interesting is the way Friedman has virtually vanished from policy discourse. Keynes is very much back, even if that fact drives some economists crazy; Hayek is back in some sense, even if one has the suspicion that many self-proclaimed Austrians bring little to the table but the notion that fiat money is the root of all evil — a deeply anti-Friedmanian position. But Friedman is pretty much absent.

The Friedman-Phelps hypothesis was the heart of the policy effectiveness debate of the 1970s and early 80s. The empirical evidence developed during the debate over the policy implications of the NUR model, at least temporally, discredited active Keynesian discretionary policy as an effective tool to reduce unemployment in the long run. One result of the debate: monetary policy appeared to improve, especially compared to the Fed’s dismal record in the late 1920s and 1930s and the mid 1960s to the late 1970s. Central banks, à la Friedman, focused on rules-based policy and inflation targeting resulting in what many, following John B. Taylor, call the Great Moderation of the early 1980s to the early 2000s.

Krugman does recognize the “stagflation (of the 1970s) led to a major rethinking of macroeconomics, all across the board; even staunch Keynesians conceded that Friedman/Phelps had been right (indeed, they may have conceded too much [emphasis added]), and the vertical long-run Phillips curve became part of every textbook.”

My early work on Hayek and Keynes (see here and here) argued that this development was important, but misleading. The then current business cycle research and its newer variants could benefit from re-examining the issues at the heart of the Hayek-Keynes debate.

Money, banking, finance, and capital structure were, and still are, for the most part ignored in much of the new (post-Friedman-Phelps) macroeconomics including the new–Keynesian approaches. In this regard, Hayek (and Mises) had then, and has now, more to offer than Keynes.

Recent papers by respected mainstream economists are beginning to recognize that attention to Hayek and Mises can be useful. Guillermo Calvo of Columbia University, in a recent paper [PDF], has even gone so far as to argue, “the Austrian school of the trade cycle was on the right track” and that the Austrian School offered valuable insights and noting that:

There is a growing empirical literature purporting to show that financial crises are preceded by credit booms including Mendoza and Terrones (2008), Schularik and Taylor (2012), Agosin and Huaita (2012), and Borio (2012).

Calvo adds “[t]his was a central theme in the Austrian School of Economics.”

Claudio Borio highlights what Austrians have long argued is a key flaw in inflation-targeting or stable-money policy regimes such as many central banks either adopted or emulated during the 1980-2008 period. This flaw contributed to back-to-back boom-busts of the late 1990s and 2000s:

A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply-side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms.

Borio thus recognizes that a time to mitigate a bust is (contra-Keynes) during the boom:

In the case of monetary policy, it is necessary to adopt strategies that allow central banks to tighten so as to lean against the build-up of financial imbalances even if near-term inflation remains subdued.

William R. White, another economist who has worked at the Bank of International Settlements (BIS) and has been influenced by Hayek, has come to similar conclusions as does Calvo, who argues “Hayek’s theory is very subtle and shows that even a central bank that follows a stable monetary policy may not be able to prevent business cycles and, occasionally, major boom-bust episodes.”

In the current environment, many, including Krugman, have argued for a higher inflation target or a higher nominal GDP target to jump start the current sluggish recovery.

Austrian business cycle theory on the other hand, as recognized by Borio and Calvo, provides analysis on why such a policy may be ineffective and if temporarily effective in the short run, harmful if not destructive, in the long run. (See here and here for more.)

An easy money and credit policy impedes necessary re-structuring of the economy and new credit creation begins a new round of misdirection of production leading to an “unfinished recession.” Calvo expounds:

Whatever one thinks of the power of the Hayek/Mises mix as a positive theory of the business cycle, an insight from the theory is that once credit over-expansion hits the real sector, rolling back credit is unlikely to be able to put “Humpty-Dumpty together again.”

It is too bad it took back-to back harmful boom-bust cycles for the profession at large to begin to again examine Austrian insights, but it does illustrate how foolish Krugman is when he argues Austrians have nothing to bring to the table.

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of “The Hayek-Keynes Debate: Lessons for Current Business Cycle Research”. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics.

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Mises Institute Explains How The State Destroys Social Cooperation

This article, written by Pepperdine University economics professor Gary M. Galles, was originally published by the Mises Institute on September 3. 

Many of our present economic difficulties, while blamed by politicians on freedom and markets, are in fact the long-run effects of government policies emphasizing short-run, visible benefits that mask hidden or delayed costs. In particular, our economic woes reflect government’s reliance on coercion, whose harmful effects expand over time, in contrast to voluntary cooperation, whose beneficial effects expand over time.

Voluntary market cooperation expands because the more time sellers have to respond to increases in demand, the more their incentives lead to better ways of accommodating buyers with improved output. Similarly, the more time buyers have to respond to increases in supply, the more profitable uses are discovered. That is, when you give individuals better incentives to voluntarily cooperate in the marketplace, over time, they discover and implement more effective ways to do so, expanding cooperation and the mutual benefits that result.

We see this everywhere in personal computing and technology in which convenience, computing power, and portability of devices increase constantly, at rates much faster than most ever anticipated in earlier times. In contrast, when the state employs coercion, it encourages buyers and sellers to act against what would be in their self interest in a free economy. Over time, those who would otherwise spend time thinking about their trading partners, instead respond to coercive measures by expanding the ways they can evade the burdens imposed. In such a situation, social cooperation contracts.

Taxes (including deficits, which are delayed taxes), subsidies, and mandates all illustrate coercion’s progressive undermining of social cooperation. For example, when government raises taxes on income earned by benefiting trading partners, those who provide the benefits earn less over time. In response, those burdened with the new taxes have incentive to do less to benefit others while substituting more effort to avoid taxation.

Moreover, when government mandates employer-provided “free” benefits, employers then reduce other parts of compensation that many workers may actually value more than the mandated benefits, to “pay” for them. Or employers may simply hire fewer workers. We see this already in Obamacare’s mandated increases to employers’ labor costs. Employers have cut jobs and hours (the mandates don’t apply to under-30-hour-per-week workers), or employers squeeze other parts of employee compensation, including on-the-job training, which is a crucial mechanism through which workers learn their way to success.

Price ceilings such as rent control, and price floors such as the minimum wage, also illustrate coercion’s increasing erosion of social cooperation. In response to such mandates, people increasingly find ways to do less of what violates their self-interest, which entails cooperating less well with others. As Friedrich Hayek noted, “Any attempt to control prices or quantities of particular commodities deprives competition of its power of bringing about effective coordination of individual efforts.”

When government holds apartment rents artificially low, they reduce landlords’ incentives to continue supplying dwellings. Over time, fewer units are constructed (seen under every rent control regime) and owners find other ways to leave the rental housing market. This takes place through a variety of mechanisms, including condo conversions, which removes units from the available rental stock in order to evade restrictions imposed on rent, but not on mortgage payments. Owners might also respond by reducing maintenance and upkeep of units which rent controls make unprofitable. The end result is less social cooperation and long-term deterioration of the existing housing stock.

When government holds the price of low-skill workers artificially high, as with the minimum wage, government reduces employers’ incentives to use low-skill workers in production. Over time, employers find more ways to conserve on that artificially scarce input, reducing employment via changing production processes and products, substituting capital for labor, reducing output, moving jobs elsewhere, and to generally cooperate less with low-skill workers. For instance, restaurant industry responses to minimum wage hikes have included moving to buffets, which require fewer workers, expanding slow-cooked menu choices (essentially substituting crock pots for workers), and self-serve soda dispensing. Similarly, the higher the price of a worker relative to a computer, the more employers will substitute computers for labor.

Furthermore, the constant prospect of endless and arbitrary changes in taxes and regulations and other forms of coercion increases the risks involved in trying new and innovative ways of cooperating with others in search of profits. And because coercion expands evasion efforts over time, more and more resources go to enforcement, taking resources away from productive uses and violating principles of equity (since enforcement is inherently selective and unequal) that can be upheld only when arrangements are voluntary.

Since there are very few areas where coercion is necessary to achieve social cooperation, there are very few areas where government advances it. Instead, the massive expansion of government beyond such bounds has undermined cooperation and violated justice. Yet still more intrusion is constantly offered as a solution. That is why Ludwig von Mises’s recognition that “Those who ask for more and more government interference are asking ultimately for more compulsion and less freedom” is important and ominous today. Each expansion of government’s reach shrinks freedom and restricts otherwise expanding social cooperation, with effects that worsen progressively over time.

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Mises: Obamaschool A Threat Just Like Obamacare

This article, written by Against Crony Capitalism co-founder Hunter Lewis, originally appeared on the Mises Institute’s website on August 30. 

The President gave a speech on August 22 in Buffalo outlining his proposal to “reform” the student loan program. He acknowledged that the program has some problems, but assured the audience they are easily fixed. Just take the principles behind Obamacare and apply them to education. The President personally “guaranteed” that his proposals would make college more affordable.

Here’s the plan. The government will rate colleges based on fees (the lower the better) and graduation rates (the higher the better) and student success in finding a job. Then student loan funds will be allocated to schools according to the rating. Students will also be guided to the best-rated schools via government web sites. And schools will get more funding if they set up demonstration projects to reduce costs. This will all encourage more “competition” among schools. Yes, you heard that right: more government control of colleges will increase market “competition.”

We don’t have a 2,000 page bill in Congress yet, but it’s all quite familiar: government will take even tighter control of higher education just as it has taken even tighter control of medicine, and use Obamacare as its operating manual. Of course, Obamacare not only rated medical insurance policies; it mandated what would be in them at what prices, which in effect put government in charge of defining what healthcare is. Presumably, the government rating of schools will in due course also lead to mandates and the government defining what higher education is. Obamacare also set up government sites where people would be steered to buy government approved policies, and set up demonstration projects, even though the history of government-inspired healthcare demonstration projects has been dismal.

There is a lot more in common between Obamacare and Obamaschool than these superficial characteristics. Obamacare came into being because of a crisis in medical care. As usual, that crisis had been caused by earlier government interventions in medicine, especially price controls. At present, Medicare price controls about 7,500 medical procedures. Because payment varies by location and practitioner (e.g., doctors employed by hospitals get paid more than other doctors), it has been estimated that Medicare price-controls six billion medical transactions at any one time. As government has come to dominate medicine and price-control it, prices have inevitably risen at a rate that threatens to bankrupt the economy. Obamacare has doubled down on the price controls, mandating allowed price increases under Medicare and installing a price control board. All of this will no doubt lead to the kind of legislation recently passed in Massachusetts where any “material” change in a medical practice, in either prices or services, must be approved by the state.

Obamaschool is coming into being for similar reasons. In this case, the government set up a student loan program which was ostensibly designed to subsidize students. But whenever government subsidizes demand without increasing supply, prices inevitably rise, and this was no exception.

As President Obama pointed out, “Over the past three decades, the average tuition [and fees] at a public four-year college has gone up by more than 250 percent. 250 percent. Now a typical family’s income has gone up 16 percent. That’s a big gap.” Yes it is.

In reality, both the 250 percent and the pitiful 16 percent have been caused by government policies, especially price manipulations and controls. The 250 percent increase in fees (mitigated somewhat by increases in student aid) has specifically been driven by government’s mistake in flooding schools with student loan money. That money did not help students; it enabled schools to keep raising fees. What students mostly got out of the loan program was an early initiation into massive debt. If leaving school with heavy debts is not exactly slavery, it certainly represents some kind of indentured servitude.

Obama was more than a bit mendacious about this debt burden. He took credit for keeping student interest rates down. He even said that “government shouldn’t see student loans as a way to make money; it should be a way to help students.” But the reality is that his administration is currently borrowing money at negligible interest rates and then relending it to students at much higher rates. The difference is booked elsewhere in the federal budget under “deficit reduction.” If that isn’t a clear case of using student loans as a way to make money, then what is?

What will really happen if the federal government completes its takeover of higher education pricing? The certain result will be even higher prices, which will then lead to calls for a complete federal takeover, just as advancing prices under Obamacare are now leading to admissions by Senator Reid and Congresswoman Pelosi that it was only intended to be a stepping stone to a “single payer” system in which government in effect nationalizes all healthcare. Nationalizing healthcare would make the crisis worse, not better, but Reid and Pelosi don’t understand that.

The President’s specific proposals for student loans will have some other presumably unintended effects as well. If schools get more federal money as their graduation rate increases, they will simply stop taking students who are more likely to drop out. That of course means they will stop taking disadvantaged students who need help the most.

The administration says that it will get advice from schools in devising the rating system. This is all we need: closed door meetings in Washington between the government and special interests with the consumer excluded. This is exactly how Mussolini ran Italy and Roosevelt tried to run the U.S. with the National Recovery Act. The results of dismantling a consumer-driven market economy will be no better now than they were then.

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