California Burning: Price Controls Destroy Like Wildfire
At first glance, what appears to be just another natural disaster, upon closer look, reveals a widespread state policy failure driven by a flat-earth theory of economic policy. In recent years, the state of California has waged a war against insurance companies. The California Department of Insurance (CDI) has closely regulated insurance premiums, requiring approval for increases to the point that insurance companies could not use future risk assessment as a valid justification for raising premiums.
Insurance companies, which provide a valuable service by bearing the risk of disasters such as wildfires, were now facing a situation in California where their business model became unsustainable. This led to coverage cuts and companies exiting the market. Many firms, including State Farm and Allstate, were unable to provide new services as California became a leading state in premium rate suppression.
Unable to reprice premiums, major companies abandoned high-risk areas, leaving homes in these regions completely vulnerable and unprotected. Price ceilings by keeping prices artificially low will lead to shortages. This means the number of people seeking insurance far exceeds the number of policies being offered. If companies cannot use pricing to differentiate between high- and low-risk areas, they will withdraw from high-risk regions, leaving a significant portion of homes uninsured.
Disaster struck as wildfires spread across Los Angeles, with California’s insurer of last resort, the FAIR Plan, receiving over 4,400 claims totaling $900 million. As more claims pour in, the solvency of the program may be pushed to its limit.
If it seems that price controls contributed to many of the problems following the wildfires, one might expect the government to ease or abandon such policies. However, California Attorney General Rob Bonta warned against increases in rent prices: “You cannot jack up prices and take advantage of disaster victims, plain and simple.” He went so far as to emphasize that such actions constitute “price gouging,” which could lead to some jail time. Mayor Karen Bass reinforced these ideas, stating that there is “no tolerance” for “illegally hiked rents and prices.”
This is yet another price control policy that will only harm the people of Los Angeles. Its only effect will be to create shortages. High prices ensure that those who need apartments the most—and are willing to pay more—will have access to housing. If prices do not rise, people are unable to bid to signal their higher preference for these homes. Beyond price control policies, zoning and building codes will likely slow down rebuilding efforts. Extensive building regulations will make reconstruction both difficult and expensive. Perhaps the best way the government can help the people of California is by easing regulations.
About this Piece
This piece is featured on the cover of When Free to Choose, Northwood University’s signature publication dedicated to promoting free enterprise. The author — Dr. Gabriel Benzecry, Assistant Professor & Bretzlaff Scholar at Northwood University — specializes in Austrian economics and the history of economic thought. His research delves into the intellectual legacies of economists and political philosophers such as F.A. Hayek, Abba Lerner, Oskar Lange, Ludwig von Mises, Friedrich List, and John Locke. Readers can email Dr. Benzecry at benzecry@northwood.eu. To receive a complimentary edition of When Free to Choose in your inbox each month, subscribe here.