Price controls almost always backfire, and today is no exception

Inflation is excruciating. However, approaching it with bad policy just adds insult to injury.

It seems like the 1970s again, with some analysts arguing for price restrictions to combat inflation. President Richard Nixon found in 1973, when he relaxed the wage and price limits he had imposed two years before, that this form of intrusive interference never worked as advertised.

Such regulations will always seem reasonable to people who refuse to learn from history. They claim that inflation is just increased prices, and that locking in prices is a simple solution.

However, addressing inflation in this manner is more akin to hiding a symptom than curing the disease. Inflation cannot be controlled by fixing prices any more than your body weight can be controlled by setting your bathroom scale to not indicate pounds beyond a certain threshold.

And, just as hiding your weight won't help you lose weight, disinformation spread by price restrictions would wreak havoc on the economy. Prices are most of the time a measurement of what buyers and sellers believe a thing is worth, rather than being established by an all-powerful vendor. They advise entrepreneurs and firms on how to shift resources from activities that customers value less to ones that they value more.

However, some people are still oblivious of this truth. "There are normative grounds for not wanting pure markets to exist," political scientist Todd Tucker recently wrote in the Washington Post. "Necessary items might be priced out of reach for poor and middle-class customers." "To guarantee that the rich do not bid up prices for necessary commodities, the moment has come to destigmatize more democratic control over pricing levels," he concludes.

Wrong. Prices that are unusually high indicate that there isn't enough of anything to go around, and putting a price ceiling on it almost ensures shortages. Units are swiftly purchased, allotted by corruption or luck, or shifted to more profitable underground marketplaces. Because none of these strategies entice real producers to invest in them, fewer items are produced over time. disproportionate damage to the poor is one of the many harmful impacts of shortages.

This isn't just idle speculation. There are several instances in the economic literature of efforts to control inflation by price restrictions resulting in economic disaster. It produces the same, disastrous results from the ancient Roman Republic to modern-day Venezuela.

What about restricting just the pricing of products and services offered by corporations regarded to be monopolists, as some are currently suggesting? Again, what seems to be easy is in fact impracticable without causing damage to the typical individual.

To begin with, detecting these monopolies is challenging. More crucially, in the contemporary market, when a company does have monopolistic power, it is nearly typically just transitory. High monopoly pricing generate enormous profits, which, in all but the most severe circumstances, attract new rivals who are eager to offer lower prices. Price regulations may diminish this motivation, allowing "monopolists" to become even more entrenched.

These kinds of suggestions reveal how little some commentators know about inflation. The government is creating money, borrowing at high levels, issuing cheques to individuals (some of whom don't need them), and therefore raising consumer demand in an environment where there are some shortages. Fixing the issue requires addressing the root causes. It can't be fixed by putting a price ceiling on a few items.

Leaving aside the faulty economics that underpin price restrictions, one thing is certain: the proposal would enrich central planners, empower the politically astute, and expand the ranks of bureaucrats. Tucker admitted that "many more authorities would very certainly be required," but not as many as the startling 160,000 price controllers deployed during WWII. Some readers may be pleased by the prospect of additional government personnel, but a tiny army intervening in our economic matters would make a poor concept much worse.

Inflation is excruciating. However, approaching it with bad policy just adds insult to injury.

Follow us on Google News

Filed under

Recent Search