Some pundits advocate price controls to reduce inflation. This suddenly makes it feel like the 1970s. Overbearing interventions like this have never been as effective as they are advertised. President Richard Nixon found out in 1973, when he removed the price and wage controls that he had put into place two years prior.
Yet, for those not willing to learn from past mistakes, these controls may seem sensible. They claim that inflation is the result of rising prices so locking prices in would be an easy solution.
However, treating inflation in this manner is more like treating a symptom than it is curing the disease. Fixing prices can not control inflation. But, controlling your body’s weight and programming your bathroom scale to show a maximum amount of pounds can help.
The misinformation that price controls convey will lead to a worse economy, just as weight loss will not make you lose more. Prices aren’t set simply by one seller. They reflect the value that consumers and sellers think a product to be worth. These prices are used to inform entrepreneurs and businesses about how to shift resources away from the activities that consumers don’t value to make them more valuable.
However, not everyone is aware of the reality. Todd Tucker, a political scientist, wrote recently in The Washington PostThere are “normative reasons not to want pure markets,” because essential products might be too expensive for middle-class and poor consumers. He concluded that “to ensure the wealthy don’t raise prices on essential products, it is important to start destigmatizing more democratic control of price levels.”
Wrong. It is wrong. Unusually high prices indicate that there aren’t enough units, and a cap on its price almost guarantees shortages. Units quickly go up for grabs, are allocated through corruption and random chance, or move to better-paying underground markets. There are fewer products made over the years because no one incentivizes legitimate producers invest in them. Unfair harm to the poor is one of the negative effects of shortages.
This isn’t just some idle theory. The economic literature has many examples of how trying to control inflation by imposing price controls can lead to economic disaster. The same results are seen in every instance, including the modern Venezuela and the Roman Republic.
How about limiting the price of products and services being sold by businesses that have been deemed monopolists as well? This sounds simple, but it can have serious consequences for average people.
First of all, it is hard to determine who the monopolies really are. Even more important, the monopoly power of a business in today’s economy is often temporary. In all cases except extreme, high monopoly prices can lead to huge profits, which in turn attracts new competitors with every incentive to lower their prices. This incentive can be eliminated by price controls, which further cements “monopolists”.
These suggestions show how ignorant some inflationists are. The government is creating money at large, lending heavily, and sending checks to individuals (some who don’t require it), causing a general rise in prices. This inflates customer demand, even in times of shortages. To fix the problem, you must first address its core causes. This problem cannot be fixed by raising a few prices.
It is important to remember that, despite the economic problems driving price controls, we know one thing: This idea will benefit central planners. Tucker admitted that it was likely that many more officers would be needed, but not as many as the 160,000 price regulators during World War II. While the promise of additional public employees might be appealing to some, a small army interfering with our economic affairs is a terrible idea.
Inflation can be very painful. It is also painful to deal with it through a poor policy.
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