Price Controls Would Make a Dire Economic Situation Worse

The past has a habit of repeating itself. Maybe it’s because people hold onto outdated beliefs while refusing to take the lessons from past mistakes. This stubbornness can be seen when President Joe Biden, pundits and legislators blame the rise in inflation on “greed” from corporate executives. They claim that price control is the solution. However, such restrictions would only lead to economic disaster.

Many politicians and pundits believe that the reason for the rise in prices for meat, poultry and energy is the greedy corporate CEOs who are able to increase their profits at the expense and the ordinary Americans. The pandemic is a reason why companies today have become so greedy, they say. For example, Sen. Elizabeth Warren (D–Mass.) Chris Hayes of MSNBC said that there are “giant corporations” who talk about inflation and high prices. You have the opportunity to enter and pass on costs as well as to raise prices further and to engage in some simple price gouging.

Biden joins the blame game and asserts that oil companies can’t increase profits at American workers.

Biden isn’t the only president who has shown ignorance about the complicated factors that affect prices at the pump. His and others’ grandstanding complaints about high prices—especially as they rise during inflationary times—aren’t novel. Don Boudreaux of George Mason University recently highlighted an important observation that Armen Alchian, a UCLA economist from 1976, made.

Politically convenient, direct attacks on inflation symptoms are made. As inflation occurs, politicians and the public blame businessmen and producers for raising prices and mulcting the public….The so-called shortage of gasoline and energy in the United States was precisely and only such a political attack.”

Alchian’s sobering and disturbing description of the events that occurred when politically illiterate people tried to rein in inflation by imposing price controls is something we need to remember today.

To correct the situation, inflate the money stock and impose price controls when there is a rise in prices. The shortages caused by these controls’require government intervention’ to make sure the supply is used appropriately, allocate the resources and manage and nationalize energy production. Increased powers are given to political leaders; open societies are suppressed.”

It is quite astonishing to see the absurd assumptions that underpin those advocating price control logic. In the first place, consumers don’t seem to be affected by price hikes. That’s because monopolies are supposedly everywhere, and most goods—we are to believe—are so indispensable to consumers that we will buy nearly all of them at any price.

A bizarre assumption by price control experts is that producers, who are already struggling with inflation and other issues, will continue to supply the same products when they face price controls. Price controls have no impact on production or consumption.

This is false belief. If prices increase, consumers decrease their demand for goods. However, inflation expectations are not a factor. In that case, consumers will make more purchases to reduce the risk of higher prices in the future. Companies that are prohibited from increasing their prices by law will decrease their supply, creating the shortage Alchian predicted.

It is impossible to believe inflation is a result of greedy corporate executives. The inflation is a continuous and general increase in all prices. This includes wages, which are the cost of labor. This means all businesses would need to be becoming more greedy at the same moment, as all workers will experience the same level of greed.

If corporate greed can allow corporations to raise prices without penalty, then why shouldn’t they be able to resist higher wages and demands?

It isn’t due to corporate greed that inflation occurs. This column’s readers know that inflation is caused in large part by excessive government spending and loose monetary policy. To eliminate inflation we need to raise interest rates, theoretically, higher than inflation currently, and implement fiscal discipline. Also, reforms such as deregulation would promote faster growth in goods and services.

We don’t have what we need but we will likely receive more government spending. This will only increase inflation. We should at least try to prevent price control from making things worse.

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