🔋Under Control Pt. 1

Why price controls are doomed to fail and politicians from both sides reliably ignore the policy blunders throughout history.

Jan 10, 2024

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Inflation was amongst the top issues according to Americans last year. There are many proposed explanations for inflation based on economic theory and circumstance, but governments like to shy away from solving the root cause which can be generalized as excess money relative to economic output. Most excess money comes in the form of new money from banks or printed currency from the government, which of course is arguably the most powerful tool the government possesses. As such, countless other strategies will be employed to “solve” inflation besides stopping the money printer. One of these techniques is wage and price controls. The fantastic book, Forty Centuries of Wage and Price Controls by Robert L. Schuettinger and Eamonn F. Butler outlines how price controls have been a theme of leaders since the dawn of civilization.

Records in ancient Egypt, the Roman Empire, the early US, the world wars, and more show that throughout history, price controls have been a failed strategy for reducing inflation and have a plethora of repercussions. While in theory, a price cap should keep things affordable, the market has a pesky way of finding loopholes, getting around controls, and ignoring them altogether. If history is steeped with examples of price controls backfiring, we surely won’t see them again in our lifetimes… right?

Prices

Wage and price controls distort the free market’s most important feature, prices. A price signals the supply and demand of a capital or consumer good, service, commodity, labor, etc. Without proper price signals, businesses don’t have the confidence to make investments or make wrong decisions, companies may hire too many or too few workers based on where true demand lies, and consumers may buy up certain goods and misallocate resources themselves. A higher price coming from a demand increase for a product signals producers to make more as the product is desired and may be profitable. If that price is artificially lowered, producers will not increase production and shift resources towards the demand, perpetuating the underlying supply/demand imbalance.

Humans are creative but also stubborn. If it is something that people still want, they tend to get around price controls in unique ways. The first way is to look elsewhere for the product. One can pay up for the product elsewhere if there are no capital controls. This makes the domestic economy less productive than it could be and helps foreign economies. Strategies from producers to still make a profit under a price control include bundle deals with other products, quality/size reductions, introducing replacement products, or withholding products altogether. Other consequences include supply shortages as people buy up arbitrarily cheap goods, black markets for people to keep getting goods that may be in short supply, or a barter system so producers can get goods for something of equivalent value.

In the 1970s when the Egyptian government decided to cap the price of bread in their compassion for the lower classes. They have a history of subsidizing food, and at one point it became 17% of total government expenditures. Because of the price controls, farmers began using bread for livestock as it was cheaper than corn, resulting in shortages in bread for people and widespread hunger and riots ensued. Ironically, the modern Egyptian government has recently implemented the same strategy. We can hope it doesn’t get to that point this time.

During the American Revolution, the Continental Congress was issuing new currency units like their lives depended on it. Since war was going on, they decided to issue a price control on commodities for George Washington’s continental army to “reduce the burden of war.” What ensued was a winter of starvation and disease at Valley Forge. Had the reluctant Congress not finally given into market prices to feed Washington’s army, the American Revolution may have had a different outcome.

WWII was a time of heavy price controls, ration stamps, and public campaigns. The Roosevelt administration wanted to control the prices of many scarce items. People had to use ration stamps on scarce items to limit household consumption of things in short supply. This meant that the Office of Price Administration had to be created to create and monitor the ever-changing system and assign ration coupon quantities for each item. This bureaucracy required twice the headcount of the Department of Treasury. As if a government employee in Washington is better at deciding what should be charged for a product than the business owner.

Meat was one area of control, with the government wanting the important food supplies to reach the military. Price control on beef resulted in “skimpflation,” black markets, and strikes ensued. The ironic consequence is that beef consumption went up over this period. Instead of letting the market dynamic of high prices disincentivize people from consuming meat, the price controls made beef more affordable for the lower classes who then raised consumption. Once the controls were terminated, the price of beef doubled which scared consumers and politicians alike. Price controls on beef were swiftly reintroduced against the wishes of the beef industry, who withheld beef from the market in retaliation. Many times politicians have a hard time or don’t care about second and third-order consequences. As you can see, the beef industry experienced just about every possible price control ramification in the 1940s. Price controls on beef were again introduced in the 1970s.

The Free World

Milton Freidman, a leading figure from the Chicago School of Economics did not mince words when suggested that wage and price controls introduced by Richard Nixon in the 1970s were immoral and a threat to free society.

Price controls are not compatible with liberal democracies, and are more suited for collectivist regimes like the Soviet Union with the central planning of most prices. This is because central planners can dictate by law and force what prices should be. A free country is not likely going to put a merchant in jail or labor camp for selling bread for higher than he should. Taken to the extreme as seen in the Soviet Union, there were harsh consequences for black markets and misbehavior. This comes at the cost of the less controllable aspects like supply. The Soviets tried to force quotas from the agricultural industry, but its centrally planned policies led to famine and the death of millions of people.

Price controls in a free country promote and lead to authoritarianism. While a single price control in itself may be minor or seemingly inconsequential, the incentives it produces are not favorable. Controls lead to the public interest being within the realm of illegal activities. After some time, it promotes spying and ratting on fellow citizens and companies, black markets, theft and crime for scarce items, and other immoral behavior. We already have programs in the US to inform of companies that are suspected of price-gouging. Ambiguous price-gouging laws around the country encourage spying and ratting on fellow citizens and distort normal market dynamics.

It is not more absurd to attempt to impel faith into the heart of an unbeliever by fire, or to whip love into your mistress with a cowskin, than to force value or credit into your money by penal laws. - Pelatiah Webster

Because of this incompatibility, one tactic employed by Carter in the 70s was voluntary price controls. This tactic may be confusing to your intuition and that would be correct as there must be some incentive to comply with voluntary controls. This program came with tax benefits for those who comply as well as an implied threat of reduced government contracts, future regulations, and non-compliers lists.

Price controls are an age-old bi-partisan economic policy mistake that is steeped in history. Nixon made the same mistakes as Roosevelt, and Carter the same as Nixon. It is proven that wage and price controls do little to solve inflation and have a multitude of deleterious consequences, but that doesn’t stop politicians from every background from returning to the flawed policy regardless of the immoral incentives attached. Mostly free economies like in the US continue to attempt these strategies to avoid solving the root cause of the problems that those themselves in power are causing. While my point is not that it will cause the US to become authoritarian, these policies lead the government down a path in that direction and instill an immoral incentive at the root of public interest.

Stay tuned next week (part 2) for where and how price controls are gripping the world today, and perhaps tomorrow. Until then,

-Grayson

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