Price controls

At some point in the not-too-distant future, when prices begin rising because the value of the dollar is dropping, we can expect the government to try using price controls. As Henry Hazlitt says in Economics in One Lesson, in the chapter on government price-fixing:

When the government tries to fix maximum prices for only a few items, it usually chooses certain basic necessities, on the ground that it is most essential that the poor be able to obtain these at a “reasonable” cost. Let us say that the items chosen for this purpose are bread, milk and meat.

The argument for holding down the price of these goods will run something like this: If we leave beef (let us say) to the mercies of the free market, the price will be pushed up by competitive bidding so that only the rich will get it. People will get beef not in proportion to their need, but only in proportion to their purchasing power. If we keep the price down, everyone will get his fair share.

In practice what happens is exactly the opposite, as shortages develop and these important goods begin to disappear. Eventually, the majority of people don't get their fair share. There are two reasons for the shortage:

First, the chosen items are a great deal, and are cheaper than the non-price-controlled foods. So, instead of fish one buys beef; instead of potatoes one buys bread; instead of orange juice one buys milk. Demand for the artificially cheap goods surges.

At the same time, the second factor comes into play: the low prices cut into the profits of producers of these items. Some producers (say, a small organic dairy farm) can't make it at all, and go bankrupt. Others may shift production away from the low-profit items, say by using milk to make butter and yogurt rather than simply selling it as milk. Large, diversified food producers may give up on the low-profit, artificially cheap foods, and rely on their other products to get by. Any way you slice it, supply of the price-controlled items drops.

It's not hard to imagine what happens when demand rises but supply drops. We run out of those items, is what happens.

Three other consequences of the price controls are

• reduced quality (as businesses try to maintain profits)
• unfair distribution of these goods, as retailers favor some customers over others
• black markets

The next thing a government would usually try is rationing. If the supply of the item in question -- say, milk -- is still reasonably sufficient, then by some sort of coupon system each family can be guaranteed a weekly allotment of milk. The problem of reduced quality is not solved, and the problem of black markets is hugely increased.

On the black market, the price of a good may be very high, so much so that the poor cannot turn to this source of goods, though the rich can. At this point we've come full circle. The whole intention of the price controls was to insure that everyone would have ample access to these staple goods. Yet now the poor are banned from getting more than X amount per week (if they can even find that!), while the wealthy can turn to the black market. You may think that the upper middle class is unlikely to break the law. But history shows that the "black market" in fact becomes very mainstream during periods of government price fixing. Sometimes the legitimate, legal market virtually ceases to exist, and almost everyone who can afford it uses the black market. At that point the poor have almost no access to these goods, which is particularly unfortunate because these are usually important items like milk, gas, bread, or butter.

Although there is a long history of failed government attempts to control prices, politicians don't seem to be able to resist such controls. The public generally doesn't know enough about economics to understand why prices are rising (i.e. because the currency is losing value). In periods of rapid inflation there is usually anger at retailers or producers, and many accusations of "price gouging" and greed. It's easy for legislators to boost poll numbers by mandating a maximum price for key goods.

This happens despite an extremely clear and consistent record suggesting that price controls never come to any good. Consider The Economic Fallacy of Price Controls:

Throughout history, many in positions of power have used price controls to influence economic activity and the results have often been disastrous. As mentioned previously, Diocletian’s own attempts to curb the rampant inflation which was devastating Rome at the time of his reign during the third century A.D., only hastened the economic deterioration of an already declining empire (Watkins). In the aftermath of the French Revolution, the government led by Robespierre instituted price controls (“Law of the Maximum”) on a variety of items (especially on food), which not surprisingly, led to widespread shortages and starvation (DiLorenzo).

Unfortunately, the United States has not been immune to the allure of price controls despite their dismal historical record. In a book review written by author Thomas J. DiLorenzo and published on the Ludwig Von Mises Institute website, he noted that at one point during the American Revolution, General George Washington’s army was in danger of starvation thanks to price controls instituted by “friendly” colonies such as Pennsylvania. These had the effect of causing severe shortages which were only alleviated after the Continental Congress recommended the repeal of these controls in June 1778 (DiLorenzo).

Furthermore, history shows that not even the threat of the death penalty can keep goods from being sold above the legislated price on the black market. The laws cannot be enforced, yet they often dramatically disrupt the economy.

When the president, the Congress, or a state legislature first enacts price controls (2010? 2011?), this is likely to be met with almost universal approval. In our just-in-time economy, it won't take long for the shortages to ensue. Then will come the accusations about "hoarders" who are causing the problem by buying absurd quantities of the cheap, price-controlled items. This won't be true either, as most stores will impose rationing all on their own (similar to Costco and Wal-Mart during the rice shortage a couple of years ago). Everyone will be pissed off, and hardly anyone will understand that the real blame should be put on the heads of the men who have run the printing press for Federal Reserve Notes.