economics Price Controls

Venezuela as a Map

The Fed is asking businesses to enact a hiring freeze to help fight inflation. The thought here is to cut off the demand for labor, which will prevent wages from increasing. This will in turn lower the amount of money available to chase goods, which will reduce demand and thereby control inflation. In other words, they want to make everyone poorer by keeping you from being able to get a job or run your business.

This is a common scenario for socialism/communism:

  • They enact policies of free stuff, which causes runaway inflation.
  • To combat that inflation, they begin wage and price controls.
  • This causes shortages of goods and labor.

How long will it be before we are eating our pets?

Inflation won’t be controlled by keeping people poor on purpose. It will be controlled by stopping leftist idiots in the government from doing things like mailing out checks so people can have free Internet.

Price Controls

Now It’s Nashville

Now rent control is coming to Nashville. In city after city, we are seeing reports of 20, 30, even 40 percent increases in rents. Market forces are putting pressure on rents nationwide.

Governments have been trying to set maximum or minimum prices since ancient times. The Old Testament prohibited interest on loans, medieval governments fixed the maximum price of bread, and in recent years, governments in the United States have fixed the price of gasoline, the rent on apartments, and the wage of unskilled labor, to name a few. 

Price controls hold within them the promise of protecting groups that are hard-pressed to meet price increases. Like all price controls, rent controls are supposed to protect those who are renting when the demand for apartments exceeds the supply and landlords were preparing to “gouge” their tenants. But what price controls actually do is distort the allocation of resources. See Venezuela for the inevitable conclusion to that plan.

The unrealistic assumptions behind the logic of those who argue for price controls are amazing. The first of those assumptions is that hikes in prices apparently have no impact on consumers’ demand for goods.

Governments may not know much, but they do know how to produce a shortage or surplus. Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. If you mandate that a product be sold below its value, those holding that product simply refuse to sell. This spawns a black market where the product is sold at its new (even higher) value.

Price floors, which prohibit prices below a certain minimum, cause surpluses. That is, dictating that consumers buy a product for more than it is worth causes consumers to stop buying. The surplus means many can’t find jobs, which forces some to work (under the table) for an amount below that minimum. (See illegal immigrants)

The law of unintended consequences is at work always and everywhere. People outraged about high prices of plywood in areas devastated by hurricanes, for example, may advocate price controls to keep the prices closer to usual levels. An unintended consequence is that suppliers of plywood from outside the region, who would have been willing to drive in to supply plywood quickly at the higher market price, are less willing to do so at the government-controlled price. Thus results a shortage of a good where it is badly needed.

This entire cycle of inflating the currency before installing price controls is another means of increasing government power.

“Inflate the money stock; when prices rise, impose price controls to correct the situation. These controls lead to shortages which ‘require’ government intervention to assure appropriate use of the limited supply and to allocate it and even to control and nationalize the production of energy. The powers of political authorities are increased; the open society is suppressed.”

Armen Alchian, 1976

This entire exercise is a means of grabbing more power and control by a government keen on stealing private property.

Private property rights contain three key features: (1) the right to make decisions about the physical conditions and uses of specified goods, (2) the right to sell the rights of ownership to other people, and (3) the right to enjoy the resulting income and to bear the loss of the use decision.

Armen A. Alchian, Universal Economics

Read more here about the government’s motives.