Price Control Temptation
The Misguided Call for Government to Employ Their Proverbial Hammer on Prices
A few months ago, I wrote about the destructiveness of price controls and highlighted various government price control plans around the world at that time. Unfortunately, as global price inflation rages on, the calls for price controls only continue to grow. The natural tendency of those who misunderstand the cause of price inflation is to call for the government to employ their proverbial hammer on prices. Instead of striking the root of the problem (i.e., monetary inflation and fiscal profligacy), people tend to call for more government intervention. They fail to understand the predictable consequences of further intervention in the market. Price controls will cause shortages, then rationing, followed by a black market, and eventually will turn the people against each other.
People in favor of government intervention deflect the blame of higher prices on greedy people instead of directing it where it belongs — on the government’s debasement of the currency. In so doing, they pit man vs. man instead of man vs. ruler.
Isabella Weber at The Guardian, as predictable as ever, calls for price controls in the US. She even refers to the use of controls as “a weapon,” supporting the view that those calling for government intervention see everything as a nail to be hammered. And, guess who she blames for high prices?
“… large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits. … cutting monetary stimulus will not fix supply chains. What we need instead is a serious conversation about strategic price controls – just like after the [second world] war.”
She then goes on to quote a metaphor:
“If your house is on fire, you would not want to wait until the fire eventually dies out. Neither do you wish to destroy the house by flooding it. A skillful firefighter extinguishes the fire where it is burning to prevent contagion and save the house. History teaches us that such a targeted approach is also possible for price increases.”
Her understanding of history is all out of wack. What she is calling for is more fuel to the fire, not strategic extinguishing. Weber’s understanding of history is that WWII price controls were beneficial and that when the price controls ended in 1946, it resulted in “triggering inflation.” But the monetary inflation was the cause of the price increases in the first place. The effort to suppress prices is simply an effort at suppressing reality.
Isabella Weber is an assistant professor of economics at the University of Massachusetts Amherst. Let that sink in.
Robert Higgs nicely summed up the destructiveness of the WWII controls and how they led to rationing and forced people into the black market:
“As the United States mobilized for war after mid-1940, the government’s demands for munitions and related resources began to put pressure on certain markets, and soon prices began to rise. … In response the government … administered a price-control system that encompassed almost all civilian goods and services. Thus from early in 1942 until late in 1946, the [Office of Price Administration (OPA)] endeavored to control prices by administrative decree.
As the government’s war outlays rose steeply and the incomes of a growing legion of war-industry workers rose along with them, consumer demand for goods and services increased rapidly. If prices had been unregulated, this increasing demand would have pushed prices ever higher, especially given that the resources available for augmenting the supply of civilian goods were being depleted by the government’s buildup of the armed forces and the war industries. But because price controls eventually kept the legal prices of civilian goods and services from rising substantially, civilian markets became subject to excess demand and the available goods had to be rationed by nonprice means, such as first-come-first-served transactions and discrimination according to race, sex, and friendship. …
Price controls and rationing created opportunities, however, for people willing to break the law. Active black markets developed all over the country. Substantial proportions of all transactions in some goods—especially beef and gasoline—occurred illegally. Housewives routinely bent the rules by trading, giving away, or selling ration stamps, which the law forbade. Mobsters entered the scene en masse, stealing ration coupons from OPA offices and reselling them, counterfeiting ration coupons and selling them, and hijacking trucks and selling their cargos without collecting ration stamps. Cattle rustling made a comeback.”
It was the total futility and destructiveness of the price controls that forced their end in 1946. Of course, political figures have short memories and the call for price controls would come back relatively soon with President Truman calling for more amidst the Korean War.
The government (and those who support its intervention) claim to have the powerful weapon of price controls to fight inflation. And when the resulting shortages occur, the government will claim to have the powerful weapon of rationing to fight shortages. And when the black market inevitably arises, the government will claim to have the powerful weapon of public shaming to fight the black market. And when public shaming inevitably leads people to turn on each other creating civil unrest, the government will claim to have the powerful weapon of militarizing the streets to fight civil unrest. And then … well, you get the point.
I’ll leave you with a tidbit of WWII propaganda. During the war, gasoline rationing was seen as a way to reduce vehicle use at a time when many Americans drove automobiles. In 1943, the Office of Price Administration made a poster that read, "When you ride alone you ride with Hitler!" to urge Americans to carpool. This was a classic example of public shaming during a period of rationing. Don’t fall for it in 2022.