Price controls are destructive. They wreak havoc on the supply chain. But politicians use them for their short-term advantage by playing off the emotions and economic ignorance of the populace. Politicians deflect the blame of higher prices on greedy businesses instead of directing it where it belongs — on the government’s debasement of the currency. The inflationary monetary and fiscal policies of governments worldwide have brought about a worldwide crisis of rising prices. Price controls will only add fuel to this fire.
Politicians, likely of their own economic ignorance and hubris, believe they can help struggling families with a simple edict. Unfortunately, the majority of the public are also ignorant of basic economic law and therefore embrace the “man-with-a-plan.” A typical political statement may go something like this:
“Rapacious businessmen are seizing on the opportunity to raise prices on families struggling to make ends meet, put food on the table, clothes on the backs of their children, and heat in their cold homes. Vote for me, one more time, and I will force these greedy businesses from charging unfair, unreasonable, and unlivable prices.”
You will hear this type of rhetoric more often than not these days. In fact, we will see some real-time examples below. But first, let’s review why price controls are bad.
Why are Price Controls Destructive?
Since we are facing a price inflation crisis, let’s focus on the consequences of fixing or “freezing'“ a price at a maximum value. If the price of a good or service is forced below the natural market level, it will result in the following two things:
Increase of demand for that good or service
Reduction of supply of that good or service
An artificial shortage then materializes and pandemonium ripples through the market.
Increase of Demand
Demand increases because a lower-than-natural price tempts the consumer to buy more than necessary. Think about when something is on sale at the grocery store — toilet paper, for instance. From your shopping experience, you know a deal on toilet paper when you see one. So what tends to happen is people will buy more than needed in the short term to offset higher costs in the long term. This is why retailers put things on sale. They know a low price influences consumer behavior this way, so a sale helps a seller clear inventory.
Reduction of Supply
Since people tend to buy more at a lower-than-natural price, the accumulated supply disappears from the shelves rather quickly. And because the price is fixed too low, re-supply will not occur quickly or may not occur at all. Think about if you were a producer or seller of a good and suddenly you were forced to sell that good at a capped price. Well, if that capped price does not allow you to make money — or worse, causes you to lose money — you are not likely to produce or sell that good anymore (or you may produce a lower quality product). The price control has removed the market incentive for you to maintain supply.
I discussed how government intervention in the labor market has contributed to the ongoing labor shortage in a previous article. Let’s now take a look at other shortages soon to surface as a result of the interventions of governments around the world.
“My top priority, after the preliminary success of the vaccination program, is regulating the market of essential goods. People must have easy access to commodities they need at reasonable prices. The Market Regulation Headquarters will constantly hold meetings until the market reaches equilibrium; after all, the philosophy behind our presence is for people to experience calm.”
In an attempt to win back favor from voters trapped in an inflationary spiral, the Argentinian government reached an agreement with retailers and business leaders to freeze prices of 1,247 household goods for 90 days. Coupled with the price freeze, Argentina’s central bank ramps up the money printing to boost spending on welfare and subsidies — a move that will only add fuel to the fire. This comes just in time before crucial midterm legislative elections in November.
Argentina’s Domestic Trade Secretary, Roberto Feletti, responds in the language of Newspeak,
“These 1,247 products with frozen prices will provide an anchor to stabilize inflation. The fundamental thing is to stop the ball and guarantee a quarter of high consumption.”
Arguably the most regulated industry in the United States — the medical industry — faces yet another layer of red tape. Instead of investigating the causes of general price increases (hint: monetary inflation) and perpetual medical cost increases (hint: layers and layers of red tape), the US government continues to convolute the system. Part of the proposed $3.5 trillion “Build Back Better” bill imposes a price control on prescription drugs, among a vast assortment of other legislation. It would give the government the authority to negotiate prescription drug prices through the Medicare program.
Senator of Vermont, Bernie Sanders, justifies his support for the bill by touting poll results showing 88% public support for lowering prescription drug prices. But, come on, who is going to say ‘no’ when asked if they want lower drug prices? I repeat: the economic ignorance and hubris of politicians feeds off the emotions and economic ignorance of the populace.
CEO of Eli Lilly and Co., Dave Ricks, is warning the move would have a devastating impact on the pharmaceutical industry.
“A cut like is being proposed would have about a 40% reduction in our U.S. revenues. There is no way we could just absorb that. We would have to make significant changes to our operations.”
Biotech investors spoke last month at the National Press Club to heed warning that the price-control scheme threatens early-stage life science research. Peter Kolchinsky, a founder and managing partner at RA Capital Management, urges caution:
“If the government can pick any arbitrarily low price it wants and prevent a company from saying ‘no’ by threatening it with a ruinous 95% tax, then I could not justify any biomedical [research and development] investment to my investors. In other words, we should expect a near-total collapse of R&D funding.”
“We will freeze, freeze — there will be no more increases in the price of gas. I have that power.”
Castex spouted an unintended pun there. Unfortunately, the French people really will freeze this winter.
Prime Minister, Andrej Plenković, announced a 30-day diesel and petrol price freeze in an effort to control soaring prices.
“We have, taking into consideration the economic circumstances and the unpredictability of oil prices, and, with the aim of maintaining economic recovery, decided to stabilize petrol and diesel prices.”
The Union of Autonomous Trade Unions of Croatia called on the government to cap prices, so of course, the Prime Minister acted without hesitation to maintain support.
In a most rare occurrence, the Sri Lankan Consumer Minister, Lasantha Alagiywanna, actually admits his error and apologizes to the people, saying,
“We admit that the price controls created shortages. We apologize for the inconvenience caused to consumers. But the government did this with the best intentions. We will talk with the suppliers today and decide on a plan.”
Note well that this apology for the “inconvenience” comes after enacting penalties on those who did not comply with the destructive price controls in the first place.
As the old proverb goes, the road to Hell is paved with the best intentions. Instead of trying to control the market, governments should simply keep their hands off. The supply chains throughout the world are in a mess due to monetary and fiscal policy insanity and various government lockdown schemes. They need to be allowed to readjust freely. No amount of political will can magically make a price low without causing a series of other problems.
I’ll leave you with a great clip from Marginal Revolution University summarizing the impact of Nixon’s price controls of the ‘70s.