The week of August 12, 2024: Prices (and their uses), trade, industrial policy, Argentina, and much, much, more.
The week of August 12, 2024: Prices (and their uses), trade, industrial policy, Argentina, and much, much, more.
Price controls are back in the news again. A few weeks ago, President Joe Biden had advocated a form of rent control. Now Vice President Kamala Harris is arguing for a federal ban on “gouging” when it comes to “excessive” increases in the prices of groceries and food products. There is a suspicion that she would like such a law to extend beyond that area, but she may have backtracked on that after earlier criticism. And just what are “excessive” price increases? Doubtless all will be cleared up at Harris’ next press conference.
The surprise that Harris or anyone else would propose broad price control legislation despite the repeated failure of such laws over the millennia reflects a lack of precision over the meaning of failure. Before concluding that a policy has “failed,” it’s necessary to ask for whom.
It’s not only free market “fundamentalists” who argue that Soviet communism failed economically as in so many other respects. As should not need saying (but sometimes seems to), there’s a good reason for that. Given the size, resources, and potential of the realm seized by the Bolsheviks, the story of the Soviet economy is one of lethal, catastrophically wasted opportunity. But, as I have mentioned before, for those who reached a sufficiently senior level within the Soviet system, it worked well for decades as a source of power and privileged access to goods, services, and accommodation. To be sure, there was an unnerving lack of job security under Stalin, but mass purges ended after his death, and those at the USSR’s more senior levels no longer needed to fear the Gulag or the bullet if they fell out of favor, making the deal better still. For them the system, which was inextricably connected with the sort of economy it ran, worked well for a long time.
Reacting to Biden’s rent control proposal, I argued that it was important to consider the extent to which the political value of an idea to its advocates could outweigh concerns they might have about its adverse economic consequences. Biden was then still running for re-election. He or his handlers had presumedly calculated that the extra votes to be gained by putting forward his plan were worth it for him (or them) even if merely making the case for it could, by adding another risk that landlords or potential landlords had to consider, damage the rental market in a way that could only hurt those looking for a place to live. They would pay the price. He would receive the return. Good trade.
The reason that rent controls, even if only introduced “temporarily,” tend to become permanent is that, if there are enough renters, it makes electoral sense for politicians not only to keep those controls in place but also to ensure that they are as stringent as possible. The results have been appalling in city after city over the years, but the system will only change when the political incentives change, and that can take a very long while. Sweden’s rent controls were introduced as a temporary wartime measure in 1942. They are still in force, with amendments, today, and the consequences have not been pretty.
In Western economies, price controls specifically targeted at food have been relatively rare. Even in wartime, they were linked to broader controls in which the allocation of resources was governed by rationing systems. The food shortages associated with the USSR and its kin were a consequence of those regimes’ abandonment of a market economy. People were (to varying degrees over the years) allowed to sell the products they sold on small, private plots. These produced a disproportionate amount of food, an ideological embarrassment accepted by Moscow as a means of reducing dissent.
In (vaguely) market economies food price controls on certain key staples have not been uncommon to protect the poor. The price is capped, and the cost of that cap is paid for by the state subsidizing producers. This won’t stop a bout of inflation, but it deflects its burden. However, the subsidies will be politically difficult to eliminate. If prices continue rising, so will the cost of the subsidies, which can be a problem where inflation is persistent.
Enter, as usual, Argentina, but, in this instance, the subsidies were for utility bills.
In 2021 the cost of subsidizing the energy supplied to households was equivalent to 2.3 percent of GDP. Mauricio Macri, Argentina’s center right president between 2015-2019, started phasing out electricityand other subsidies. Political opposition (and the fear of political opposition) among other factors, meantthat progress was too slow. The economy was still headed in the wrong direction by the time he lost the 2019 election to the Peronists’ Alberto Fernández. Fiscal pressure (and the IMF) saw continued, if inadequate, efforts to cut back a still massively bloated subsidy regime (for a little while), but by 2022, inflation was accelerating so fast that it threatened the Peronists with electoral disaster the following year. Their response, characteristically, was to boost spending (much of which was increasingly funded by, in essence, money-printing). The cost of Covid had only made things worse. They also relaunched and extended price controls on a range of consumer goods that had been in force, off and on, for a while, with no material effect on inflation, although they provided some relief to hard-pressed Argentines.
However, Argentina’s economic crisis had reached a point where the politically impossible was now possible. Libertarian Javier Milei was elected president in December. He has scrapped rent and other price controls (abandoning the former delivered impressive results very quickly indeed) and has cut (and is cutting) subsidies. Economically, that’s the right thing to do, and politically too. If Milei fails economically, he will fail politically, but there’s a catch. Restoring economic sanity is enormously painful. Most people are very poor (the poverty rate has risen to around 60 percent) and life is extremely hard. Milei continues to enjoy — under the circumstances — decent support. His message that there is no alternative is still getting through, but no one knows how long Argentines’ patience will last.
But there’s nothing they can do to change the reality that a freely functioning price mechanism is a key element in the development, preservation of, or rebuilding of a successful economy. That’s true when times are good, it’s true when inflation strikes, and it’s true (extreme exceptions aside) if sudden shortages caused by an unexpected event — a virus, say — lead to a jump in prices.
I wrote about this in 2022 when, in the aftermath of the pandemic, angry talk of greedflation was in the air. I quoted the British economist Edwin Cannan, who, writing in 1915, explained how such scapegoating has recurred through the ages:
Buyers who have to pay higher prices suddenly become either ‘the poor’ forced to reduce their consumption of necessary articles or else employers of a particularly needy and deserving class which will be thrown out of work by the rise. All the injured persons are at once represented as being iniquitously robbed by an unscrupulous gang of speculators, middlemen, bloodsucking capitalists, or rack-renting landlords against whom all the resources of the State ought to be brought forthwith. The ideal somewhat vaguely held seems to be an immediate return to the prices of a few months or a year ago.
Consumers feel that there is something “not quite right” about the prices they are being asked to pay. That’s a natural response to a sudden price rise and, at some level, it reflects the survival of the premodern fallacy, contained in the work of Aristotle and Aquinas, among others, that there is a “just” or “fair” price for some good or service, nonsense preserved by its psychological appeal. It was no coincidence that when the Peronists relaunched their price control scheme in 2022, it was called the Programa Precios Justos.
But the only “right” price is one at which the buyer freely agrees to buy, and the seller freely agrees to sell. That price may change from moment to moment and buyer to buyer, its movement the product of a continuous “dialogue” between seller (or potential sellers) and potential buyers, multiplied many, many times over.
For the state to insert itself into that dialogue, let alone supplant it, will backfire. There are commonsense reasons for that — if the price isn’t high enough to motivate the makers and sellers of goods, the supply will dry up. In 2007, Venezuela’s unlamented Hugo Chávez threatened to jail grocery store owners (and take away their business) if they contravened his price control rules. As would be expected, that didn’t do much for inflation, but it emptied stores’ shelves. If the reward to store owners from selling something is capped below what they believe they need to give them a return that justifies the cost and risk of stocking it, they won’t bother to do so.
In a fine 2011 article on President Nixon’s adventures in price control, the Cato Institute’s Gene Healey quotes this passage from The Commanding Heights: The Battle for the World Economy by Daniel Yergin and Joseph Stanislaw:
Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.
But the state messing with prices also comes with a broader danger best explained by Hayek’s depiction of the free market as the spontaneous meeting point for a vast amount of information — far more, incidentally, than any central planner could ever gather. This information is then “coordinated” and delivered through the signals sent by prices.
Summarizing Hayek’s argument, Jerry Z. Muller put it this way in his The Mind and the Market:
Knowledge of the availability of resources is widely dispersed in society. Market prices act as signals of where those resources could be put to their most valuable use, the profit motive serves as an incentive to bring one’s knowledge to bear in the market. Those with knowledge of where to buy a commodity more cheaply or how to produce it as less expense can use that knowledge to make a larger profit. The efficient use of resources depends on having particular knowledge at a particular time and a particular place, not on the aggregate statistics that might be available to a government planner. It also depends on the ability to perceive opportunities that others miss and to know when to take advantage of them—the characteristics associated with the entrepreneur rather than with the bureaucrat.
To distort price information with price controls is to don blinders. More broadly, the greater the reliance of a policy on the dogma and diktats of bureaucrats rather than market price signals, the greater the chance that it will degenerate into a Soviet-style shambles. This helps explain why the switch to electrical vehicles, a top-down program that, among its numerous faults, is riddled with price-distorting incentives and subsidies, is turning out the way it is. Further installments of the Green New Deal promise more of the same.
But back to the topic of price control and shortages. Writing in Capital Matters earlier this year, Amity Shlaes discussed a pamphlet from 1946 by Milton Friedman and George Stigler, two future Nobel laureates Roofs or Ceilings? In it, they discuss “the current housing problem,” and find a lesson in the aftermath of the 1906 San Francisco earthquake, a time long before rent control took up permanent residence in the city.
Shlaes:
Those families who still had homes invited the homeless into their residences, for free and for rent. Rents for empty apartments still standing rose dramatically, by some measures, 350 percent. The higher rents, note Friedman and Stigler, forced “some people to economize on space” — a single shared bedroom for a family, not two or three rooms. The economists’ point: “Shortage” is a term we use when we don’t like a high price. When we insist on affordability, and defining what is affordable, we try to moralize our way out of the iron parameters of life, supply, and demand.
Especially supply.
And that observation summons up a paradox identified by Edwin Cannan in 1915:
[W]hen the price of a thing goes up, [people] abuse, not the buyers nor the persons who might produce it and do not do so, but the persons who are producing and selling it, and thereby keeping down its price’.
The key is to find a price for that thing at which people will produce and sell, and which people will buy. It will be found by that dialogue in which the state has no useful role to play.
Shlaes:
Absent the “complex, expensive and expansive machinery” of rent regulators, landlords felt free to raise rental charges. “The rationing was done by rents,” note the punctilious Friedman and Stigler. Profits from those rents inspired investment in new housing. Motivated builders began clearing rubble and laying foundations at a pace we today associate only with China, and continued to do so for decades.
Meanwhile, even shouting about gouging may come at a price. The next time there is an emergency, the mere thought of vilification from Washington may lead manufacturers or vendors who, given the right incentive, could have scrambled to fill a sudden surge in demand, decide that it’s not worth their while. And if those shouts are transformed into law, well…
And will price controls (or, less formally, the prospect of being investigated for breaching some regulator’s notion of an acceptable margin profit margin) make any difference to inflation? In his reaction to Harris’ comments, economist John Cochrane turned, inevitably to the Roman Emperor Diocletian, the gilt standard for misguided anti-inflation policies since antiquity. Unaware that he had triggered inflation by debasing the coinage, he blamed gouging and sent out a decree specifying maximum prices for a remarkably wide range of goods and services.
It failed, explains Cochrane, to contain inflation:
But it also threw a huge monkey wrench into the Roman economy. Trade did decline. Hoarders did hoard, suppliers did not supply. More deeply, combined with taxes assessed on traded goods, it led to more and more self-sufficiency inside large estates, not using money for transactions, presaging the Middle Ages.
The penalty for breaching Diocletian’s price limits (death!) presumably discouraged the development of the healthy black market that might have helped out.
Diocletian’s failure to contain inflation has not discouraged countless imitators over the ages, and their record is … not good. Sometimes, they have been the product of desperation (I’m old enough (just) to remember ill-fated British attempts in the 1970s), but it’s hard not to think that many of them were the result of political calculation. As so often, Richard Nixon provides a master class. He introduced his wage and price controls in 1971 despite knowing (details available on relevant White House tapes) that the “God damned things will not work” (“They didn’t work even at the end of World War II. They will never work in peacetime.”) and despite being aware that they could damage the economy (which they did). What mattered more was the way they could help his reelection in 1972. And they did. A failure? Well, it depends.
Harris (or her advisers) must know that price controls, even if only applied in “excessive” cases, whether in response to a short-term crunch or in a broader inflationary environment, don’t work and may well be counterproductive. That only leaves political advantage as the reason to propose them. Those might be in both the short and long term.
Whatever their final form, such proposals have an obvious populist appeal as an attack on Big Grocery (no matter that these villains’ margins are typically fairly modest). That Harris is raising the topic now, when the CPI has to fallen below 3 percent, and the rate of annual food price increases in grocery stores is barely above 1 percent, may suggest two things. The first is that, however absurdly, she wants to blame the recent surge in prices, which is still fresh in people’s minds, as an episode of greedflation, doubling down on the trick that was tried at the time. The second (and the two are not mutually exclusive) is to use memories of this supposed greedflation as a tool to win popular support for more intrusive federal pricing supervision in future.
If the latter is successful, the losers, one way or another, will be consumers. The winners would be members of Washington’s political and regulatory class, who would gain additional power and, of course, the opportunity to abuse it.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 183rd episode, David is joined by Dr. Victor Claar, an economics professor at Florida Gulf Coast University and a renowned Acton Institute fellow. They discuss the anthropology that underlies all economic schools of thought, but particularly the Austrian school, and ask whether or not knowing that mankind acts with purpose is really enough. This is a fascinating discussion on what might be at the heart of economics for those committed to a worldview-understanding of human action.
The Capital Matters week that was . . .
Trade
Everyone talks tough on China trade, yet not much happens. In this light, calls to end permanent normal trade relations (PNTR) status for China do not hold up well. Bills in Congress and comments from former Trump-administration officials suggest that China’s PNTR status could be downgraded or suspended. Countering China’s predatory economics is an excellent idea, but PNTR’s role in that is small. For the sake of American security and prosperity, China must be pushed out of key supply chains. In comparison, PNTR is a distraction…
Russia
As Vladimir Putin continues to pursue his Ukraine invasion, the specter of high inflation is haunting Russia. This does not bode well for the country’s long-term economic outlook nor for its maintenance of social stability, particularly given its past experience with high inflation…
Tariffs
Last week, the Cato Institute released a national survey of 2,000 Americans conducted by YouGov about trade and trade-related issues. Michael Strain and Dominic Pino have each reported on the main findings.
Industrial Policy
There are many, many things wrong with industrial policy, from waste to capital misallocation to the opportunity it gives the political and bureaucratic class to use taxpayer money to pursue agendas unrelated to the policy’s supposed purpose.
And then there’s incompetence, another all-too-frequent problem…
Economic Development
Economics offers powerful tools for understanding our world and making informed choices, but economic analysis is about broad trends, not specific details. That’s why it’s so confusing to real economists when local governments make policy decisions based on, for example, a prediction that some action will create a very specific number of new jobs five or ten years in the future…
Antitrust
The U.S. District Court for the District of Columbia ruled last Monday that Google violated antitrust law by paying to be the default search engine on browser providers. This case is arguably the most significant antitrust ruling against a large technology company since the Microsoft case at the turn of the century…
Policy
If J. D. Vance is really going to be the Trump campaign’s “policy attack dog,” as Audrey Fahlberg and Brittany Bernstein report, he probably should get a handle on policy…
Price Controls
Imposing price stability by decree was Diocletian’s idea of good policy. The Edict on Maximum Prices was issued in 301 by the Roman emperor. Harris promises fines for price-gougers; Diocletian promised the death penalty for profiteers — it was a more bloody time then. Price controls go back even further: There were price controls in the Code of Hammurabi, and archaeologists have discovered price controls a few centuries before then, ca. 1750 b.c…
Regulation
Political interference, even if the motivation is benign, undermines the functioning of scientific agencies and public confidence in their actions. The FDA rallied during the pandemic to make novel vaccines available within ten months as opposed to the usual ten-year process. We need to ensure it can function as well in the next health emergency.
Argentina
The impressive fall in Argentina’s inflation rate since December has resumed after a bump up in June that was due, in no small part, to the effect of reduced subsidies on various items. Cutting such subsidies is an important part of Javier Milei’s strategy to restore order to the country’s finances and to see off inflation, but, as I noted in a recent Capital Letter, while they may be part of the anti-inflationary cure, such cuts can make the disease worse in the short term…
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