The latest proposals by Harris to manage inflation through price controls on drugs, rents, and food are piling on to our already price-controlled economy.
In the twelve-step program to cut our government’s addiction to price controls, the first step is recognizing the problem.
S ome economists have criticized Kamala Harris’s recent proposal for price controls on things such as housing and food. But unfortunately, there is still strong bipartisan support for many of the implicit price controls that currently dominate the vast majority of the U.S. economy. In the twelve-step program to cut our government’s addiction to price controls, the first step is recognizing the problem.
Price controls are very pervasive among service sectors, which make up more than three quarters of the U.S. economy. As our national GDP accounts reveal, the biggest one is health care — close to a fifth of our economy — followed by other well-known and large service industries such as education, housing, financial services, and insurance.
Soviet-style price controls set from the nation’s capital are the norm in health care. Bureaucrats running Medicare and Medicaid set prices for doctors and hospitals; these controls spill over to private health insurers who peg their prices to correlate with the ones set by policy-makers. So, instead of supply and demand setting a doctor’s earnings, congressional votes determine overall pay and bureaucrats set specialty-specific pay. Subsidizing health care for the poor and needy is not a justification for price controls like these, as such help can be given without them.
Financial-service industries are also severely affected by price controls, particularly those set by the Fed in short-term credit markets. Although economists across the political spectrum recognize the inefficiency of rent controls in housing, those same economists are delighted with the government’s controlling the rental price of capital, namely interest rates. Although the Fed may be useful for limiting the impacts of financial crises, its day-to-day operations need not micromanage the economy. Because price controls are so influential in credit markets, they also impact services and goods that require credit, such as housing and cars.
Imagine how much more efficiently capital would be allocated if the media and markets were not obsessed with government bureaucrats and the timing and the size of their price controls in credit markets. All the time spent by market participants obsessing about the Fed and speculating on its decisions could be better used to figure out how to allocate capital to the private companies that helped their customers the most.
Public grammar-school education, covering the overwhelming majority of students, is another service sector that adds an extra level of control beyond simply dictating prices. Jail awaits if you do not pay the price controlled by the government — that is, taxes. No doubt private industries would love to have that power over nonpaying customers.
The latest proposals by Harris to manage inflation through price controls on drugs, rents, and food are piling on to our already price-controlled economy. They follow a long historical tradition where price controls are a weapon against the scapegoats of the private sector — even though inflation is a disease only caused by government.
Supply chains were the initial scapegoat, but this accusation fails to explain the absence of any price declines when supply flooded back. Greedy companies were next in line, which economists only believe in when they have a political axe to grind. Companies respond to increased input prices by raising their own prices. Ironically, Biden’s strike force targeted lenders, which, because of the Fed’s price controls responding to the administration’s inflation, had the largest rise in input costs. Companies may also respond by cutting quality instead of raising prices, so-called shrinkflation, which is a rational response if it raises sales.
More generally, the administration seems to argue that economy-wide price increases across highly competitive industries are due to a massive collusion in which companies in all these industries held prices above costs. Can someone please put up a “Help Wanted: Hiring Economists” sign outside the White House?
Although many economists have voiced opposition to the recent proposals, there is still great bipartisan support for most of our economy being under price controls. In order to cure Washington’s dangerous addiction to controlling prices, economists and politicians need to better understand that private competition, not regulation, is the best form of consumer protection.