A Capital Writing interview with the author of The War on Prices.
A Capital Writing interview with the editor of The War on Prices.
As part of a project for Capital Matters called Capital Writing, I’ll be interviewing authors of economics books for the National Review Institute’s YouTube channel. This time, I talked with Ryan Bourne of the Cato Institute about his book The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy. Below you will find an edited transcript of a few key parts of our conversation as well as the full video of our interview.
Dominic Pino: In the war on prices, who are the combatants, and which side is winning?
Ryan Bourne: Well, the combatants really are primarily government — state, local, and federal — as you’d probably expect, given that this is about the way in which governments are attacking market prices in various ways, I think based on a number of different misconceptions and faulty ideas about what drive prices and what drive inflation. But I think the really crucial point for the hook of this book is that we’ve just lived through a period in which inflation has been higher than in any year since 1981. As a result of that, people’s grocery prices have gone up 21 percent in the last three years. People are now paying 7.5 percent for new 30-year fixed mortgages. That inevitably brings a lot of public angst.
As a result of that public angst, politicians and, to a lesser extent, central bankers have a very strong incentive to deflect blame onto malevolent actors or external factors, whether that be the war in Ukraine, the pandemic, or whatnot, for the inflation that we’ve lived through. And when that occurs, when they’re devising that narrative, it really lends itself to seeing dealing with inflation as something to do with microeconomics rather than macroeconomics. So this idea that you can fiddle with infrastructure policy or antitrust policy or, at its very worst, directly control individual prices in order to combat inflation.
So I became aware of the fact that inflation itself had led to a lot of these bad ideas about prices and how to control the price level manifest themselves. But then when I thought about it more intensely, I realized that actually there was a kind of lower-level war on prices going along in much of the country already, where we’ve seen a return of rent control in various major states, such as California and Oregon. We’d seen big increases in the minimum wage across much of the country over the past decade, we’ve seen anti-price-gouging statutes proliferate, and of course, Joe Biden’s war on junk fees.
So you put it all together, and I think the war on prices is an attempt to kind of subvert market prices across many sectors of the economy through a whole range of direct controls on prices, controls on pricing structures, and just general bad ideas about what cause prices. And that’s become worse as a result of the inflationary environment.
DP: In this assault on prices, are the people making the assaults doing well? Is it working? Or are prices ultimately winning out on the other side?
RB: That’s a great question. Well, when it comes to the price level and inflation, obviously we’ve gone through this period and we didn’t reinstitute economy-wide price controls that we saw under Richard Nixon or during World War II. So in that sense, we should be grateful for small mercies. That said, polling now suggests that the modal answer to who is to blame for inflation among Americans is greedy corporations. If a future inflationary period arises, that’s a kind of worrying backdrop, and you could imagine that politicians would take advantage of that.
More broadly, though, when it comes to individual-level market price controls, we are seeing a proliferation of them across the economy. I do think you’re seeing, even in the periodicals, some of the magazines, big attacks on dynamic pricing and algorithmic pricing. This idea that every American is being nickel-and-dimed in all of the purchases they’re making. And kind of Joe Biden’s war on junk fees, as it were, is capturing the imagination of many commentators, at least. I don’t know whether the general public care about it too much. And I just think the general mood music is antithetical to the idea that market prices are a really important coordinating mechanism for economic activity. So I’d say those of us who think that market prices are important are kind of on the back foot at the moment. But it feels like a time to come out and make this defense now before we lose too much ground.
DP: That’s something that we definitely focus on here at Capital Matters, the importance of market prices. William F. Buckley Jr. said that the competitive price system is indispensable to human liberty. And so why is it that we think prices are so important? What is it that a price contains? What is it that a price makes possible that is so vital to human society?
RB: I think the key role is that prices are essential for coordinating economic activity. And what is a market price? If you look in a dictionary, the definition of a price would be something like the monetary amount that somebody, a seller or producer, charges for a good, but that’s not really what we’re getting at when we talk about a market price. We’re talking about the market price as a signal, the bottom-up manifestation of information, all the information out there of supply-and-demand factors in the economy.
Think of the price of bread, for example. That doesn’t just reflect the cost of manufacturing that bread. It reflects the extent of the harvest. It reflects what’s going on in agricultural markets in terms of the equipment needed to realize that harvest. It reflects weather patterns on the supply side. It reflects shipping of certain goods, the transport costs across the economy on the demand side. It reflects income levels. It reflects whether we’re living through any fads at the moment where people are kind of hostile to carbs.
So an individual market price is really an aggregator of all that different information that no one individual would be able to collect. And that plays a crucial role in coordinating economic activity because when I go into a store and recognize that market price and see that market price and think about it within my own budget constraint, it leads me to make decisions about how much I want to purchase, or for suppliers, how much they want to change their production levels based on the information that they’re getting from that market price.
I really like Alex Tabarrok’s summary. He says a price is a signal wrapped in an incentive. And the problem with this, of course, is that if we really do believe prices are essential messengers of information, the flip side is that when we attempt to control prices, we’re essentially holding a gun to the messenger’s head and getting them to tell us a comforting lie about the realities of the world.
DP: One of the real-world examples I think people most relate to is gasoline prices because gasoline prices are so ubiquitous. Wherever you are driving around, you see them on signs. So it’s very easy to compare what they are in different places and what they are over time.
We remember, for example, the energy crisis in the ’70s where we had rationing, odd-even rationing with license plates, and we had price controls. Rather than letting the price go up, as it would have, the government said, “We’re not going to do that. Instead, we’re going to do all this rationing stuff.” And people really hated that.
More recently, we’ve had gas prices go up, whether it’s because of the war in Ukraine or earlier in the 2010s, there was that brief period where we had gas over $4 a gallon nationally. There we allowed the price to go up, but we didn’t have any of these big lines of cars waiting for gasoline. We didn’t have the odd-even rationing because we let the price mechanism sort out that allocation problem. Obviously, high gas prices aren’t popular either, but it seems to be that that was less unpopular than the ’70s outcome with the rationing and people stealing gasoline from each other’s gas tanks.
Do you think that maybe because of the failure of the more direct approaches in the past, like you said before, we didn’t have economy-wide price controls this time around for inflation? Do you think there’s at least a little bit of politicians’ learning a lesson from that and saying, actually, that’s a really bad way to go about it?
RB: I think that’s absolutely right. This time with the high gas prices, we saw progressives in Congress basically saying we should have a federal anti-price-gouging law whereby we investigate what’s going on with gasoline markets. There was much less of a reach for direct price controls. And as you say, I think that’s because oil and gas price controls in the 1970s — and they were in place for almost all of the 1970s — were proven to be a failure and not just because they led to the traditional impact of price controls where you hold the price below the market rate and it leads to shortages. Yes, we did see shortages in heating oil in ’72, ’73 and ’74. Then, of course, for gasoline as well, we saw those gas-station lines, particularly in early 1979.
But I think one of the big things we actually learned from that 1970s experience was that price controls facilitate a whole lot of political corruption, a whole lot of lobbying, a whole lot of favoritism. For a lot of the period, it was only about 60 to 70 percent of the market under price controls. There were certain exemptions for kind of new oil and gas production. There were different regimes for imports at various times. This was all incredibly complicated and changed pretty dramatically. But the primary effect was actually a lot of surplus that was transferred from domestic crude-oil producers to refiners, some of which at various times benefited consumers who were able to then find gasoline, but with big deadweight losses to the economy.
I think coming out of that, a lot of people realized not only did these price controls risk shortages, and there certainly were shortages at particular times, but they set up an incredibly complex regime, which was politically toxic and really, really difficult to administer. And so I don’t think it’s any surprise that now, when we see big spikes in the gas price, yes, politicians want to show that they care about it by saying we should have an investigation, but we don’t see those direct calls for price controls. And I think that is due to the dreadful experience we had in the 1970s.
DP: My economics professor in college, Tom Rustici at George Mason University, talked about the example of the ’70s when people were using tubes to siphon gas out of other people’s gas tanks. And he said that anytime you have a government policy that is leading you to believe that it’s a rational decision to possibly inhale gasoline, it’s probably a really bad policy.
One of the other historical policies that you talk about in the book is World War II price controls. A lot of people who support price controls might point to that and say that that was a successful example of price controls because during the war, government had to step in. It had to make sure that people could get what they needed on the home front, but also have enough to supply the war effort. And so government came in and managed prices and, hey, the Allies won World War II, so it must have worked. And then after the war was over, we got rid of the price controls. So what’s the big deal? What is your take on the World War II price controls and the experience there?
RB: Certainly, when you’re in a mass-mobilization war, you’re kind of putting economic efficiency to the side in service of a greater goal, which was trying to defeat Hitler and the Japanese when it comes to World War II. And one could imagine that if you’re printing lots of money to buy up lots of goods and services, and you want to keep people’s inflation expectations under control, you can hold down prices and impose extensive rationing to make sure people get certain things.
My big-picture take on that is that the people who look at that and say that was a really successful period ignore the reams of evidence that suggests that a lot of that inflationary pressure was just suppressed in various ways rather than ameliorated. Ultimately, inflation is about the balance between the amount of money in circulation and the amount of production, and during wartime, there were lots of inflationary policies. As a result of prices being controlled, eventually across most of the economy, producers had to kind of adjust to that in various ways. Some of the ways that they adjusted to it was to reduce the quality of the products to reflect the new price that they’re able to charge.
So you have tons of stories during World War II of meat that was incredibly tough that nobody could cut or sausages filled with corn. There was extensive shrinkflation. Clothing products hugely declined in quality. Even the Office for Price Administration at the time admitted that there were big declines in quality. There were extensive black markets because, of course, if you get in the way of sellers who are willing to sell at a particular price and consumers who are willing to buy at the same price, it incentivizes people to do it in black markets. So there were extensive black markets, so much so that one of the officials at the OPA at the time said that there was such extensive conniving that he had to question the moral fiber of Americans for not being willing to stick to price controls. And indeed, I believe there were more civil cases under price-control legislation at the federal level than all other federal civil charges combined.
And of course, there were extensive shortages. You know, journalists at the time documented having to go to seven different stores before they could find a soda and there was extensive rationing. So, you know, big impositions on freedom, big reductions in the availability and quality of products and extensive black markets.
When price controls were removed in the immediate aftermath of World War II, the price level spiked quite sharply to indicate the fact that underlying inflation was actually there. Now, some people go from that and say, well, actually the poor did relatively okay during World War II. If you look at their eating habits and stuff, they seem to do pretty well. And indeed, they ate more meat, for example, during World War II than pre–World War II. But if you look at things like meat consumption after price controls were removed, it continued to increase, and overall consumption jumped pretty dramatically from 1946 onwards when price controls were removed. So I just think the story that people tell that price controls were a success during that period ignores lots of the adjustments that were being made and paints a Panglossian picture as to what was going on with people’s consumption habits.
DP: And anytime you’re yearning for the return of World War II, that’s probably a bad place to be.
