The Dangers of Price Controls

Larry Janesky: Think Daily

Some years ago I talked to this guy from Venezuela at an Atlas Network conference. He owned appliance stores there.  The country is ruled by a strongman who has no idea how to run a country.  He has run it into the ground, caused shortages of everything (empty store shelves) and hyperinflation.  There is starvation (literally the weight of the average Venezuelan is something like 20 pounds lower), and millions trying to escape the country.

At the time I talked to this guy, the leader of the country was struggling with hyperinflation because they just kept printing money.  He was being criticized for the inflation and didn’t like that one bit.  To solve this problem he thought that he would implement price controls.  That is to tell businesses how much they could charge.  

One day men from the government, backed by men with guns came into his store.  They literally took a sharpie marker and drew a line through his price tags on the appliances and cut the prices in half.  This they felt would solve the problem of inflation.

Of course the store owner went out of business and fled the country.  There were no more appliances to be found; or groceries; or fuel; or much of anything.  The economy was destroyed and their money became near worthless. Nobody would try to run a business when they could not set their prices according to their cost, and make a profit.

If someone told me I had to cut my prices by 15% to control inflation, I would close my doors and 2200 people would be out of a job.  I can’t do that, and I will not work for free.  Even if I did stay in business, no employee would get a raise or bonus, I could not keep up or invest in my facilities and have nice places for my employees to work, and I would make no more investments in innovation, real estate, or new business.  All corporate and personal discretionary spending would cease.  And everyone else would do the same thing.  The economy would enter a depression.  Everyone would suffer.

Today there is talk of price controls by people in our government.  They will tell corporations how much they can charge and stop “price gouging”.  This of course is to deflect the blame for inflation from the government who caused it by excessive government spending and printing way too much money, to the producers and suppliers.  It is grossly ignorant to say such a thing will solve the inflation problem.  It has been tried before, even in the United States in the 1970’s – and never worked.

The following is from the Imprimus newsletter from Hillsdale College, written by Harry Hazlitt & Brian Westbury – 

“Proposals to address this monetary inflation with price fixing, if carried out, will lead to shortages and a profit squeeze and will tend to distort and reduce production. 

Sometimes people talk as if it would be possible to have universal price fixing.  That is to say, the government would fix every wage, every price, and every cost.  This is absolutely impossible.  While nobody knows how many separate prices and wages there are, there are good reasons for thinking that there cannot be fewer than about ten million.  If you try to fix ten million prices, what you are trying to fix is something on the order of 50 trillion cross-relationships of prices.  This is something that no government is capable of determining – or policing.  

If the government could police it, the government would have to impose rationing and allocation of individual goods in order to keep prices where they were if it kept increasing the money supply.  And even then, the whole project would be impossible for the simple reason that the government cannot control the price of imports.  And it would not know how to pass these increases in import pricing through the economy without creating disruptions and distortions.”

Until our government can reduce spending and stop increasing the money supply, inflation will continue.  I am saddened that we as citizens support fiscal discipline and balanced budgets until we hear that it is our project or benefits that is cut.  During election time one candidate will tell the public “my opponent cut_________ for (working families, seniors, the military, our state, children, housing, the environment, this cause or that, etc. etc.).  Then we vote for the big spender because they will “save us” (by borrowing and printing more money).  We all want to keep the party going and we are ignoring the smoke coming out of the back room.

Unfortunately, candidates that speak the truth (and there aren’t many) don’t get elected because we don’t want to hear it or fix it.

Thomas Jefferson said something to the effect that democracy is great until elected officials figure out they can buy people’s votes with their own money.  Then – the end is near.

We need to be smarter than that and see the big picture, and not screw up the American experiment for future generations.

Mike Mitchell

Your analysis of this is spot on and as clearly stated ask have seen. We have to address the spending side of the equation – soon!!!

We need people with your acumen and experience to have a voice in our government.

I too am grateful for Hillsdale College.

Brian Moran

Well said!!!!

Jill

While this is an outstanding analysis, I have learned over time that most people vote their emotions, not what are the best policies. Remember the “they hate Big Bird” cries when the duplicative, no-longer-necessary, and demonstrably biased Public Broadcast was up for taxpayer funding cuts during the George W. Bush years? No one talked about the hours of other needless programming, they went straight to Sesame Street to stoke emotions. I pray the next Presidential Administration has the political courage to to take a sledgehammer to government overspending.

Daniel Perry

So well written. The current administration is talking about raising the tax structure for the ultra rich. This country was built on the ultra rich. I’ve been working for over 50 years in the same field and if it wasn’t for these ultra rich i would not have had the future I’m enjoying now. The products I sold were mostly purchased by this elite group. Increasing their taxes will stop the spending down the stream.

Tim Funke

I love and help support Hillsdale!

Ronny Steven Krogstad

Your post ignores corporate greed and corruption, and the consequences to working families. Inflation is not only the goverment, it’s also corporations, mega corporations who monopolize a market then increase prices-groceries, wall street buying single family housing-corporate landlords raising rents, oil companies who lie to no end to increase gas prices, utility companies (Enron), Wall Street collapse of 2008, the list goes on and on.
History shows civlizations collapse, were not infallable, we can fail.

Andrew T Gehrig

Great post Larry! Love these ones focused on economic fundamentals!

Tanner Janesky

Great analysis. Prices are information. Setting prices artificially low loses critical information about the profit/income required to sustain individuals and businesses. Similarly, failing to price externalities misses crucial information about natural capital and resources required to sustain life in the long run. A government cannot spend more than it takes in and remain viable in the long run, just as a civilization cannot remain viable if it extracts more than it regenerates.

Randy Olm

I live through the price controls in the 70’s. They don’t work for all the reasons stated. Ultimately supplies dry up and then there is nothing to buy, and the demand then keeps pushing prices up.
Remember toilet paper during Covid. We need to quit printing money and borrowing against our children’s futures.
The social security situation is similar. The actuarial math doesn’t work anymore. The Politician who says they won’t touch social security is either stupid or lying to you. Someone needs to have the guts to address the problem. I am one of the boomers who had to wait until 67 to get full benefits, and I’ve paid significantly more into the plan than my parents. It’s time we demand action.

Eddie

Appreciate your willingness to speak to this! For any student of history, the last number of years have been very difficult to watch. We are only days away from breaching $36T in debt and the vast majority of people are totally unaware. Recently, I was working with a group of managers in my company in attempt to expose them to financial literacy. These are mostly folks that are living paycheck to paycheck, many of them told me that they don’t have the time to sit with me to learn about simple financial topics such as how tax brackets and compounding interest works. While these employees were commenting that they didn’t have time, I brought up a play in an NFL game played over the previous weekend. I made the comment that a player did not make a catch, I was met with ample explanations on why it was a catch, they went on for 10 minutes trying to convince me. One employee asked me why I brough that topic up and I told him to gauge their ability to learn (it was clearly a catch based on the definition of a catch). In short, they have the ability, many just choose to apply it to what others would deem not very important/meaningful topics in the grand scheme of things. What do we do when the masses of people are completely self-consumed? I often ask myself this with little in the way of answers. I now see the current circumstance as “another one of those” as well articulated in Ray Dalio’s “Dealing with the changing world order”. Do what you can but don’t lose your head over it! Lastly, why should we expect government to control spending when the masses voting these politicians in are typically in financial distress and lack financial knowledge and discipline?

Willis Ponds

If they would only teach these basic economic principles in schools then this country wouldn’t be in the state it’s in. I read some of the comments above but I still agree with Larry. Inflation is only and can ONLY be caused by an increase in the size of the money supply. A corporation that provides products for inflated prices will not cause inflation because soon there won’t be enough money to buy their products and they will be forced to stop selling or severely discount their products. The government could give people money to buy these expensive products from corporations (welfare, food stamps, WIC program, etc) so then the corporation could continue selling at the inflated prices but the money the corporation is receiving is now worth less than it was before and so the corporation is no longer making the profits it once was. As a result it will raise its prices again. Corporation actually lobby the government and have them pass spending bills that either enable or require people to buy that corporation’s products. This is another method of inflation but the government is STILL involved. The government requires people to buy a particular thing and then subsidizes those who can’t afford it…More inflation.
Corporations aren’t the problem in a free market but our market isn’t really free anymore. Corporations have taken over the government and are using the Federal Reserve system and tax revenues to line their own pockets. Putting a stop to that is easy if only politicians had a backbone.

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