• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Economy Wage and Price Controls Are Not the Answer to Inflation
Economy

Wage and Price Controls Are Not the Answer to Inflation

by January 10, 2023
by January 10, 2023 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

Prominent New York Times economic columnist Paul Krugman has done it again. Standing against accepted principles in economics, he comes out in favor of universal wage and price controls.

Price controls have been thoroughly debunked by history and economic theory. In fact, one of the first lessons in a standard freshman introductory microeconomics class is explaining how controls on prices (and wages, hereinafter, just “price controls”) cause shortages and surpluses. Whenever a price is set below or above a market clearing price, it creates an imbalance between quantities demanded and supplied, leading to either a shortage or a surplus of the commodity in question, whether it is gasoline, milk, or low-skilled labor.

Price Control Diagrams from an Introductory Economics Textbook

Stating the issue in positive terms, economist Alex Tabarrok says that “a price is a signal wrapped in an incentive.” The father of economics, Adam Smith, identified the importance of incentives when he talked about the “invisible hand” of the market. Motivated solely by the incentive of self-interest, the butcher, the baker, and the brewer act in harmony with each other to provide us with our dinner. All of this happens (in just the right quantities and using the most efficient methods of production) because of the operation of the market price mechanism. The coordinating effect of prices as signals of what and how much to produce was famously explained by Nobel Laureate economist Friedrich Hayek in his 1945 paper, “The Use of Knowledge in Society.” This principle was later popularized by economist Leonard E. Read in his 1958 essay “I, Pencil”, and more recently in the elegant 2012 video, “I Pencil: The Movie.”

Reinforcing what economic theory tells us, evidence of the harm of price controls abounds in history, from the infamous 303 A.D. Edict of Emperor Diocletian in Ancient Rome to America’s 1970s gasoline price controls and, perhaps most infamously, New York City’s disastrous eight-decade-long experiment with rent control.

The most infamous example of universal price controls – which Professor Krugman endorses – is the Soviet Union. Under communism, the government controls all means of production, so a communist government faces the burden of deciding every single price in the economy. In its attempt to perform this impossible task, the Soviet Union at one time employed 30,000 price setters and economic planners at Gosplan, its central economic bureaucracy charged with managing its economy and carrying out successive Five Year Plans. Unsurprisingly, it was a disaster, resulting at its worst in mass starvation (a result documented in every communist society) and, at best, widespread poverty and a complete inability to make technological advances on its own, without importing or stealing them from the West. Ultimately, the Soviet economy could not be planned, and it finally collapsed in 1991.

In this context, Mr. Krugman blithely suggests that economy-wide wage and price controls could be the answer to inflation in the United States. Economy-wide wage and price controls were tried earlier in the 1970s in an effort to stop inflation. Both failed then, as every such attempt is bound to fail, because they do not address the cause of inflation. Economist Milton Friedman identified that cause when he said that “inflation is always and everywhere a monetary phenomenon.” Inflation is caused fundamentally by a central bank’s overly expansionary monetary policy or by excessive government spending, which is then monetized by the central bank. Turning deficits into dollars that flood the economy causes prices to rise. It is no coincidence that massive pandemic spending and monetization by the Federal Reserve, America’s central bank, caused our recent spike in inflation. It is also no coincidence that every hyperinflationary episode in history has been marked by a rapid expansion of the money supply.

The other disturbing error of Mr. Krugman, and a common one made by economists,is what I call the “Philosopher-King Fallacy.” It is the failure to consider the political context in which economic policies are made. Mr. Krugman cites a single example where a small country (Israel) imposed weakly enforced, partial price controls in the mid-1980s. By citing the apparent success of this policy in reducing inflation (which also entailed significant pro-market reforms, not credited by Krugman, such as reduced subsidies and privatization of businesses), Krugman implies that we could surgically and precisely impose and remove price controls without harmful effect, achieving the hoped-for goal of slowing down or stalling inflation, without other unwanted deleterious consequences.

This naivete is inexcusable in a worldly and well-read economic scholar who regularly confers with political leaders and understands the political process. Once government intervenes in the economy, it immediately creates new vested interests that will lobby for retaining the harmful policy. This has proven intractably true for a wide range of price controls, such as New York City’s rent control. Initially, NYC rent control was just part of the web of temporary, economy-wide, wartime price controls imposed during World War II. When those controls were repealed in 1946 shortly after the war ended, the liberated US economy undertook a rapid post-war expansion.

Unfortunately, controls on New York City apartment rents were kept in place, first by the city government, later by the state government, ostensibly in order to keep apartment rents low for soldiers returning from the war. But controls didn’t have that effect. Instead, rent control immediately created a shortage of housing, one that has only worsened in the decades since. Rather than making apartments available at low rents, it has created an artificial scarcity of housing, which has had the perverse effect of driving market rents to the highest level in the country and, in some years, the world. At the same time, it created a powerful vested interest of existing rent-controlled (and “stabilized,” the new term for rent control after 1969) tenants who did not want their rents raised, at the expense of landlords whose properties were economically impaired (and even destroyed) by the loss of rent revenue, and at the expense of future tenants who had to pay much higher prices for the fewer market-rate apartments available, or languished for years in poorly maintained rent-regulated apartments.

Similar vested interests were created with agricultural price controls (mandatory minimum prices, or “price floors”) enacted during the Great Depression for dairy and wheat farmers. Like rent control (a “temporary wartime” measure) those “temporary” measures designed to fight the 1930s Great Depression are still with us today, nearly 90 years later. They are kept in place by the extensive lobbying efforts of farmers, who contribute millions of dollars to congressmen to make sure they stay in place.

If the US imposed economy-wide price controls, as Krugman proposes, it would not stop inflation, just as the Emperor Diocletian’s economy-wide controls did not stop Roman inflation and just as the 1970s economy-wide controls did not stop US inflation. But it would throw sand into the gears of the economy, destroying the coordinating effect of the Invisible Hand. It would reduce our standard of living and create new vested political constituencies for maintaining parts of it, even if one could precisely remove the “temporary” controls at just the right time, as hoped for by the Economic Philosopher-King.

The advantage of established, true economic theory is that we do not need to keep repeating the mistakes of the past. There are unsettled parts of economic theory, but the beneficial coordinating effect of free, market-determined prices is not one of them. It surprises and disappoints me that a prominent economic columnist at the self-described “newspaper of record,” the New York Times, would traffic in such absurdities.

You Might Also Like
  • Biden calls Russia prisoner swap deal that freed WSJ’s Gershkovich, Whelan a ‘feat of diplomacy’
  • Will Hunter Biden guilty verdicts impact his father’s rematch with Trump in 2024 presidential election?
  • Crypto Trading Strategies That Every Investor Should Know
  • Tim Scott slams Trump, other GOP presidential candidates for being ‘wrong’ on abortion
Share
0
FacebookTwitterPinterestWhatsapp

previous post
Embrace Dynamism: The Future and Its Enemies at 25
next post
Skyworks and Semtech Launch Ground-breaking LPWAN Reference Design for Industrial and Smart City Applications

You may also like

Morning Glory: Biden and his disastrous national security choices

February 22, 2024

French PM to resign as leftists nab majority of parliamentary...

July 7, 2024

Polish leader warns of ‘prewar era,’ urges European nations to...

March 30, 2024

Trump to meet with House, Senate Republicans in DC this...

June 11, 2024

Zelenskyy to address US senators during classified briefing on stalled...

December 5, 2023

Wisconsin Assembly votes to mandate police in high-risk schools

March 15, 2023

Arkansas Department of Education throws down gauntlet on CRT, demands...

August 22, 2023

Tennessee law restricting drag shows ‘unconstitutionally vague,’ federal judge rules

June 4, 2023

Truckers fight new hit-and-run law in country with world’s highest...

January 5, 2024

No handcuffs: Ex-prosecutor says Secret Service, NYPD could arrange polite...

March 21, 2023

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right Now

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025
    • U.S. foreign tax bill sends jitters across Wall Street

      May 30, 2025
    • Amazon taps Xbox co-founder to lead new team developing ‘breakthrough’ consumer products

      May 30, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,765 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,472 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,451 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,432 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,308 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Breakouts, Momentum & Moving Averages: 10 Must-See Stock Charts Right...

      May 31, 2025
    • Leadership Rotation Could Confirm Corrective Phase

      May 30, 2025
    • Run Your Stock Portfolio Like a Pro Sports Team

      May 30, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,106)
    • Investing (538)
    • Stock (2,581)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Morning Glory: Defining competence down

    August 1, 2024

    Michigan Senate candidate says he was...

    November 24, 2023

    Climate czar John Kerry says Biden...

    March 27, 2023
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here