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7 MIN READ - Kamala Harris’ recent announcement that she wants to take the USA back to the 1970’s prompted CO himself to address the subject from Cautious Optimism World Headquarters.
The Cautious Optimism Economics Correspondent had planned to post a series of articles later on price controls and the subject of supply and demand, but given how hot the subject is right now he’d like to build on CO’s excellent column of Friday.
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| 1970's USA: One of world history's more recent price control failures |
The subject of price controls is rooted in the concepts of supply, demand, and equilibrium price which are themselves pivotal foundations of the field called microeconomics.
The law of supply, law of demand, and law of supply and demand are so immutable and inseparable from human nature that they’ve been proven out by literally 4,000 years of human history. And unlike certain theories in the field of “macroeconomics” (the discipline that attempts to explain larger economy-wide movements in unemployment, interest rates, spending, investment, and output), supply-and-demand microeconomics has been dubbed by economist Benjamin Powell as “the nonfiction part of the curriculum.”
The Economics Correspondent agrees with Powell’s assessment.
At its simplest, there are two forms of price controls: price ceilings and price floors.
Kamala Harris’ blueprint to halt prices from rising alongside a historic expansion of the U.S. money supply since 2020 is a price ceiling proposal. It’s referred to as a “ceiling” because you can picture prices trying to rise higher but bumping up against a government-imposed ceiling through which they can’t pass further.
Price floors, through which prices can’t fall any lower, are the reverse: an attempt to force prices higher than the market wants to set them.
Government price controls have more commonly taken the form of price ceilings to appeal to the masses of voters. Who doesn’t want lower gas prices, lower food prices, lower rent, lower toilet paper prices… other than the producers and sellers of those things? And since consumers outnumber producers on Election Day politicians are more fond of price ceilings than floors.
However the U.S. federal and state governments have imposed price floors from time to time as well. Minimum wage, which forces wages for unskilled workers higher than they otherwise would be, is a good example.
Also during the Great Depression both the Herbert Hoover and Franklin Roosevelt administrations imposed thousands of price floors throughout the economy in a naïve attempt to force prices up after the deflation of the early 1930’s. Their efforts simply resulted in millions more unemployed, warehouses full of unsold products and rotting crops, and economists cite the price floors as a crucial factor in deepening (Hoover) and extending (Roosevelt) the Great Depression.
ANCIENT HISTORY
So just how far back do price ceilings go?
Historians have found records from the ancient Sumerians and Babylonia, the latter’s Code of Hammurabi (1750 BC) setting prices and wages for a litany of products and services.
There are too many to include here but a few examples are:
Code 121: ”If any one store corn in another man's house he shall pay him storage at the rate of one gur for every five ka of corn per year.”
Code 268: “If any one hire an ox for threshing, the amount of the hire is twenty ka of corn.”
Code 275: “If any one hire a ferryboat, he shall pay three gerahs in money per day.”
French historian Jean-Phillipe Levy gives us a more detailed account of price ceiling policy from ancient Egypt’s Lagid dynasty (306 BC):
”…there was a real omnipresence of the state…. The state … intervened by employing widely all its public law prerogatives … all prices were fixed by fiat at all levels.”
”Control took on frightening proportions. There was a whole army of inspectors. There was nothing but inventories, censuses of men and animals … estimations of harvests to come…. In villages, when farmers who were disgusted with all these vexations ran away, those who remained were responsible for absentees’ production… [one of the first effects of harsh price controls on farm goods is the abandonment of farms and the consequent fall in the supplies of food]. The pressure applied [by inspectors] extended, in case of need, to cruelty and torture.”
There are many more examples from ancient Greece, India, China, and the Roman Empire. The Roman emperor Diocletian, who oversaw a critical episode in Rome’s rapid decline of the 3rd century, debased the coin to fund the empire’s bloated bureaucracy, welfare state, and construction of a magnificent new capital, sparking a hyperinflation.
Instead of backing off cheap coin production and higher stamped denominations Diocletian imposed price controls—a “maximum price” allowed on wages and goods alongside the death penalty for violators. Subsequently, according to contemporary historian Lactantius (314 AD):
"The people brought provisions no more to market, since they could not get a reasonable price for them, and this increased the dearth so much that … the law itself was set aside."
MODERN DAY
Fast-forwarding to modern times, many older Americans remember the effects of price ceilings on gasoline during the Nixon, Ford, and Carter years.
(The first price controls were actually announced by Richard Nixon in the same 1971 speech when he took the U.S. dollar off the international gold standard)
Instead of paying higher prices that reflected a scarcity of oil brought on by OPEC’s embargo, American commuters were granted lower gas prices by fiat.
Well, sort of. Churning up their driving in response to lower prices they soon discovered they couldn’t find any gas to buy (see picture). American producers also refused to bring additional supplies to the market since the price ceilings made new, riskier oilfield projects unprofitable.
Price ceilings were also imposed during World War II and shortages resulted then too.
Casual readers might think shortages were the result of the war, when resources were diverted away from the consumer economy to military production, and this is partly true.
But what historians tend to miss is the federal government paid for a great deal of the war effort with inflation—the Treasury ordering the-then subservient Federal Reserve to lend vast amounts of newly printed money directly to Washington, DC.
Of course all this new money spent into the economy produced rapid inflation, so to counter rising prices the Roosevelt administration imposed price ceilings—and shortages immediately appeared. These were easily blamed on the war and most Americans accepted simply going without as a patriotic duty.
At war’s end the price ceilings were lifted and all the new money that had been held back by price controls, like a rubber band pulled back further and further and then let go, was finally unleashed on the public. The inflation rate rose to 9.4% by July 1946, peaked at 19.7% in March 1947, and by July of 1948 (two years later) had fallen to a still elevated 9.9%.
Prices rising by nearly 25% also had the convenient effect of in just two years wiping out one-fifth of the enormous debt the federal government had incurred during the war. Many war bond investors found themselves underwater since their returns were simply wiped out by sharply higher prices.
By the end of 1947 the Fed clamped down on the inflation with higher interest rates and triggered an 11-month recession in 1948-49.
More postwar misery for Americans.
Incidentally, does this pattern of crisis, printing vast amounts of money, sharply higher prices, a Fed higher-interest-rate crackdown, and recession (the last not here yet) sound familiar?
History repeats itself.
Lastly there’s empty shelves in communist and socialist countries.
Many critics of communism and socialism blame empty shelves on lack of motivation from workers to produce, and they wouldn’t be wrong. When the state pays you the same measly compensation whether you produce one widget a day or one hundred, there isn’t much reason to work very hard.
But price controls were equally guilty.
Given the overall scarcity of production in socialist and communist economies, prices naturally tended to rise. In the USSR the government would then assign a wheat czar or sausage czar or energy czar to enforce state-imposed prices—always lower than the market price to inflict justice on "counterrevolutionary capitalist elements" trying to "exploit" the masses.
Consistent with millennia of history before the communists, the price ceilings created chronic shortages of wheat, sausage, electricity… basically everything.
That’s why we hear stories about Soviet citizens standing in line for hours to buy bread just to find the shelves empty. The Soviets were no more able to defeat the law of supply and demand than any of history's other government bureaucrats.
Even in the 1980’s western visitors to the Soviet Union were warned to bring their own toilet paper which in turn fetched a handsome price on the black market. Toilet paper production in the USSR was undoubtedly lower per-capita than in the West, but government imposed price ceilings transformed scarcity and high prices into empty shelves.
And toilet paper shortages have been a laughing point of the socialist Venezuelan regime as well. The Hugo Chavez and Nicolas Maduro governments nationalized most Venezuelan industries—starting with oil of course, but moving from there to steel, cement, farms, telecommunications, utilities, retail and grocery stores, etc…
With government now running industry production naturally fell while the socialist state cranked up the printing presses to dole out massive welfare payments to its loyal voters.
The combination of lower production and a lot more money resulted in inflation—hyperinflation actually as the inflation rate neared 1,000,000% in 2018 and 2019 although official inflation was high-double digits even back in the 2000’s with unofficial inflation in the triple digits. Immediately the Chavez and Maduro governments imposed price ceilings, and high prices were transformed into chronic shortages of meat, milk, toilet paper, electricity (constant blackouts), etc…
The Economics Correspondent has included links to inflation and shortage stories and pictures from Venezuela’s Chavez era at the bottom of this article—stories that preceded the American/European socialist's excuse for that country’s economic failure: sharply lower oil prices (which didn’t arrive until 2015) and U.S. sanctions on the Venezuelan economy (which didn’t arrive until 2018).
And now we have Kamala Harris proposing price ceilings yet again in exchange for votes.
Not that the Correspondent thinks Harris has any clue about the history of price ceilings and their inevitable shortages. But even if she did know, if she believes "things will somehow turn out differently in 2024” she will be in for a rude awakening… and sadly so will the United States.
Government-imposed price ceilings, whenever set below the free market equilibrium price, *always* create shortages. It’s an immutable law of human nature that governments have attempted to override or ignore away for 4,000 years—and failed every time.
Because price controls simply don’t work. But then as Nobel laureate and Austrian economist F.A. Hayek once said “If socialists understood economics, they wouldn’t be socialists.”
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(comment from the Economics Correspondent) Press stories of Venezuelan price controls and shortages, all while Hugo Chavez was still alive:
2006 (food shortages)
https://www.ft.com/content/e0d7320e-7e39-11da-8ef9-0000779e2340
2007 (food shortages)
https://www.theguardian.com/world/2007/nov/14/venezuela.international
2008 (milk shortages)
https://www.npr.org/templates/story/story.php?storyId=91680886
2008 (power blackouts)
https://www.reuters.com/article/us-venezuela-blackout/power-blackout-in-venezuelan-capital-oil-province-idUSN0145186220080901
2009 (food shortages)
http://www.mcclatchydc.com/news/nation-world/world/article24523447.html
2010 (goods shortages, rotting stockpiles)
http://www.economist.com/node/16326418
2010 (power blackouts)
https://www.theguardian.com/world/2010/jan/14/hugo-chavez-caracas-power-blackouts
2013 (hyperinflation)
https://qz.com/125339/hyperinflation-is-forcing-venezuela-to-print-hundreds-of-millions-of-extra-banknotes/
2013 (food shortages)
https://www.theguardian.com/global-development/poverty-matters/2013/sep/26/venezuela-food-shortages-rich-country-cia
2014 (food line, OK this from a year after Chavez's death)
https://i.insider.com/5310c92decad04be055385c2?width=1000&format=jpeg&auto=webp
