THE POLITICS OF PRICE CONTROLS #101 | | |
Simple as basic economic principles may be, their ramifications can be quite complex, as we have seen with the various effects of rent control laws and agricultural price support laws. However, even this basic level of economics is seldom understood by the public, which often demands political “solutions” that turn out to make matters worse. Nor is this a new phenomenon of modern times in democratic countries. #102 | | |
When a Spanish blockade in the sixteenth century tried to starve Spain’s rebellious subjects in Antwerp into surrender, the resulting high prices of food within Antwerp caused others to smuggle food into the city, even through the blockade, enabling the inhabitants to continue to hold out. However, the authorities within Antwerp decided to solve the problem of high food prices by laws fixing the maximum price to be allowed to be charged for given food items and providing severe penalties for anyone violating those laws. #103 | | |
There followed the classic consequences of price control—a larger consumption of the artificially lower-priced goods and a reduction in the supply of such goods, since suppliers were less willing to run the risk of sending food through the Spanish blockade without the additional incentive of higher prices. Therefore, the net effect of price control was that “the city lived in high spirits until all at once provisions gave out” and Antwerp had no choice but to surrender to the Spaniards.{92} #104 | | |
Halfway around the world, in eighteenth-century India, a local famine in Bengal brought a government crackdown on food dealers and speculators, imposing price controls on rice. Here the resulting shortages led to widespread deaths by starvation. However, when another famine struck India in the nineteenth century, now under the colonial rule of British officials and during the heyday of free market economics, opposite policies were followed, with opposite results: #105 | | |
In the earlier famine one could hardly engage in the grain trade without becoming amenable to the law. In 1866 respectable men in vast numbers went into the trade; for the Government, by publishing weekly returns of the rates in every district, rendered the traffic both easy and safe. Everyone knew where to buy grain cheapest and where to sell it dearest and food was accordingly bought from the districts which could best spare it and carried to those which most urgently needed it.{93} #106 | | |
As elementary as all this may seem, in terms of economic principles, it was made possible politically only because the British colonial government was not accountable to local public opinion. In an era of democratic politics, the same actions would require either a public familiar with basic economics or political leaders willing to risk their careers to do what needed to be done. It is hard to know which is less likely. #107 | | |
Politically, price controls are always a tempting “quick fix” for inflation, and certainly easier than getting the government to cut back on its own spending that is often behind the inflation. It may be considered especially important to keep the prices of food from rising. Accordingly, Argentina put price controls on wheat in the early twenty-first century. Predictably, Argentine farmers reduced the amount of land that they planted with wheat, from 15 million acres in 2000 to 9 million acres in 2012.{94} Since there is a large international market for wheat, where the price is higher than the price permitted domestically in Argentina, the government also found it necessary to block wheat exports that would have made the domestic wheat shortage worse. #108 | | |
The greater the difference between free market prices and the prices decreed by price control laws, the more severe the consequences of price control. In 2007, Zimbabwe’s government responded to runaway inflation by ordering sellers to cut prices in half or more. Just a month later, the New York Times reported, “Zimbabwe’s economy is at a halt.” It detailed some specifics: #109 | | |
Bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs who denuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.{95} #110 | | |
As with price controls in other times and places, price controls were viewed favorably by the public when they were first imposed in Zimbabwe. “Ordinary citizens initially greeted the price cuts with a euphoric—and short-lived—shopping spree,” according to the New York Times.{96} Both the initial reactions and the later consequences were much as they had been in Antwerp, centuries earlier. #111 | | |
When a local area is devastated by a hurricane or some other natural disaster, many people consider it unconscionable if businesses in that area suddenly raise the prices of such things as bottled water, flashlights or gasoline—or if local hotels double or triple the prices of their rooms when there are many local people suddenly made homeless who are seeking temporary shelter. Often price controls are regarded as a necessary quick fix in this situation. #112 | | |
The political response has often been to pass laws against “price gouging” to stop such unpopular practices. Yet the role of prices in allocating scarce resources is even more urgently needed when local resources have suddenly become more scarce than usual, relative to the increased demand from people suddenly deprived of the resources normally available to them, as a result of the destruction created by storms or wildfires or some other natural disaster. #113 | | |
Where homes have been destroyed, for example, the demand for local hotel rooms may rise suddenly, while the supply of hotel rooms at best remains the same, assuming that none of these hotels has been damaged or destroyed. When the local population wants more hotel rooms than there are available locally, these rooms will have to be rationed, one way or another, whether by prices or in some other way. #114 | | |
If the prices of hotel rooms remain what they have been in normal times, those who happen to arrive at the hotels first will take all the rooms, and those who arrive later will either have to sleep outdoors, or in damaged homes that may offer little protection from the weather, or else leave the local area and thus leave their homes vulnerable to looters. But, if hotel prices rise sharply, people will have incentives to ration themselves. A couple with children, who might rent one hotel room for themselves and another for their children, when the prices are kept down to their normal level, will have incentives to rent just one room for the whole family when the rents are abnormally high—that is, when there is “price gouging.” #115 | | |
Similar principles apply when there are local shortages of other things suddenly in higher demand in the local area. If electric power has been knocked out locally, the demand for flashlights may greatly exceed the supply. If the prices of flashlights remain the same as before, those who arrive first at stores selling flashlights may quickly exhaust the local supply, so that those who arrive later are unable to find any more flashlights available. However, if the prices of flashlights skyrocket, a family that might otherwise buy multiple flashlights for its members is more likely to make do with just one of the unusually expensive flashlights—which means that there will be more flashlights left for others. #116 | | |
If there is an increased demand for gasoline, whether for electric generators or to drive automobiles to other areas to shop for things in short supply locally, or to move out of the stricken local area entirely, this can create a shortage of gasoline until new supplies can arrive at filling stations or until electric power is fully restored, so that the pumps at more filling stations can operate. If the price of gasoline remains what it has been in normal times, those who get to the filling stations first may fill up their gas tanks and exhaust the local supply, leaving those who arrive later with no gasoline to buy. But, if the price of gasoline skyrockets, motorists who arrive earlier may buy just enough of the unusually expensive gasoline to get them out of the area of local destruction, so that they can then fill up their gas tanks much less expensively in places less affected by the natural disaster. That leaves more gasoline available locally for others. #117 | | |
When local prices spike, that affects supply as well, both before and after the natural disaster. The arrival of a hurricane is usually foreseen by meteorologists, and their predictions of approaching hurricanes are usually widely reported. Supplies of all sorts of things that are usually needed after a hurricane strikes—flashlights, bottled water, gasoline and lumber, for example—are more likely to be rushed to the area where the hurricane is likely to strike, before the hurricane actually gets there, if suppliers anticipate higher prices. This means that shortages can be mitigated in advance. But if only the usual prices in normal times can be expected, there is less incentive to incur the extra costs of rushing things to an area where disaster is expected to strike. #118 | | |
Similar incentives exist after a hurricane or other disaster has struck. To replenish supplies in a devastated area can cost more, due to damaged roads and highways, debris and congested traffic from people fleeing the area. Skyrocketing local prices can overcome the reluctance to take on these local obstacles that entail additional costs. Moreover, each supplier has incentives to try to be the first to arrive on the scene, since that is when prices will be highest, before additional suppliers arrive and their competition drives prices back down. Time is also of great importance to people in a disaster area, who need a continuous supply of food and other necessities. #119 | | |
Prices are not the only way to ration scarce resources, either in normal times or in times of sudden increases in scarcity. But the question is whether alternative systems of rationing are usually better or worse. History shows repeatedly the effect of price controls on food in creating hunger or even starvation. It might be possible for sellers to ration how much they will sell to one buyer. But this puts the seller in the unenviable role of offending some of his customers by refusing to let them buy as much as they want—and he may lose some of those customers after things return to normal. Few sellers may be willing to risk that. #120 | | |
The net result of having neither price rationing nor non-price rationing may well be the situation described in the wake of the super storm “Sandy” in 2012, as reported in the Wall Street Journal: #121 | | |
At one New Jersey supermarket, shoppers barely paused for a public loudspeaker announcement urging them to buy only the provisions needed for a couple of days of suburban paralysis. None seemed to be deterred as they loaded their carts to the gunwales with enough canned tuna to last six weeks. A can of Bumblebee will keep for years: Shoppers take no risk in buying out a store’s entire supply at the normal price.{97} #122 | | |
Appeals to people to limit their purchases during an emergency, like other forms of non-price rationing, are seldom as effective as raising prices. #123 | | |
