I call all this The War on Prices, the title of a new Cato Institute book. And when it comes to this war, economists are typically pacifists. The long sweep of history, from ancient Egypt to modern America, shows us that price controls can’t quell inflation, because they don’t fundamentally change the money supply or aggregate production. What controls on market prices guarantee is inefficiency. They squelch the delicate coordination mechanism that prices and their movements provide to encourage economical action. Price ceilings, the most common incarnation, are thus a tried-and-tested recipe for shortages, declines in product quality, and black markets.
Yet if we know the destructive effect of government price controls as a matter of economic science, what explains their current revival? Who is behind this new “war on prices” and what, exactly, are they hoping to accomplish?
The specific answer for “why now?” — the Archduke Franz Ferdinand moment, say — was the recent inflation. Americans are livid that their grocery prices are up 21 percent in three years, used car prices up 19 percent, and electricity prices up 29 percent. They aren’t chuffed that the cost of financing new mortgages and auto-loans has surged after money was tightened to reduce inflation. Faced with this wrath of angry citizens, politicians and central bankers have every incentive to deflect blame elsewhere towards malevolent actors and one-off shocks, excusing their own culpability for excessive macroeconomic stimulus.
That, broadly, is what occurred. The Federal Reserve, which oversaw a $6 trillion money supply expansion in two years, initially claimed inflation was “transitory” and the result of one-off supply crunches due the pandemic and war in Ukraine. Joe Biden’s Democrats, who waved through their $1.9 trillion American Rescue Plan in March 2021, putting more stimulus fuel on the fire, now blame greedy corporates for the results of Washington DC’s collective folly. There’s a political self-interested reason to do so, and regular empirical “research” from heterodox economists and left-leaning pressure groups, those who cheered on “running the economy hot” in 2021 and want Democrats re-elected, keeps this narrative going.