“This is a great suppressed topic. It was absolutely mainstream from the start of World War II until the Reagan administration.” This is a quote from “Price Controls Set Off Heated Debate as History Gets a Second Look,” a January 13 New York Times article by Ben Casselman and Jeanne Smialek. The speaker quoted is James (Jamie) K. Galbraith, a left-wing economist at the University of Texas. The “this” in the quote refers price controls, which Galbraith appears to favor. He comes by it honestly. His father, the late John Kenneth Galbraith, was a high-level official in the Office of Price Administration during World War II, and he sometimes reflected fondly on the power that he exerted over the US economy.
I disagree with Galbraith that the topic has been suppressed. We opponents of price controls have been quite willing to discuss why they’re a bad idea. If he were to be more accurate, Galbraith would have to say that the idea has been rejected. Indeed, the heartening point of the Times article is that the vast majority of economists, including left-wing economists such as Paul Krugman, reject the idea of comprehensive government controls on prices. But sometimes it’s hard for people who are losing a debate to admit that they’ve lost, not because the topic has been suppressed but because their idea has been analytically crushed. It’s worthwhile, therefore, to say why they are such a bad idea. Price controls cause shortages, waste people’s time in line, sometimes lead to favoritism by suppliers, and, as in the case of oil and gasoline in the 1970s, can lead to harmful regulation that lasts for decades.
This is from David R. Henderson, “Price Controls: Still a Bad Idea,” Defining Ideas, January 20, 2022.
The problem with the “smashed thermometer” analogy:
When University of Chicago economist Harold Demsetz gave a talk in the winter of 1970 at the University of Winnipeg, where I was an undergrad, he used an analogy that many critics of price controls still use. Demsetz told his audience that using price controls to reduce inflation is like responding to cold weather in Winnipeg by breaking the thermometer. His point was that just as thermometers respond to temperature, prices are an indicator of underlying economic phenomena, namely supply and demand. Breaking a thermometer doesn’t cause the temperature to rise; controlling prices doesn’t cause inflation to fall.
But it’s worse than that. When you break the thermometer, you don’t make the weather worse. But when a government controls prices, it makes the economy worse by causing shortages.
“Greed”
What’s wrong with attributing price increases to “corporate greed”? The problem with that explanation is not that corporations aren’t greedy. If we take “greed” to mean “wanting to make as high a profit as possible,” then yes, most corporations are greedy. But those same corporations often cut prices. Have you noticed that the prices of wide-screen televisions have fallen regularly over the past fifteen years? Does that mean that the corporations producing those TVs have steadily become less greedy? Unlikely. So greed is not a good explainer of price increases. A good rule for thinking, as Charles L. Hooper and I pointed out in our book, Making Great Decisions in Business and Life, is that to explain a change in one variable, you need to point to a change in another variable. Because greed (however defined) is relatively constant, it’s not a good way to explain a change.
Read the whole thing.
READER COMMENTS
Andrew_FL
Jan 22 2022 at 11:51pm
Yes, I myself modified the quip long ago. It’s like breaking the thermometer and ingesting the contents.
Peter Gerdes
Jan 22 2022 at 11:57pm
That’s all true but the problem is that the motivation for price controls isn’t really about achieving certain ends. It, like too much politics and affinity statements generally, is more about expressing a certain moral alignment: we think the people charging high prices are bad and that it would be better if things were cheaper.
Us humans are political animals and we care as much about building coalitions and knowing who is on what side as we do about outcomes in many cases. The problem is that price controls are often a really clear way to declare sides while the policy of allowing competition to allocate goods, while in fact better for those who are in need, doesn’t make such a clear declaration. We fear that someone who says that might really not care about those who need the product and could just be pretending.
BC
Jan 23 2022 at 1:17am
Some price control proponents may be sincerely ignorant of all the shortcomings. Young people especially may be too young to remember the earlier price control failures between WW2 and the Reagan Administration, which began over 40 years ago. (Actually, I think the tide started to turn against price controls even by the late 70s.) If that part of economic history has been suppressed by left wing academics and media, then how would we expect non-economists to know about it if they are younger than 40? After all, price controls arose the first time around for a reason.
I think it’s too early to give up on education and good faith persuasion. Besides, if the mainstream is not persuadable by facts and reason, then we will have lots of problems no matter what we do. Better to assume that the mainstream is persuadable so that, if it turns out that they are, we won’t have lost the opportunity to persuade.
BC
Jan 23 2022 at 1:34am
I think what has been suppressed is the history that price controls have been extensively tried and, as a result of those failed efforts, have been rejected. That my be conventional wisdom among professional economists, but that history seems far less appreciated among the general public, especially among younger folks that depend on academics and media, rather than their own memories, for historical perspectives.
john hare
Jan 23 2022 at 4:37am
One problem is that price controls haven’t been entirely rejected when the situation gets emotional.
Hurricane knocks out power to an area and it becomes illegal to raise prices during the emergency, so thousands of unused generators stay where they are in unharmed counties within a hundred miles. A lot of people I know would have been glad to make a profit on their stand by generators. Same with many other supplies where I have heard many people talk about loading up on plywood and roofing felt before the storm and hitting the road as soon as the know the landfall. Except for concern about legal troubles with emergency price gouging. Companies especially do less than they are capable of because it would be a losing proposition to use heroic (expensive) measures to deliver the needed goods at the same price.
The covid restrictions are recent and known.
As long as it sounds good to the uninformed that vote, politicians will use the rhetoric and sometimes the implementation.
Thomas Hutcheson
Jan 23 2022 at 8:39am
If Krugman is “left wing” 🙂 who is centrist?
I would distinguish favoring a temporary price freeze (which one might reject believing that it would not, in fact, be temporary) from favoring “real” price controls as a supposed long run system. The first makes sense in a model in which part of the demand for money is affected by expectations of future inflation and one believes that expectations are formed from reports of past inflation. I don’t but one might still favor the former as an experiment that has never been tried.
Jon Murphy
Jan 23 2022 at 8:59am
Given that Paul Krugman calls himself “left-wing,” is there really any question?
From an economic and political economy perspective, I’m not sure that’s a distinction that matters a whole lot. There’s no such thing as a temporary government program, after all.
Daniel
Jan 23 2022 at 9:25am
I’d love to see this debate actually debated rather than disingenuously discussed. I think the anti-price control group has a very strong position (and the correct one) but unfortunately the debate in 2021/22 consists of the sides talking about different things. Pro-PC says they want “targeted” price controls, so intervention in a few key markets, and anti-PC replies that “economy-wide” price controls would be bad, which is a different thing.
Another thing the pro-PC crew cites is pricing power in driving price increases. This to me is much more possible (see research on markups, much more equivocal) than the position that price controls are good. I agree that usually “to explain a change in one variable, you need to point to a change in another variable,” but one could reasonably point to a moderator variable. For example, if pricing power increased over a period of time and has been stable in recent months, but no wild price increases occurred over that time and did so only recently, it is possible that recent events are responsible for “unleashing” that latent pricing power into de facto pricing power. I don’t find that story particularly convincing (plus “real factors” is a much more obvious and parsimonious explanation) but the nuance that the IV doesn’t necessarily have to change, at least the conditions that affect the relationship between the IV and DV can, is important not to lose sight of.
Jon Murphy
Jan 23 2022 at 10:38am
I don’t think that’s a fair representation of David’s post. He is discussing price controls in general, not general price controls. Indeed, the examples he gives are of “targeted” price controls. So, I think your claim of disingenuity is incorrect.
No, I disagree that such an interpretation is reasonable. It just means there is some other factor going on. Pricing power cannot explain inflation. You’d have to explain why every firm in the entire world with pricing power decided at exactly the same time to raise their prices and why they continue to do so when the profit-maximizing thing to do would be lower prices.
So, we’re still left with the question “what changed”?
Daniel
Jan 23 2022 at 11:43am
Thanks for a great comment Jon.
I should say that I don’t think David is being disingenuous. I only wish we could get more of a direct volley on the PC-inflation argument. “PCs in general” are indeed not “general PCs” but also not directly addressing the proposal of the pro-PCs either. Appeals to inefficiency are perhaps more important than where the price level is (and getting people to think that way is great), but it doesn’t really contradict the alleged effectiveness of targeted PCs in restraining inflation.
I agree we would still be left with “what changed?”. One answer is the supply chain crisis facilitated a general narrative that provides cover so actors rationally concluded now is the time (again, I don’t find that convincing). But that also doesn’t work *without* pricing power, so that’d be a key part of that story.
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