INFLATION DRIVERS: PRICE CONTROLS #4
Along with subsidies (which we discussed yesterday) and tariffs (which will be covered in our next memo), price controls are a common but destructive economic tool. They are politically motivated and substitute the intelligence of bureaucrats for the intelligence of the marketplace by telling companies and individuals the prices they can charge for goods and services. Often, the prices are slow to reflect cost increases, and companies and individuals can experience losses and dislocations in profits if the price controllers are not proactive, effective and accurate.
The way they hurt an economy depends upon many variables, like whether they are all-inclusive, whether they are instituted in concert with wage controls, how much free trade the world and the country enjoys and so forth.
Like subsidies and tariffs price controls cause a misallocation of resources, non-economic behaviors on the part of the government, and antisocial behavior on the part of the public.
Price controls often go hand in hand with: shortages, conniving behavior by businesses and consumers, declines in production, declines in quality, and many other problems. A common problem in price controlled economies is that capital will not be invested to grow businesses because a fair return on capital can not be obtained. So, the manufacturing and employment capacity of the economy will usually fall. This may have the unintended consequence of slowing economic activity and increasing unemployment.
Price controls cause the creation and growth of bureaucracies to administer the controls. These bureaucracies often develop lives of their own and become difficult to remove, causing the controls to last years longer than they should…which further diminishes economic growth.
The biggest problem is that price controls cause a build-up of unfilled price increases and diminished production (people don’t produce for a loss if they can help it). When shortages and economic dislocations caused by the controls finally become politically unpalatable, and politicians remove the controls…INFLATION ACCELERATES.
These make up reason #4 why inflation will be here for a while, and why it is not being driven solely by food and energy price rises.
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