Thursday, September 18, 2008

Price controls

Price controls are popular, in the sense that people often ask for them. At first blush, they seem like the most reasonable response to a certain kind of problem.

The price of gas is high? Government should step in and put a cap on how much people are allowed to charge for gas.

People are starving because of a huge rise in the price of rice? Someone should force rice farmers to sell at a reasonable price.

There's just one problem with all of this: price controls seldom work. (I was tempted to write 'never' instaed of 'seldom', but I CAN think of a few isolated cases where they may actually work - not often, though.)

When a government tries to control the price of a product, the result tends to be shortages, inflation, or both. This is true even when price controls are enforced through force - just ask Zimbabwe's citizens. Rather than accede to price controls, the country now produces nothing, and much of the population survives on food aid. In the 1980s, Jose Sarney's Brazilian government tried to freeze prices in order to control inflation. I was a child at the time, but I still have vivid memories of my father waiting in line for black market chicken. None was available at the official price, even though there was no shortage of poultry.

Hopefully, my position is clear - it is my belief and experience that price controls do not work, and only lead to hardship.

That being said... I'm all for their implementation when this is clamoured for by the population of a democratically elected government (or a fair approximation of such).

If people want price controls, politicians should first try to tell them exactly what will happen if price controls are put in place: shortages will get worse, and goods will go to the well-connected or those most willing to wait in line instead of to the richest. This appeal will probably be ignored, but it allows the government to say 'I told you so' later on.

If the people of the country, after hearing arguments against them, still speak with one voice, and say that they want price controls, the government should do as it is asked.

Ideally, any price controls will be put in place when nothing else of note is going on in the national economy. In practice... well, fat chance. Usually price controls are called for as a response to some economic crisis or another.

What happens next?

Best case scenario: the controls aren't terribly onerous. Citizens are happy because they were heard. There are some lineups, perhaps a black market forms, but everyone grudgingly accepts it as an acceptable tradeoff. There is no reason to remove the price controls in this case. Good enough is good enough. If people want greater 'efficiency', they'll ask for it.

Likeliest scenario: shortages caused by the price controls cause genuine hardship. People complain about lineups, shortages and having to buy goods on an expensive and possibly dangerous black market. The population asks the government to do something about all this.

In this case, the government should, of course, remove the price controls - first, though, it should explain exactly WHY the shortages became worse.

I believe it is self-evident that price controls don't work. A crucial element in the formation of this belief, was living through them.

Just as people should be allowed to make their own mistakes, if they are to ever evolve and grow, so should nations be allowed to make their own mistakes.

IMF loans (to pick an example beloved of activists) with 'common-sense' provisions such as the immediate abolition of all price controls do no one any favours when such controls were put in place at the request of the general public. Worse, since such loans are usually given in times of dire economic crisis, such a policy may lead people to believe that the abolition of price controls worsens a crisis.

If a population with a (kind of) democratic government believes it's had enough of the problems caused by price controls, it'll say so to its chosen rulers. At that time, the country itself can get rid of them.

Until then, well-meaning 'fixers' should restrict themselves to educational campaigns. By all means, explain to people why trying to cap the price of gas may lead to gas shortages - but don't go about removing the caps yourself, unless you are asked to by the country as a whole.

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