Price controls and government spending won’t solve inflation
The United States experienced its highest inflation rate in almost 40 years last year. Not surprisingly, the public expects the government to do something to bring inflation under control. If policymakers hope to deliver on their promises, they will need to address the root causes of inflation, not hide its symptoms.
Last year’s 6.8 percent inflation rate was the highest since 1982. Seventy-two percent of Americans, according to a mid-December CNN poll, say the government is doing too little for it. reduce.
Some, like Isabella Weber, professor of economics at the University of Massachusetts, are now offer government-imposed price controls.
As Robert Schuettinger and Eamonn Butler demonstrated in their 1979 book, Forty centuries of wage and price controls, price controls have been imposed throughout the history of the world and inevitably fail. It’s such a bad idea that left-wing economist and Nobel Laureate Paul Krugman called Weber’s argument “really stupid” before. apologize for his rude tone.
But Krugman’s initial reaction was right. Rising prices are a symptom of an underlying problem, not the problem itself. Using the power of government to limit price increases will do as much good in the long run as trying to stop global warming by preventing thermometers from recording higher readings.
It is also important for policy makers to recognize that while the inflation rate is an aggregate measure, not all prices increase in the same way. Each individual price — for beef and poultry, gasoline, lumber and plywood, new cars, and so on — conveys information about the relative scarcity of specific goods or services. These price signals encourage consumers to turn to goods that are relatively less scarce (and therefore less expensive), while prompting entrepreneurs and producers to find more efficient ways of producing the goods they are looking for or finding desirable alternatives. Price controls dampen these market adjustments, causing unnecessary shortages and surpluses and discouraging innovation.
President Richard Nixon’s wage and price controls in the 1970s led to shortages and did little to stem inflation, which weighed on both his immediate successor, Gerald Ford, and the successor to President Ford, Jimmy Carter. The same policy would not lead to a different result today.
Inflation is ultimately caused by too much money for too little goods and services. It is not difficult to see how the United States entered this inflationary situation during the COVID-19 pandemic. On the money side, the federal government injected more than $ 6 trillion into the economy, while the Federal Reserve adjusted with historically low interest rates, further encouraging spending using borrowed money. . Meanwhile, on the goods and services side, production has been hampered by shutdown orders and other pandemic-related disruptions, both at home and in our overseas supply chains.
Stopping inflation requires slowing monetary stimulus while increasing economic output. The Fed has announced tightening monetary policy for 2022 and it appears President Joe Biden’s $ 5,000 billion “build back better” spending bill is stuck in a political stalemate. This should slow growth on the monetary side of the equation and slow demand somewhat.
But what can policymakers do to boost output, which would also help curb inflation? The answer: back off from policies that discourage the production of needed goods and services.
For example, since supply chain issues limit both U.S. production and access to imported goods, Washington could repeal (or order in council) the obsolete Merchant Marine Act of 1920, better known as name of Jones Act. This protectionist law prevents foreign ships from calling at multiple U.S. ports by requiring that cargo ships going between U.S. ports be built in America and owned and piloted by U.S. citizens. Removing these restrictions would help alleviate short-term supply chain problems while reducing overall costs and improving long-term productivity.
Government policies have also contributed significantly to sharp increases in energy and housing costs.
With a gallon of regular unleaded gasoline costing more than $ 3.30 nationwide on Dec. 7, according to AAA, and likely to rise, President Biden could (and should) reverse the restrictions he imposed to domestic oil and gas production shortly after taking office.
As a colleague and I document in our book Housing America: Emerging from a Crisis, the government also bears a significant responsibility in the high costs of housing. State and local zoning restrictions, building codes, permit regulations, and paperwork all limit production and drive up prices.
Inflation is not a natural phenomenon. It is largely created by human action or inaction.
Even if they don’t know all the details, the public does. Now they want politicians to fix the mess they created.
Benjamin Powell, a senior researcher at the Independent Institute in Oakland, Calif., Is director of the Free Market Institute and professor of economics at Texas Tech University.
The opinions expressed in this article are those of the author.