Post by RS Davis on Oct 22, 2004 1:35:26 GMT -5
Making Economic Sense
Chapter 34
Price Controls Are Back!
--------------------------------------------------------------------------------
Bad and discredited ideas, it seems, never die. Neither do they fade away. Instead, they keep turning up, like bad pennies or Godzilla in the old Japanese movies.
Price controls, that is, the fixing of prices below the market level, have been tried since ancient Rome; in the French Revolution, in its notorious "Law of the Maximum" that was responsible for most of the victims of the guillotine; in the Soviet Union, ruthlessly trying to suppress black markets. In every age, in every culture, price controls have never worked. They have always been a disaster.
Why did Chiang-kai-Shek "lose" China? The main reason is never mentioned. Because he engaged in runaway inflation, and then tried to suppress the results through price controls. To enforce them, he wound up shooting merchants in the public [p. 124] squares of Shanghai to make an example of them. He thereby lost his last shreds of support to the insurgent Communist forces. A similar fate awaited the South Vietnamese regime, which began shooting merchants in the public squares of Saigon to enforce its price decrees.
Price controls didn't work in World War I, when they began as "selective"; they didn't work in World War II, when they were comprehensive and the Office of Price Administration tried to enforce them with hundreds of thousands of enforcers. They didn't work when President Nixon imposed a wage-price freeze and variants of such a freeze from the summer of 1971 until the spring of 1973 or when President Carter tried to enforce a more selective version.
The first thing I ever wrote was an unpublished memo for the New York Republican Club denouncing President Truman's price controls on meat. I was a young graduate student in economics at Columbia University, fresh from my M.A., and I wrote the piece for the Republican campaign of 1946. Price controls, I, and countless economists before and since, pointed out, never work; they don't check inflation, they only create shortages, rationing, declines in quality, black markets, and terrible economic distortions. Furthermore, they get worse as time goes on, as the economy adjusts out from under these pernicious controls.
In 1946, all federal price controls had been lifted except on meat, and as a result, meat was in increasingly short supply. It got so bad that no meat could be found, and diabetics could not even find insulin, a meat-derived product. Radio disk jockeys implored their listeners to write to their Congressmen urging them to keep price controls on meat, for if not the price would triple, quadruple, who knows, rise to infinity. (Ignored was the question: what's so great for the consumers about cheap meat that no one can find?)
Finally, in summer, President Truman went on the air in a nationwide radio address. Summing up the dire meat crisis, he said, in effect, that he had seriously considered nationalizing the Chicago meatpackers in order to commandeer hoarded meat. But then he realized that the meat-packers had no meat either. Then, in a remarkable revelation that few commented on, he disclosed that he had given serious consideration to mobilizing the National [p. 125] Guard and the Army, and sending troops into Midwestern farms to seize all their chickens and livestock. But then, he reluctantly added, he had decided that such a course was "impractical."
Impractical? A nice euphemism. Sending troops into the farms, Truman would have had a revolution on his hands. Every farmer would have been out there with a gun, defending his precious land and property from a despotic invader. Besides, it was a Congressional election year, and the Democrats were already in deep trouble in the farm states. As it was, the Old Right Republicans swept both houses of Congress that year in a landslide, and on the slogan: "controls, corruption, and Communism." It was the last principled stand of right- wing Republicanism, and, not coincidentally, its last political victory.
Truman reluctantly concluded that there seemed to be only one course left to him: to abolish the price controls on meat, which he proceeded to do. In a couple of days there was plenty of meat for consumers and the diabetic alike. The meat crisis was over. Prices? They did not, of course, go up to infinity. They rose by something like 20% from the unrealistic control level.
The most remarkable part of this affair went unremarked: that President Truman, apparently without knowing it, had conceded the crucial point: that the "shortage" was, pure and simple, an artificial creation of his own price controls. How else interpret the fact that even he admitted that the last, unfortunate resort to end the crisis was to abolish the controls? And yet, no one drew this lesson and so no one initiated impeachment proceedings.
Twenty-five years later, President Nixon imposed a price-wage freeze because inflation had reached what was then an "unacceptable" level of 4.5 % a year. I went ballistic, denouncing the controls everywhere I could. That winter, I debated Presidential economic adviser Herbert Stein before the Metropolitan Republican Club of Washington, D.C. After I denounced price controls, Stein re marked that, in essence, the price controls were my fault, not his and President Nixon's.
Stein knew as well as I did that price controls were disastrous and counterproductive, but I and others like me had not done a good enough job of educating the American public, and so the Nixon Administration had been "forced" by public pressure to [p. 126] impose the controls anyway. Needless to say, I was not convinced about my guilt. Years later, in his memoirs, Stein wrote of the heady rush of power he felt at Camp David when planning to impose price controls on everyone. Poor Stein: another "victim" amidst the victimology of American culture!
And now, Bill Clinton is in the White House, and price controls are back in a big way. The FCC has ordered a 15% rollback on two-thirds of the TV cable rates in this country, thereby reregulating communications with a bang. The reasoning? Since being deregulated in 1987, cable rates have risen twice as fast as general inflation. Well: averages usually have roughly half of the data rising higher and roughly half lower; that's the nature of an average. Are we proposing to combat inflation by going after every price that rises higher than the average?
That, indeed, is the major reasoning behind the looming Clintonian program for price controls on health care. Health care prices have risen faster than inflation. The threat of controls over health care has brought forth a chorus of protests from economists, and from former price controllers, who learned about price controls the hard way. Thus, C. Jackson Grayson, who headed Nixon's price-wage control experiment from 1971 to 1973, warns: "price" controls will make things worse. Believe me, I've been there . . . . Controls have not worked in 40 centuries. They will not work now."
Grayson warns that, already 24% of U.S. health care is spent on administrative costs, largely imposed by government. Clintonian price control will cause regulations and bureaucrats to proliferate; it will raise medical costs, not lower them. Barry Bosworth, who headed price control efforts under Jimmy Carter, reacted similarly: "I can't believe they [the Clinton Administration] are going to do it. I can't believe they are that stupid." He pointed out that health care, a field where there is rapid innovation in goods and services, is a particularly disastrous area to try to impose price controls.
But none of these objections is going to work. The brash young Clintonians don't mind if price controls cause shortages of health care. In fact, they welcome the prospect, because then they can impose rationing; they can impose priorities, and tell everyone how much of what kind of medical care they can have. And besides, as [p. 127] Herb Stein found out, there's that deeply satisfying rush of power. We should know by now that reasoned arguments by economists or disillusioned ex- controllers are not going to stop them: only determined and militant opposition and resistance by the long-suffering public.
Chapter 34
Price Controls Are Back!
--------------------------------------------------------------------------------
Bad and discredited ideas, it seems, never die. Neither do they fade away. Instead, they keep turning up, like bad pennies or Godzilla in the old Japanese movies.
Price controls, that is, the fixing of prices below the market level, have been tried since ancient Rome; in the French Revolution, in its notorious "Law of the Maximum" that was responsible for most of the victims of the guillotine; in the Soviet Union, ruthlessly trying to suppress black markets. In every age, in every culture, price controls have never worked. They have always been a disaster.
Why did Chiang-kai-Shek "lose" China? The main reason is never mentioned. Because he engaged in runaway inflation, and then tried to suppress the results through price controls. To enforce them, he wound up shooting merchants in the public [p. 124] squares of Shanghai to make an example of them. He thereby lost his last shreds of support to the insurgent Communist forces. A similar fate awaited the South Vietnamese regime, which began shooting merchants in the public squares of Saigon to enforce its price decrees.
Price controls didn't work in World War I, when they began as "selective"; they didn't work in World War II, when they were comprehensive and the Office of Price Administration tried to enforce them with hundreds of thousands of enforcers. They didn't work when President Nixon imposed a wage-price freeze and variants of such a freeze from the summer of 1971 until the spring of 1973 or when President Carter tried to enforce a more selective version.
The first thing I ever wrote was an unpublished memo for the New York Republican Club denouncing President Truman's price controls on meat. I was a young graduate student in economics at Columbia University, fresh from my M.A., and I wrote the piece for the Republican campaign of 1946. Price controls, I, and countless economists before and since, pointed out, never work; they don't check inflation, they only create shortages, rationing, declines in quality, black markets, and terrible economic distortions. Furthermore, they get worse as time goes on, as the economy adjusts out from under these pernicious controls.
In 1946, all federal price controls had been lifted except on meat, and as a result, meat was in increasingly short supply. It got so bad that no meat could be found, and diabetics could not even find insulin, a meat-derived product. Radio disk jockeys implored their listeners to write to their Congressmen urging them to keep price controls on meat, for if not the price would triple, quadruple, who knows, rise to infinity. (Ignored was the question: what's so great for the consumers about cheap meat that no one can find?)
Finally, in summer, President Truman went on the air in a nationwide radio address. Summing up the dire meat crisis, he said, in effect, that he had seriously considered nationalizing the Chicago meatpackers in order to commandeer hoarded meat. But then he realized that the meat-packers had no meat either. Then, in a remarkable revelation that few commented on, he disclosed that he had given serious consideration to mobilizing the National [p. 125] Guard and the Army, and sending troops into Midwestern farms to seize all their chickens and livestock. But then, he reluctantly added, he had decided that such a course was "impractical."
Impractical? A nice euphemism. Sending troops into the farms, Truman would have had a revolution on his hands. Every farmer would have been out there with a gun, defending his precious land and property from a despotic invader. Besides, it was a Congressional election year, and the Democrats were already in deep trouble in the farm states. As it was, the Old Right Republicans swept both houses of Congress that year in a landslide, and on the slogan: "controls, corruption, and Communism." It was the last principled stand of right- wing Republicanism, and, not coincidentally, its last political victory.
Truman reluctantly concluded that there seemed to be only one course left to him: to abolish the price controls on meat, which he proceeded to do. In a couple of days there was plenty of meat for consumers and the diabetic alike. The meat crisis was over. Prices? They did not, of course, go up to infinity. They rose by something like 20% from the unrealistic control level.
The most remarkable part of this affair went unremarked: that President Truman, apparently without knowing it, had conceded the crucial point: that the "shortage" was, pure and simple, an artificial creation of his own price controls. How else interpret the fact that even he admitted that the last, unfortunate resort to end the crisis was to abolish the controls? And yet, no one drew this lesson and so no one initiated impeachment proceedings.
Twenty-five years later, President Nixon imposed a price-wage freeze because inflation had reached what was then an "unacceptable" level of 4.5 % a year. I went ballistic, denouncing the controls everywhere I could. That winter, I debated Presidential economic adviser Herbert Stein before the Metropolitan Republican Club of Washington, D.C. After I denounced price controls, Stein re marked that, in essence, the price controls were my fault, not his and President Nixon's.
Stein knew as well as I did that price controls were disastrous and counterproductive, but I and others like me had not done a good enough job of educating the American public, and so the Nixon Administration had been "forced" by public pressure to [p. 126] impose the controls anyway. Needless to say, I was not convinced about my guilt. Years later, in his memoirs, Stein wrote of the heady rush of power he felt at Camp David when planning to impose price controls on everyone. Poor Stein: another "victim" amidst the victimology of American culture!
And now, Bill Clinton is in the White House, and price controls are back in a big way. The FCC has ordered a 15% rollback on two-thirds of the TV cable rates in this country, thereby reregulating communications with a bang. The reasoning? Since being deregulated in 1987, cable rates have risen twice as fast as general inflation. Well: averages usually have roughly half of the data rising higher and roughly half lower; that's the nature of an average. Are we proposing to combat inflation by going after every price that rises higher than the average?
That, indeed, is the major reasoning behind the looming Clintonian program for price controls on health care. Health care prices have risen faster than inflation. The threat of controls over health care has brought forth a chorus of protests from economists, and from former price controllers, who learned about price controls the hard way. Thus, C. Jackson Grayson, who headed Nixon's price-wage control experiment from 1971 to 1973, warns: "price" controls will make things worse. Believe me, I've been there . . . . Controls have not worked in 40 centuries. They will not work now."
Grayson warns that, already 24% of U.S. health care is spent on administrative costs, largely imposed by government. Clintonian price control will cause regulations and bureaucrats to proliferate; it will raise medical costs, not lower them. Barry Bosworth, who headed price control efforts under Jimmy Carter, reacted similarly: "I can't believe they [the Clinton Administration] are going to do it. I can't believe they are that stupid." He pointed out that health care, a field where there is rapid innovation in goods and services, is a particularly disastrous area to try to impose price controls.
But none of these objections is going to work. The brash young Clintonians don't mind if price controls cause shortages of health care. In fact, they welcome the prospect, because then they can impose rationing; they can impose priorities, and tell everyone how much of what kind of medical care they can have. And besides, as [p. 127] Herb Stein found out, there's that deeply satisfying rush of power. We should know by now that reasoned arguments by economists or disillusioned ex- controllers are not going to stop them: only determined and militant opposition and resistance by the long-suffering public.
...when he's around
Yes!