We’re Poised to Fail Again

Even as the White House press secretary was denying the existence of inflation, the Treasury Department was announcing a 6.2% cost of living adjustment for Social Security recipients.  The first conclusive evidence of inflation is always the denial of its existence.

Unfortunately, the second sign of an imminent period of rising inflation is always some elected fool (pardon the redundancy) calling for price controls in an effort to stop it.  It is simply amazing how many times the same failed tactic has been tried to stop a market from following its inevitable path—Without one exception or even a marginal success in recorded history.

Don’t just take my word for it:  I recommend reading "Forty Centuries of Wage & Price Controls: How Not to Fight Inflation” by Robert L. Schuettinger and Eamonn F. Butler.  The book brilliantly outlines how the attempt to “set” prices always fails to reduce prices or to even eliminate shortages.  Using examples from Hammurabi, Ancient Egypt, Rome, Nixon, and all the way to today’s inept leaders, the result of such practices has always inevitably been abject failure.  To quote the authors:

By giving producer and consumers the wrong signals because “low” prices to producers limit supply and “low” prices to consumers stimulate demand, price controls widen the gap between supply and demand.

Of particular interest is the chapter on the French Revolution and the “Law of the Maximum”.  Over roughly twenty months, the Revolutionary Committee tried just about every form of price control (before or since), ultimately managing to “control” the most agriculturally rich country of Europe into a protracted period of starvation and economic collapse.

Despite price controls having a long record of total failure as an economic policy, politicians keep finding new ways to repackage the same old failures.  Under the guise of rent controls, minimum wages, or moratoria on evictions—and despite the name changes—these measures are all simply price controls and they will end up doing more harm than any supposed good.  The eviction moratoria will inevitably lead to higher rents and a housing shortage.  Even as you read this, landlords all over the country are converting apartments into condominiums.

Recently, I read of a proposal for a novel new method of price control that started in France, under which grocery stores are to be forbidden by law from disposing of unsold produce—it has to be donated to the poor.  Although it’s supposed aim is charity, it will inevitably lead to the stores’ purchasing less produce from farmers, lowering production, and leading to higher prices and less choice.   (Notice how the people who passed the law are being charitable with the property of someone else.)

Despite anyone’s best intentions to the contrary, market forces are as fixed as mathematics.  You can no more change the laws of supply and demand than you can pass a law successfully invalidating the Pythagorean theorem…Not that politicians haven’t tried.  Let me tell you about my favorite example.

My parents were older than sliced bread.  Literally, since sliced bread was invented in 1928 and both of my parents were born years before Otto Frederick Rohwedder started selling bakeries a single loaf slicing machine that rapidly changed the industry.  (While not the first bakery to use the new machine, it was Wonder Bread that made the novelty of uniformly sliced bread known across America.  

Sliced bread was more convenient to use, and housewives with large families hated the chore of slicing large amounts of bread before meals.  More convenient to use meant that more people ate bread, increasing sales and rewarding the stores, the bakeries, and the wheat farmers.  

Then came World War II and an era of price controls and rationing to meet the needs of full mobilization.  As is usually the case, the price controls created an active black market and raised prices, but because of international demand, production stayed high.  In America, the price of wheat grew by 25% while production rose by 50%, with most of the excess production being used to feed our allies.

While direct examination of the American wartime wage and price controls is made difficult by the elimination of some models of production, a steady decline in quality, and an active black market, it is obvious that the mandated measures failed—wages and prices still rose.

On January 18, 1943, the Food Administrator, Claude R. Wickard mandated that bakeries cease the production of sliced bread.  Reasoning that the metal used to create the slicing machines were needed for the war effort and that sliced bread needed heavier wrapping paper to keep the bread from drying out and becoming stale, Wickard banned the production of sliced bread as a measure to win the war.  The announcement was timed to come out simultaneously with a 10% rise in the cost of bread, hopefully encouraging less consumption.

Unfortunately, there were several things wrong with the plan.  First, the bakeries already owned the slicing machines and couldn’t have bought new ones since the factories that normally manufactured them had found more lucrative contracts producing war materials.  Second, after more than a year in the war, the bakeries were used to the vagaries of interrupted supplies and thus had already stocked up with a large supply of the waxed paper to wrap the sliced bread.

Bread consumption actually went up, since most people were unable to slice their bread into uniformly thin slices.  At any rate, there was little need to reduce wheat consumption by 1943:  Rising prices meant that the farmers were already growing more wheat and the government had already stockpiled over a billion bushels of wheat (enough to supply the needs of American consumers for over two years, even if no wheat were grown during that time).  

None of the above reasons was as important to the bureaucrats as the outcries of an angry public.  The public might be willing to ration sugar, automobile tires, and coffee, but even rationed gasoline wasn’t the best thing since sliced bread.  In less than three months, the War Food Administration reversed itself and the supply of sliced bread returned to store shelves on March 8, 1943.

Even with this dismal history, the United States seems poised to once again experiment with price controls.  Gee, I wonder what the results will be.