The political implications of price controls

It would be a big mistake to do so.

There’s a reason that price controls have little support among economists. The argument most frequently cited against them is that price controls will lead to shortages, inefficiencies, and other unintended economic consequences. But that’s not the whole story. Price controls also generate a series of unnecessary political tensions that, once they start, may never stop.

Standard economics textbooks offer a pretty straightforward assessment about price controls. A price cap on meat, for example, causes two main problems. On the one hand, artificially low prices for beef tend to increase demand — people want it because it’s cheap. On the other hand, the price cap discourages ranchers from increasing supply for the same reason. The net result: a shortage of meat. Yet the problems are not only economic. This type of intervention also alters a society’s political norms, leading people to favor ever-increasing levels of intervention. There are three political processes that may force this outcome.

The first one is called “transfer dynamics.” When policymakers grant the privilege of buying cheap beef to meat consumers, they are indirectly harming ranchers. In that situation, they will also have an incentive to demand similar privileges. If policymakers then fulfill the demands of ranchers and reduce the price of their inputs, they will inevitably harm the manufacturers of ranchers’ inputs. This unfolds a process in which policies only create winners and losers all the time.

The second political process is the “self-fulfilling thesis.” Once the price of meat is artificially reduced, ranchers will have a genuine target to blame: the government and meat consumers. Paradoxically, their request for a similar privilege suddenly becomes justified because of the harm they suffer due to the first intervention. Therefore, the government is forced to act to fix its previous mistake.

Finally, there’s the “gradual-acceptance thesis,” which means that each government intervention indirectly reduces the population’s aversion to a subsequent new intervention. When policymakers lower the price of meat, the unintended consequence is often a shortage. If that happens, policymakers might try to solve this new problem by providing subsidies for ranchers to increase production. These subsidies will then have to be paid by raising taxes. Thus, interventions begin to pile up, and the public accepts each further intervention with fewer complaints than the previous one.

Once several interventions have accumulated, the deregulation process may also be politically complicated.

If policymakers fix the price of different inputs along the supply chain of meat and then decide to deregulate, they would face the dilemma of eliminating all these price controls simultaneously or gradually one by one. Simultaneous deregulation processes are more harmful because they shock the economy. However, a gradual process of deregulation always creates winners and losers. That could again activate the practices of transfer dynamics and self-fulfilling theses, putting the deregulation process at risk and leading policymakers to intervene again.

Though price controls are far from becoming a reality, rejecting them solely because of the economic problems they cause is actually short-sighted. Price controls not only reduce the economy’s efficiency. They also generate pointless political frictions, which can then prove to be challenging to unwind. Both the economic and the political argument against price controls will help bury them once and for all.

Agustin Forzani is an M.A. in economics from George Mason University. He has been published in National Review, Inside Sources, Discourse, and Global Trade. Follow him @agustinforzani.