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Price Controls?!

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Price Controls?!

Democrats look to resurrect a completely discredited economic policy. May 13, 2022
Economy, finance, and budgets
Politics and law

Senate Democrats, led by Elizabeth Warren, just released a bill that would make price-gouging unlawful. The proposal gives further life to price controls, one of the worst policy failures from the last period of high inflation, decades ago.

According to the bill, “It shall be unlawful for a person to sell or offer for sale a good or service at an unconscionably excessive price during an exceptional market shock, regardless of the person’s position in a supply chain or distribution network.” What is an “unconscionably excessive” price? Presumably Warren knows it when she sees it. The punishment would be the lesser of a $25,000 fine or 5 percent of revenues.

This bill flunks basic economics. Firms raise prices for two reasons: they face higher costs and must pass them on to the consumer, or they are seeing increased demand. Right now, both things are happening, though it’s often hard to separate the two. Costs are higher because of higher energy prices and problems with supply chains. Demand is hot because Americans have savings from the pandemic and the government, with respect to both fiscal and monetary policy, was too expansionary.

Increasing prices when demand goes up might offend Senate Democrats, but it’s an important part of how markets work. When demand is high and supply is fixed, prices adjust. Otherwise, shortages ensue.

Under the proposal, firms would be permitted to appeal their fines to prove they are merely passing on higher input costs. But this really means that any price increase risks lots of regulatory interference. If firms can’t increase prices, they’ll have less incentive to offer more products—which would worsen inflation—or to increase wages. And wage increases need to be paid for with higher prices, which, under this bill, would mean paperwork and legal fees. Warren’s proposal would therefore make pay bumps more expensive and less desirable for firms.

The bill is designed not to apply to firms that bring in less than $100,000 in gross revenue. That’s a very low cut-off for a law that applies to the entire country—$100,000 in revenue does not even cover rent for a small Manhattan store. It is often smaller firms, which run on tighter margins and need to increase prices when costs rise, who bear the costs of policies like this.

Even if this is just a messaging bill, it sends a bad message. It blames private enterprise for inflation in an attempt to deflect blame for overstimulating the economy, and to attract support to keep stimulating it. But private enterprise is our best hope out of the current morass. When prices and—yes—profits go up, firms have more of an incentive to supply goods. They’ll find creative ways to get around supply problems. Over time, supply expands in response to higher demand; restrictions like these undermine that healthy process.

If this latest offering from the Democrats is any indication, we really may be doomed to repeat the mistakes of the 1970s.

Photo by JOSH EDELSON/AFP via Getty Images

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