Will price controls make a comeback? – News Couple

Will price controls make a comeback?

Since the pandemic began, we have seen significant supply and demand imbalances in global markets. Supply chain disruptions due to lockdowns and other regulations, travel and trade restrictions and business closures while at the same time we saw a negative demand shock in the air travel, restaurants, tourism, cinemas, etc. industries. Come to us as a surprise because we are seeing rapid price adjustments (especially for the products we use every day).

Moreover, the massive increase in the money supply has significantly increased the balance sheets of the Federal Reserve and the European Central Bank.

Source: Tradingeconomics.

The European Central Bank expanded it by about 54% of the eurozone’s GDP over the summer. Government spending on GDP increased sharply in both the USA and the Eurozone to stem the decline in aggregate demand, and this of course led to huge deficits and thus an explosion in public debt. There is also a widespread belief in the markets that central banks will continue to pursue relatively easy monetary policy along with extending financial measures due to the slow recovery. Inflation in both the EU and the USA has exceeded the targets set by the central banks with the risk of going higher if action is not taken immediately.

Source: Tradingeconomics.

Policymakers in both the US and Europe spoke out and warned that future inflation rates are higher than expectations. Things get even more difficult when Jerome Powell is willing to take on an inflation target above the traditional 2% for an indefinite period of time. Since the 2008 crisis, the independence of central banks has faded, yet their powers are greater than ever with no monetary rules in place to keep things in check. Annual inflation of 3, 4, or even 5% may seem low to some, but as former Fed Chairman Paul Volcker said: “A target of 2% inflation each year means that after a decade, prices are rising by more than 25 percent. % and the price level doubles every generation. This is not price stability, yet they call it price stability.”

Nearly 50 years ago in 1971, President Nixon imposed wage and price controls for the first time since World War II in hopes of containing inflation. During 1971 and 1974, the Wholesale Price Index (WPI) rose at an annual rate of 12% and the CPI at an average of 7.2% After the Nixon program ended in 1974, inflation fell, but in 1978 it rose again this time under the Carter administration who announced In October 1978 announced a new set of voluntary wages and price controls, a massive rise in interest rates by Federal Reserve Chairman B. Volcker was able to stem inflation at the cost of a deep recession in the short term.

Before we discuss the need for wage and price controls, we need to understand the causes of inflation. Increases in aggregate demand (by increasing government spending) and aggregate expenditure (faster than increase in goods and services) can only occur when the money supply is greater than the demand for it. With production not expanding in parallel with the monetary increase. Milton Friedman is best known for the Nobel Prize in Economics for showing the relationship between excess money supply over production and a general increase in prices. “Inflation is always and everywhere a monetary phenomenon.”

Economists generally agree on very few things, but the economic argument against price setting is one of them. The first consequence of controls is shortages, especially if controls are maintained for too long causing widespread economic damage. There is a reason why Nobel Prize-winning economist FA Hayek describes the free price system as a miracle because it acts as a signal, providing information to both buyers and sellers about the scarcity of products in the market, when prices are manipulated, these signals are too. Firms have no incentive to increase supply because profits fall as others go out of production paving the way for the creation of black markets. Prices tell everyone what the consumer needs, and how much they are willing to pay for it, while in times of high uncertainty discourage hoarding. The mere existence of profits tends in the long run to lower prices because they give incentives to entrepreneurs to produce more of them which will increase supply and may reduce costs due to economies of scale. On the other hand, price controls or anti-manipulation laws discourage innovation and can sometimes lead to directing the supply of goods and services to foreign markets where these controls do not apply, the basic economic law of supply and demand makes it clear that if you are artificially suppressing price increases You will get a lower offer. Defects in the price system do not justify the need to control it by central planners.

Controls divert attention away from the real causes of inflation and give short-term excuses for avoiding structural reforms in the economy. Fighting inflation is not an easy task, tight monetary policy will lead to unemployment in the short term, cuts in government spending are needed, and companies that have given big wage increases due to inflation expectations will be in a bad position. However, like most of our problems, inflation is happening in the capital and in Brussels, the Fed and the European Central Bank are responsible for creating excessive monetary growth and there is no way to solve this problem unless that growth matches the output of the economy.

Economists agree that controls produce uncertainty, they prevent firms from expanding operations and production. While they (the controls) are able to freeze prices for a short period, inflation explodes after their end which leads to higher prices in the long run. As Eamonn Butler and Robert Schuttinger wrote in their book, Forty centuries of wage and price control: “If the historian wants to summarize what we have learned from the long history of wage and price control, he will have to conclude that the only thing we learn from history is that we do not learn from history.”

This article was originally published by Brussels Report.

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