September 2024

Price Controls

“As president, I will go after the bad actors. And I will work to pass the first-ever federal ban on price gouging on food.” Kamala Harris

Between 1965 and 1968, Lyndon Johnson’s Great Society social welfare programs increased government spending (demand-side economics) by 60%, which, not surprisingly, increased price levels over 5% per year. Due to Johnson’s economic mismanagement and the Vietnam War, his approval rating fell to between 35-40%, prompting him to withdraw from the 1968 presidential race.

Richard Nixon, who went on to win the election, campaigned on tackling inflation, stabilizing the economy, and bringing American troops home. While Nixon is credited with ending the war, his economic policies, which centered around two ideas, were largely unsuccessful. The first was to end the Bretton Woods system, which pegged the value of the U.S. dollar to gold. Removing the dollar from the gold standard allowed the central bank to effectively print money. The second idea was price controls. Nixon believed he could suppress inflation by simply capping prices.

In his first two years of office, the CPI remained in the 5% range, but by 1973 had risen to 9%, and GDP fell into negative territory in the same year. Thus, stagflation was born—a sluggish economy coupled with high inflation. This represented the worst of both worlds. The question policymakers should have been asking is, “How can general price levels increase during a period of economic decline?”

Classical economics teaches us that price is the function of two variables; supply and demand. Therefore, the only way to decrease the cost of a good or service is to increase the supply/output faster than rate of demand. Supply-side economic policies aim to reduce tax and regulatory burden, which leads to increased capital investment  and efficiency-improving innovation, that increases output.

Logically, if the money supply is increased faster than the rate of output, price levels will increase. Until recently, it was understood in the academic community that the term inflation referred to the central bank policy of increasing (inflating) the money supply faster than the rate of economic growth. The definition of has since been changed to mean an increase in general price levels. This semantic sleight of hand was done to absolve the Federal Reserve from the responsibility of eroding the value of the dollar and reducing Americans’ purchasing power.

Price controls neither limit cost nor increase output. Rather, they simply impose price limits. In order to remain solvent a company must make a profit. If the government imposes a price limit below the marginal cost of production, the company would simply halt production as it would lose money on every additional unit sold. Price controls discourage production, which creates scarcity (shortages). A perfect example is Nixon’s odd-even gas rationing, which did nothing to reduce price or curb consumption, but did a fine job of creating disruptions and long lines at the gas pump.

In response to concerns over a 25% increase in food prices, Kamala Harris, the Democrat presidential candidate, is advocating price controls as a way to address “price gouging.” Which begs the question; Are “greedy” grocery chains responsible for soaring food prices?

Price gouging, by its definition, results in excess profits. However, as illustrated in the table below, over the past years, the net profit margins of the largest grocery companies have remained relatively stable, averaging about 2%, despite rapidly rising food prices.

Store	Walmart	Kroger	Costco	Albertsons
2020	2.42%	1.95%	2.40%	1.22%
2021	2.39%	1.19%	2.56%	1.79%
2022	1.91%	1.50%	2.57%	1.63%
2023	2.39%	1.43%	2.60%	1.41%
Average	2.28%	1.52%	2.53%	1.51%

Yahoo Finance

If rapacious retailers weren’t the reason for the massive jump in food prices, what was? No, Jerome Powell and Janet Yellen, it wasn’t demand-pull, supply-push, or temporary supply dislocations. Rather, it was the Fed, which increased the money supply more than 40% between 2020–2022, or 20% per year.

To ease the pain of business closures and, consequently, the forced layoffs of non-essential employees, the Fed printed money, which it used to purchase Treasury debt issued to finance $5 trillion in stimulus programs. The Fed dramatically increased the money supply at the same time that output collapsed due to lockdowns. It was the very definition of too much money chasing too few goods. Is it any wonder the CPI exceeded 9% in 2022?

When will bureaucrats, central planners, and managerial elites learn that they can manage the economy about as effectively as they can control the weather—or anything else, for that matter? Price controls have never succeeded and in every instance have resulted in lowered living standards. It’s time to lay the failed notion of price controls to rest in the graveyard of bad economic ideas. Policymakers must recognize that the only way to control or reduce prices is by unleashing the productive capacity of a free market system.

Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com