2008-07-03

Price Controls - a rethink

Prince Controls. They're bad. They're evil. Politicians and Economists who suggest them are idiots.

And for good reason. History shows us that whenever price controls have been used to control inflation, they neither solve inflation nor help people pay less. The Austrian School of economic thinking has convinced us - rightly - that prices should be controlled by market signals.

We're in the midst of another oil crisis. One thing which is different in this oil crisis is the lack of queues around petrol stations. Why were there queues back in the 1970s and not today? Well, back in the 1970s, Price Controls enacted by governments to control inflation meant that the ordinary behaviour of "supply and demand" was countered. So even though there were supply problems, the Price Controls ensured that consumers did not adjust their behaviour. Result? Petrol stations running out of petrol and long queues at ones that did have petrol.

Such behaviour was also present in the Soviet Union. The price controls of Soviet shops ensured that, while bread was cheap, there was never enough of it to satisfy - and so people queued. Queueing is the natural response to Price Control.

These days, with Price Controls gone, and with the market driving petrol costs, people are buying less petrol. This means there are no queues, because demand is dropping in response to supply issues. Price Controls have never served as an effective method of containing inflation.

Nevertheless, I have been in recent times rethinking them - not as a way of controlling inflation, but as a way of controlling demand. Rather than the government setting prices below what the market sets (which is a queue-maker), what if the government set prices above what the market sets, in order to reduce demand?

Our world needs to get off its addiction to oil and petrol. High oil prices have resulted in changed social and economic behaviour - people are buying more economical cars or taking public transport or riding or walking to places. Nevertheless, the importance of getting off oil is merely beyond the close-minded economic model. Global Warming is an important issue and getting our world off hydrocarbons altogether is important.

What I am suggesting, therefore, is that governments set Price Controls for Petrol that are above and beyond what the market is willing to pay. Rather than increasing taxes (which is effective but fraught with government revenue addiction) the government could simply mandate that petrol prices be set at an artificially high level.

Here in Australia, unleaded petrol is selling for around $1.60 per litre. If price controls were enacted to lift that to, say, $3.20 per litre (a doubling), the result would be a market that was very unwilling to buy it. Raising prices in America to US$8.00 per gallon would have the same effect.

In many ways, the setting of an artificially high price would result in the opposite of setting them too low. Queueing would not be a problem - oversupply would be. Petrol stations would not be able to get rid of the stuff because consumers are just not willing to pay.

Of course, such an action would have rather unfortunate side effects - notably a downturn in the auto industry, higher transport costs (which would be inflationary) and all the associated problems that these would cause as the shock travelled through the economy. Setting prices higher than the market average - way higher - would result in less oil used but will also result in higher unemployment and lower economic growth.

Nevertheless, higher unemployment and lower economic growth are going to happen anyway as oil prices get higher. Moreover, as the market adjust to a lower-oil-dependent economy, things will return to "normal" with economic growth and unemployment adjusting to the new way of doing things.

Sadly, setting prices that high would be political suicide. Imagine if Kevin Rudd (Australia's PM) announced tomorrow to the nation that he has decided that they'll pay twice as much for petrol as they did before? The outcry would be immense. Even if these price controls were set up in stages (say, a monthly increase), it is unlikely that the voting population would tolerate it.

And this is, of course, a pity. Our world needs to be taken off its diet of hydrocarbons - both in the form of oil for cars and coal for electricity - and setting prices above what the market is willing to pay is a way to force the market into adopting zero carbon energy consumption.

17 comments:

BLBeamer said...

You are joking, I presume. Maybe even a little?

With the price of petrol set so high, people will shift resources from activities like growing food, for example, to making ethanol and reaping windfall profits. Meanwhile, little children will starve. Do you want that on your conscience?

Here in the US, high prices have started to affect the amount of petrol consumers are buying, just as every non-insane economist said they would. Consumers are taking themselves off their hydrocarbon diet without the government's Big Stick to coerce them.

Why must the government act now? I don't believe the case for further government action is that compelling, most especially given its track record.

One Salient Oversight said...

With the price of petrol set so high, people will shift resources from activities like growing food, for example, to making ethanol and reaping windfall profits.

How would such a thing happen? Are you suggesting that there will be a huge black market of fully ethanol powered cars? Or are you suggesting that the high prices will encourage such activity since it would be profitable?

The former event is unlikely to happen since it would be easy for the government to regulate.

The latter is unlikely to happen since the price would be set too high for the market to handle. The price is so high that even sellers can't make a profit selling the stuff.

Moreover, the amount of ethanol needed would be massive and it would be easy to prevent ethanol production.

So no, I don't need to worry about little kids starving because it won't happen.

Little kids starving does, however, happen quite often in countries that have little or no government welfare system. The high infant mortality rates in the US as compared to social democratic nations is problematic. For me, supporting a small government system is akin to supporting the little kids starving - something which I certainly don't have on my conscience.

Anyway, government action of the sort I propose is certainly allowable under section 8 of the US Constitution: The Congress shall have power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

What is important in that part of the constitution is not the size of government, but the "general welfare" it promotes. And if increasing government spending and the size of government results in increasing "general welfare" of the nation, then it is allowable by the constitution.

Just look at all the quantifiable long-term studies and you'll see a basic pattern - Social Democracies like those in Western Europe and superior at promoting the "general welfare" of their people than the small government ideals of the USA (especially since about 1970).

Human Development Index.

Infant Mortality Rates.

BLBeamer said...

I was suggesting the latter including a black market and smuggling. People won't just stop buying gas, they will find other ways to get it including buying from smugglers.

The US experience with liquor Prohibition and our current drug prohibition laws should be ample evidence that such government schemes do nothing but create a new class of wealthy criminal and breed corruption among those who would regulate and legislate such laws. The only difference is that with your scheme, the wealthy would still be able to buy legal petrol. That is not a situation that many would find appealing - particularly someone with left of center sensibilities.

Your broad interpretation of the term "general welfare" implies there is nothing that Congress is not allowed to do. The thrust of the Constitution clearly is to delineate what governments can and can not do, but the cupidity of Congress have used this little clause to render any intended restraints ineffective.

The infant mortality tables reflect differences in the way "live births" are counted, for one thing. Very ill babies who are born alive, but die soon after are not counted as live births in every Western country.

In addition, infant mortality is not spread evenly among the entire huge, heterogenous US population. American Indians, for example, have much higher infant mortality rates than Jews. It is dangerous to make policy based on averages.

I don't think it is fair to argue that the general welfare clause means there is nothing that can't be defined as part of the general welfare, but then use one superficial interpretation of infant mortality statistics to prove that the general welfare is bad.

For example, if the US's general welfare is so bad, why is our population still growing and many Western countries' shrinking?

One Salient Oversight said...

I was suggesting the latter including a black market and smuggling. People won't just stop buying gas, they will find other ways to get it including buying from smugglers.

The US experience with liquor Prohibition and our current drug prohibition laws should be ample evidence that such government schemes do nothing but create a new class of wealthy criminal and breed corruption among those who would regulate and legislate such laws.


Drugs and liquor are small enough to smuggle in. But you're talking about smuggling in large quantities of ethanol and gasoline. This would really be impossible.

The comparison between this situation and prohibition is not workable. Gasoline isn't being banned the same way drugs and alcohol are banned. Gasoline is still very much in the marketplace and being legally sold. Setting up price controls to dissuade usage is not the same as outright banning.

One Salient Oversight said...

Your broad interpretation of the term "general welfare" implies there is nothing that Congress is not allowed to do. The thrust of the Constitution clearly is to delineate what governments can and can not do, but the cupidity of Congress have used this little clause to render any intended restraints ineffective.

The constitution gives Congress the power to legislate according to the common good. The limits of government are contained in the constitution itself.

What I am pointing out is that setting up price controls to reduce demand is something that congress is allowed to do in the constitution. Moreover, there is no section of the constitution which has limited this activity.

If people want the government to "do less", then amendments should be made to the constitution giving specific areas which they cannot touch.

One Salient Oversight said...

The infant mortality tables reflect differences in the way "live births" are counted, for one thing. Very ill babies who are born alive, but die soon after are not counted as live births in every Western country.

I've heard this argument before and it is nonsensical. It is essentially arguing that the data collection methods of statistical organisations are unreliable. Therefore this makes any form of international comparison impossible.

Apart from the fact that places like the CIA world factbook therefore contain seriously deficient information. It is also terribly convenient for those whose ideology is challenged by facts.

I'm sure faithful communists in the Soviet Union all believed that things were getting better all the time because of their political system as well.

One Salient Oversight said...

For example, if the US's general welfare is so bad, why is our population still growing and many Western countries' shrinking?

A number of serious problems with this assertion:

1) A shrinking population is bad.
2) Western countries population shrinkage is due to poorer welfare.

I suggest you research fertility rates. A drop in birth rates is what is resulting in population decline in Western nations - not a higher death rate.

By that logic, places like Liberia and Libya have wondeful welfare systems because their population is growing.

BLBeamer said...

Drugs and liquor are small enough to smuggle in. But you're talking about smuggling in large quantities of ethanol and gasoline. This would really be impossible.
I don't agree. You have conflated, I believe, limiting how much people can buy at a price with a shift in the demand curve. Referring to your S-D chart, you are proposing raising the price to P2, but at that price something less than Q1 is demanded. The supply will increase to Q2, but since the market is not allowed to find its clearing price (P1) inventories will soar and it is likely at least one of the following will happen:

1) a black market will develop so the sellers can unload their inventories and make some profit rather than none.
2) other buyers like China will gladly take it off our hands.

I believe you are naive regarding the ingenuity of black marketeers and smugglers. I believe you are also naive regarding the difficulty of enforcing those prices on a country the size of ours.

Gasoline is still very much in the marketplace and being legally sold. Setting up price controls to dissuade usage is not the same as outright banning.

It is legally sold but at controlled prices. The wealthy will still be able to buy the expensive legal gas, but poor folks who either depend on their vehicles to make their living or depend on public transit will take the brunt of the new higher price shock. Or do you propose to exempt public transit from paying the higher prices?

BLBeamer said...

Moreover, there is no section of the constitution which has limited this activity.

Actually, there is. It is called the 10th Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the States respectively, or the people."

One Salient Oversight said...

Okay, so are you saying the 10th amendment cancels out section 8?

Or maybe the 10th amendment puts a limit to section 8?

So. Would the impost of a tax or price control go against the 10th amendment?

BLBeamer said...

I've heard this argument before and it is nonsensical. It is essentially arguing that the data collection methods of statistical organisations are unreliable. Therefore this makes any form of international comparison impossible.
Not at all. Comparison is not impossible. Any scientist worth his salt strives to understand the limitations of his data. Not only does the problem I mentioned exist, but the collection methods are not always of the highest quality, particularly in Third World countries. That does not mean we should not strive to collect and continue to work to improve the quality of the data. That would be nonsensical.

What is also nonsensical is to ignore those limitations and make sweeping policy proposals as if the data was precise, merely because one's ideology demands it.

BLBeamer said...

A number of serious problems with this assertion:

1) A shrinking population is bad.
2) Western countries population shrinkage is due to poorer welfare.


Actually, a shrinking population is bad if your entire "general welfare" is based on programs requiring a growing, productive population base.

However, I don't understand your points. I did not assert either of those things.

BLBeamer said...

Would the impost of a tax or price control go against the 10th amendment?

A tax probably would not be, and since we've had price controls before, I believe the courts would also allow them in your scheme. My arguments go back to the impossibility of managing supply and demand for anything in such a huge economy as ours. I only offered the 10th Amendment as a corrective to your view that "nothing expressly forbidden is allowed" to Congress.

One Salient Oversight said...

For example, if the US's general welfare is so bad, why is our population still growing and many Western countries' shrinking?

What did you originally mean by that statement?

you compared two things - the US and other nations.

And then you essentially said "The US can't be bad because our population is growing".

Thus you also inferred the reverse - Other Western nations are bad because their population is shrinking.

One Salient Oversight said...

What is also nonsensical is to ignore those limitations and make sweeping policy proposals as if the data was precise, merely because one's ideology demands it.

I think it is nonsensical to make the assumption that whenever data is quantified and then arranged in order that somehow the variables of one's preferred data source are different to the rest.

What is the point of having a table like this if not for the purposes of comparison?

What is the point of having a table like this if not for the purposes of comparison.

Take the Human Development Index. Are you saying that the three bits of data that make up this index (average death rate, gdp per capita, educational level) cannot be quantified?

One of the more basic strategies to undermine ideas is to bring the nature of data in question. Unfortunately if you begin to say "the data is unreliable" without backing it up, all it does is end in smear.

If you're absolutely convinced that sources of data which conflict with your small government ideology are questionable, then the problem isn't with data, it is with your ideology.

So - find me a reputable source that refutes my position. If you don't have the time or inclination to do this, then I suggest that you do the best thing and not comment.

BLBeamer said...

You originally implied the US was bad because of the infant mortality tables and in addition, offered a general policy proposal. You had earlier implied there was nothing the US Congress can't do because they essentially had no Constitutional limits due to the "general welfare" clause.

I didn't dispute the general mortality data but the leap you made to use it to endorse "social democracy" programs. One of the reasons I disputed it was because of the known problems with the data. Nowhere from you did I see any recognition of an analysis of the data to determine whether or not the policy you proposed would even address the cause of the US's infant mortality. Your ideology simply allowed you to assume it would.

If nothing is ruled out regarding what fits under "general welfare", and infant mortality is used to imply the US is a failing country, why can't population growth be included to indicate the opposite? I was implying you were being selective with your data.

BLBeamer said...

If you don't have the time or inclination to do this, then I suggest that you do the best thing and not comment.

My, my. I seem to have hit a nerve.

A common tactic is to mischaracterize the nature of opponent's criticism. You mischaracterized my objections to your leap in logic by saying it was nothing more than an attempt to undermine the nature of the data.

If you are absolutely convinced that the US (a nation which you have never so much as visited for an hour) is failing due to its not adhering to your big government philosophy (which I also dispute), then you will have to do better than cherry pick bits of data. I believe you must also demonstrate how its successes are due to adhering to your philosophy. It would also be interesting if you can name a single big-government program in the US which you consider a failure.

In addition, you also mischaracterize my philosophy as "small government ideology". I am opposed to unnecessary, ineffective or counter-productive expansion of government power. Among the criteria I include to make the determination is whether or not our citizen's rights are jeopardized by that expansion.

Why would a leftist object to that criteria?