Price controls: The false cure for inflation
October 9, 2024
When prices are high and people struggle to make ends meet, there are always politicians promising to make your life more affordable with price controls.
But they’re wrong.
As we’ve seen in places like Argentina and Venezuela, government-mandated price controls only bring bread lines, empty shelves, and astronomical inflation. In fact, many Latinos in America have fled countries wrecked by the devastating consequences of price controls.
Their stories show how price controls do nothing to make life more affordable — and serve as a stark reminder of why we can’t believe in politicians who promise to end inflation with the stroke of a pen.
Empty shelves in Venezuela
The failure of price controls: The theory
Economists tend to agree on very few things, but if there’s something most can agree on, it’s that price controls are bad ideas.
Despite what some politicians might say, prices are not determined by greedy business owners and CEOs conspiring in tall corporate buildings. They are determined by the everyday interactions of millions of consumers and producers — that is, the market.
Prices depend on how many people want to buy something (demand) and how many goods are in the market (supply). If demand is higher than supply, prices will rise; if it’s lower, prices will drop.
A price is a signal. It gives information to consumers and producers on which goods are scarce or abundant.
That’s the danger with price controls.
They disrupt this delicate process as the government price is an artificial one that does not reflect the real market. Since the government prices are usually below the actual value, businesses will simply produce less, making it much harder for people to find the goods or services they want.
Think of prices as a scoreboard in a baseball game, they don’t change the result of the game, they just show what’s happening on the field. Price controls would be like a rule limiting the number of runs a team can score. After the team reaches that limit, it makes no sense for them to play anymore.
In this case, however, it is not a baseball team who’s paying the price—but millions of hardworking people who endure rationing and runaway inflation.
That’s the theory.
However, if you want to know if the theory is right, we must look to the real world.
Price controls, a tested record in failure
Thankfully — or regretfully for those who’ve lived it — history has many examples of price control ending in economic catastrophe.
We can look to some recent history in Latin America.
For decades, Latin America has been a fertile ground for price controls that have wrecked the livelihoods of millions, many of whom came to America in search of stability, prosperity and economic freedom.
In the 2010s, Hugo Chavez and Nicolas Maduro waged a vicious war against free enterprise in Venezuela, decreeing prices that were not aligned with the real economy and prosecuting any business that failed to comply with the unrealistic government mandate.
The result? Venezuelans were hit with long bread lines and hyperinflation, with prices rising by more than 130,000% in a year.
Venezuela was not the only country that suffered from price controls.
Less than three years ago, the Argentinean government also decided to fight inflation and economic crisis by fixing the price of 1,432 products. This decision did little to tame inflation and only worsened the dire economic crisis in Latin America’s third-largest economy.
Price controls are not limited to Latin America.
During the 1970s, America was also facing rampant inflation and economic malaise, so then-President Richard Nixon imposed a 90-day price freeze in an ill-advised, desperate attempt to address the issue. Even after the 90 days passed, the government kept controlling prices of some key goods, like gas.
Gas lines in 1970s America
While politically popular at the time, Nixon’s price controls were bad economics.
In 1973 oil prices skyrocketed and price controls left gas stations with not enough gas to meet the demand. By the fall of 1973 and the spring of 1974 cars were doing long lines to fill up their tanks, a scene that sadly became a common occurrence for the rest of the decade during the Ford and Carter Administrations.
It took until the 1980s and a broader deregulation of the economy to put America back on track.
Both economic theory and history show price controls don’t work, whether you are in Argentina or America.
Next time you hear politicians promise to magically end inflation with government control. Don’t believe them; they are dead wrong.