Sunday, February 21, 2010

Price controls past, present, and perhaps future

President Barack Obama will propose giving federal authorities the power to limit rate hikes by health insurance companies — part of a new health care overhaul plan he will unveil Monday in a last-ditch bid to salvage his signature issue.

The proposal would give the federal Health and Human Services Department — in conjunction with state authorities — the power to deny egregious premium increases, roll them back, or demand rebates for consumers, said a White House official, speaking on condition of anonymity because details have not yet been officially released.
--Ricardo Alonso-Zaldivar, Associated Press, on what could be a Hugo Chavez moment for Obama

[Hugo] Chavez said he’ll create an anti-speculation committee to monitor prices after private businesses said that prices would double and consumers rushed to buy household appliances and televisions. The government is the only authority able to dictate price increases, he said.
--Daniel Cancel, Bloomberg, on eerie echoes from South America

Faced with an accelerating inflation rate and shortages of basic foods like beef, chicken and milk, President Hugo Chávez has threatened to jail grocery store owners and nationalize their businesses if they violate the country’s expanding price controls. ...

Entering a supermarket here is a bizarre experience. Shelves are fully stocked with Scotch whiskey, Argentine wines and imported cheeses like brie and Camembert, but basic staples like black beans and desirable cuts of beef like sirloin are often absent. Customers, even those in the government’s own Mercal chain of subsidized grocery stores, are left with choices like pork neck bones, rabbit and unusual cuts of lamb.
--Simon Romero, NYT, on the consequences of price controls

Perhaps the earliest case in which a government tried to use price controls to prevent inflation occurred in late imperial Rome. By the end of the third century it had clearly reached a crisis. The state could no longer obtain sufficient resources because heavy impositions had destroyed the economic base of taxation. The historian Lactantius, who lived from 240 to 320, tells us that the problem was a bloated welfare state:

"The number of [welfare] recipients began to exceed the number of contributors [taxpayers] by so much that, with farmers' resources exhausted by the enormous size of the requisitions, fields became deserted and cultivated land was turned into forest."

Rome was forced to rely ever more heavily on debasement of the currency to raise revenue. By the reign of Emperor Claudius II Gothicus, who served from 268 to 270, the silver content of the principal coin, the denarius, was down to just 0.02%. As a consequence, prices skyrocketed. ...

At this point, the very survival of the state was at stake. Emperor Diocletian, who served from 284 to 305, attempted to stop the inflation with a far-reaching system of price controls. They were justified by Diocletian's belief that the inflation was due mainly to speculation and hoarding, rather than debasement of the currency.

In 301 Diocletian issued an extensive edict fixing the prices for just about all goods and services. ... The death penalty applied to violations of the edict. Nevertheless, they failed in their purpose. As Lactantius tells us, "much blood was then shed over small and cheap items." Soon there was nothing for sale and the inflation got worse. Finally, after "many had met their deaths, sheer necessity led to repeal of the law."

The historical experience with price controls down to the present day confirms their futility and often counterproductive nature; the U.S. experience is no exception. According to a history of wage and price controls by the Congressional Budget Office, they have never worked more than temporarily.
--Bruce Bartlett, Forbes, on the first price control debacle

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