5.19 Price Controls and Subsidies

When there is inflation and prices for food and other goods get too high people who want to be reelected and stay in power, are often tempted to pass laws requiring that food and other goods be sold at a lower price.  Sounds like a great idea and one that will bring social justice and food for all.  Like most social justice ideas in reality it is a terrible one that has been repeated over and over again throughout history.  One thing about appealing socialist ideas is people don't learn from the past and keep repeating the same disastrous mistakes because politicians know those ideas are appealing and so say that they will do them to get votes.  Politicans and their voters have been making the same mistake so long that Robert Schuettinger and Eamonn Butler wrote a book about called "Forty Centuries of Wage and Price Controls: How Not to Fight Inflation." Yes you read that right 40 centuries, that's 4000 years.  Did that book have any impact?  The Democrats tried to put a price control on the price of insulin in their latest Inflation Reduction Act but the Republicans blocked them.  On the other hand the Democrats enabled prices for drugs to be negotiated by Medicare which sounds a lot like price controls to me.  

Robert Schuettinger and Eamonn Butler start their book with the story of the Pharoahs of ancient Egypt, whose price controls on the price of wheat brought famine and in the end their downfall.  Their next example is that of the Babylon empire whose leader, Hammurabi's price controls bought about the collapse of the Babylonian empire.  Roman leaders produced vast numbers of coins to pay their bills and soon faced enormous inflation.  To cope with inflation they passed price caps so that farmers couldn't charge higher prices for wheat even though the coins were worth less.  The result, in the words of one historian: "The people brought provisions no more to market, since they could not get a reasonable price for them." The result of price caps was no more food in the market.

Another way that governments interfere is with subsidies.  Subsidies are when the government pays money to a business to help it keep the price down of the goods the business sells.  Sounds great, the business will then be able to sell products more cheaply than foreign competition and consumers will be able to pay less to buy those products.  The problem becomes apparent when one asks the question "Where is the government getting the money".  The answer if you are a tax payer is "from you".  In fact even if you aren't a tax payer you buy things from tax payers and they have to raise their prices so they can pay the  higher taxes that pay for the subsidies.  Another problem is sometimes governments subsidize things that are a complete waste of money such as electric vehicles that require coal generated electricity and that are actually worse for the environment than gas powered vehicles.  Here again the government does an appealing policy that they tell people will help when it does the opposite.

The video below explains some of the problems of price caps and subsidies.



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What about Biden and the Democrat's latest Inflation Reduction Act?  It has subsidies and it has price controls and they say it will reduce inflation?

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