Sunday, August 11, 2013

Ironies of Price Control

It is hard to decide which has been more harmful—the new Price Control Extension Act or its administration. The law itself provided that controls could not be reimposed on meat unless meat was “in short supply.” As the production of meat when the present law went into effect was substantially above the prewar average, meat could have been decontrolled immediately. But the Price Decontrol Board, instead of adopting the simple standard of supply mentioned in the law, put meat back under control on the ground that it was in short supply “in relation to demand at reasonable prices.”

Under this elastic standard, price control can be retained indefinitely. A comparison of present with past supplies is definite and measurable, but a comparison of supply with “demand at reasonable prices” depends on the concept of reasonableness in the minds of administrators.

The new price-extension law was so badly conceived that only expert administration could have made it work. The administrators proceeded to follow the precise combination of policies likely to do the most harm. First, meat was needlessly put back under control. Then, as if to make certain that there would be a meat famine, grains and animal feeds were left free of controls, while the OPA delayed a couple of weeks in restoring ceilings.

Livestock raisers, fearing a profit squeeze, rushed their unfattened cattle to free markets while they lasted. This added temporarily to the supply of meat at the cost of a long-term shortage. When controls were restored, livestock raisers decided to fatten the cattle that remained on the range rather than sell it; at the latest, they figured, price control would end next June.

The result has been the worst meat famine in the nation’s history. Residents of New York City found themselves for the first time reduced to trying horse flesh. Poultry and egg prices soared. Die-hard price controllers blamed this rise on the free market, though it should have been obvious that when a scarcity of meat was brought about by price control, the whole demand would concentrate on the substitutes remaining, and force their prices far above any levels that would have existed without price controls over other items.

The crisis reached a point where even the Democratic Majority Leader of the House, who had fought tenaciously to have price control restored, called for a 60-day suspension of controls over meat and other scarce foods. Republicans were prompt to denounce this as a political trick, and to point out that it would suspend price control over meat until safely after the elections and then probably reimpose it. But wholly apart from the political aspects, a mere 60-day “suspension” of meat controls would be another economic error. That was precisely what we had in July and August. A second price-control suspension would produce the same kind of results. When producers are left with a sword of Damocles hanging over them, they do not act as they would in a free market. The government cannot monkey with the price mechanism in this way without courting disaster. Only one thing will do now—the definite termination of meat control and, in fact, the definite termination of all price control.

What is particularly ironical is that the restoration of price control itself brought about the very shortage in meat that the Decontrol Board and the Secretary of Agriculture declared to exist when there was no shortage. It would be embarrassing for Secretary Anderson to declare meat now not to be in short supply, in order to get rid of price controls, when he declared it to be short at a time when it was obviously more plentiful than today.

The dilemmas of the administrators are no worse than the paradoxes in the law itself. In the agricultural realm it provides for price controls only over commodities in short supply. But the effect of holding down the price of goods in short supply is to increase their consumption, discourage their production, and intensify the shortage. The only defensible course with regard to goods in short supply would be to ration them without controlling their price. This would restrict demand without reducing incentives.
Between price controls and priorities, production has been thrown into more chaos than we have ever seen in peace times.

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