Thursday, August 15, 2013

Squeezing the Price Balloon

The recent crisis in meat brought out an important consequence of price control that until now has been overlooked. It was illustrated most vividly by what happened to poultry and egg prices. When beef, lamb, and pork were put back under price controls in September, an immediate result was an increased price of poultry and eggs. The price controllers, naturally, blamed the free market. But the public had the good sense to realize that when price ceilings made meat impossible to get, and the whole demand for meat was concentrated on the only available substitutes, the prices of poultry and eggs were being forced substantially above what they would have been in a free market for everything. When ceilings were taken off meat, poultry and egg prices immediately dropped. And when ceilings were removed from margarine and other fats, the price of butter immediately dropped.

These effects on particular commodities merely illustrated a broad principle. The day after the President lifted meat ceilings, a regional price administrator declared that the OPA had never governed the entire economy. American consumers, he estimated, spent a total of $250,000,000,000 a year; the OPA at its maximum had never controlled more than $100,000,000,000 of this, and after the release of meat it controlled only about $65,000,000,000 of goods.

These estimates are of doubtful accuracy, but they will do well enough to illustrate the principle. If the public buys altogether some $250,000,000,000 of goods and services of all kinds (I suppose the OPA administrator included in this total real estate, securities, professional services, and other items never brought under ceilings) while the government controls the prices of only $65,000,000,000 or even $100,000,000,000 worth, what happens to the prices of the other $150,000,000,000 worth?

To the extent that prices of controlled commodities are kept down by price-fixing, consumers will be able to get them for less. They will have just that many more dollars left over, therefore, to bid up the prices of the uncontrolled commodities. In other words, to squeeze down the prices of the controlled commodities is to force up the prices of the uncontrolled commodities.

What we have fundamentally is a certain total volume of money or money incomes bidding for a certain total volume of goods. If we increase that volume of money or money incomes without a corresponding increase in the volume of goods, the inevitable effect is to push up the prices of those goods. If we hold down the prices of part of those goods, we must either pile up a certain amount of unspent savings in the hands of the public, or we must divert part or all of that unspent amount to the uncontrolled goods. If you squeeze a toy balloon at one place, it will swell all the more at some other, because the gas pumped into it has to go somewhere. In the same way, if you prevent money from having its effect on goods at one place, it must affect goods all the more at some other. The money has to go somewhere.
This brings us to a major conclusion precisely the opposite of that usually drawn. The ultimate effect of fixing the prices of only part of the goods in an economy is not necessarily to reduce the general price level at all.

Perhaps the best solution of our immediate economic problem that is politically feasible is to decontrol everything but rents on old houses. But if we do this we must not retain rent control itself too long. For one consequence of holding down rents is merely to divert  that much more purchasing power to the bidding up of other commodities or services.

Because the problem that price fixing seeks to solve cannot be solved by partial price fixing, it does not follow that it can be solved by fixing the price of everything. Such a plan could be made to work in the long run only by universal allocation and universal rationing, not merely of raw materials but of labor. That could only lead to totalitarianism. The problem can be solved only by dealing, not with the mere symptoms and consequences, but with the basic cause of inflation. That basic cause is the increased issue of money and bank credit, and the policies that encourage it.

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