Cry for Me, Argentina (and Russia and China)The return of price controls.
Posted Tuesday, Oct. 30, 2007, at 12:26 PM ET
Price controls are so last century. The notion of central planners telling private entities how much they should charge for goods and services seems about as dated as that "Government and Politics of the Soviet Union" course I took in 1987. Only the world's dwindling tanks of anti-capitalist moonbats, led by Venezuela's Hugo Chávez, still employ them.
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StumbleUponBut price controls haven't been completely vanquished. Rather, they've lain dormant, waiting to be revived by the strong odor of inflation. Several years of synchronous global growth, powered by surging economies in Asia and dissolute monetary and fiscal policies (thanks, Messrs. Greenspan and Bush) are combining to push prices higher. The United States has dealt with the rise of inflation in a typically American way—by spinning it out of existence. If you ignore food and energy—i.e., the things that have been rising for several years and that have a tendency to filter into other prices—and instead focus on the core rate, the conventional wisdom goes, inflation is utterly under control.
The U.S. economy—resilient, flexible, diverse, wealthy—has built-in shock absorbers that insulate customers and businesses from the impact of inflation. Other nations aren't so fortunate. In poorer countries, where people spend a much higher chunk of their income on food and energy than Americans do, governments can't simply ignore the evidence of inflation. The rising cost of sustenance can set off social unrest, especially if political systems aren't well-developed. (Remember what happened in France in the 1780s when the price of bread soared?) And so several countries—nations that in recent years have purportedly moved from the darkness of command-and-control economies toward the light of market capitalism—are rolling out the blunt instrument of price controls to combat inflation.
Exhibit A: Argentina. Having come through a currency and inflation crisis at the beginning of this decade, Argentina has enjoyed an annual growth rate of about 9 percent for the last few years. Alas, the overheating economy has produced inflation: 12.3 percent in 2005. President Néstor Kirchner, eager to pave the way for his wife, Cristina, to succeed him and wary of taking the tough fiscal steps necessary to contain inflation, has taken cues from northern neighbors Venezuela and the United States. First, as the Economist notes, Argentina enacted price controls on energy. Last year, as the New York Times reported, Kirchner "sought to persuade producers and stores to agree to voluntary freezes on prices of hundreds of products, including sugar, flour, noodles, bread, shampoo and pencils." (What about dulce de leche?) When those failed to work, Argentina simply changed the method by which it calculates the consumer price index. The result: Nobody believes the official inflation figures, which proclaim the Argentine CPI (PDF) has risen just 5.8 percent so far this year. Economists believe the real rate could be two or three times that. And now Cristina Kirchner is going to have to clean up her husband's mess.
Exhibit B: Russia. When you have the visible hand of a former KGB-nik running the government, who needs Adam Smith's invisible hand? As the New York Times noted last week, food prices have been on a tear in Russia. With elections approaching, Vladimir Putin decided pricey potatoes and pierogies just wouldn't do. The solution: Soviet-style price controls. As the Financial Times reported last week: "The country's biggest food retailers and producers have reached an agreement, expected to be signed with the Russian government on Wednesday, to freeze prices at October 15 levels on selected types of bread, cheese, milk, eggs and vegetable oil until the end of the year." According to the New York Times, a "statement on the Web site of the Agriculture Ministry said the producers had signed the agreement 'at their own initiative.' " (Where's Yakov Smirnoff when you need him? In Branson, Mo.—Ed.)
Exhibit C: China. China's CPI rose 6.5 percent between August 2006 and August 2007, thanks in part to an 18.2 percent year-over-year increase in the price of food. Beijing has responded in part by telling government officials not to use the word inflation. But it is also taking action. The International Herald Tribune reported that China hasn't permitted gasoline prices to rise since May 2006, when oil was about $70 per barrel. (Yesterday, oil closed at nearly $94 per barrel.) And in September, China froze prices on certain household staples.
There's more to come. Jacques Diouf, director-general of the United Nations' Food and Agriculture Organization, yesterday told the Financial Times, "Many [countries] will have to take hard decisions because of the impact of food prices. ... In some countries there will be price controls, some will scrap import tariffs on food to minimise the impact of rising costs and others will increase food subsidies."
Price controls, food subsidies, greater state control of the economy, a governor named Romney running for president. It seems like 1967, not 2007. And of course, price controls create powerful disincentives for people and companies to invest in the sort of production capacity that could, in time, create the sort of competition that would help bring prices under control. This isn't a good time to invest in a cattle farm in Argentina, a cheese plant in Russia, or a gasoline refinery in China. If the price controls continue much longer, these economies could see the revival of another distressing factor that defined socialist economies in the 20th century: rationing.
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Remarks from the Fray Editor
Some interesting discussions here (economics at the sharp end from Days, a cab driver) and here (excerpted below), and some ideas on containing inflation in the rest of Urgelt's post, see below.
Remarks from the Fray
So many people seem to have forgotten that the last time America had wage and price controls was under that well-known socialist Richard Milhous Nixon. Nixon's on-again off-again approach to controls is a textbook case of what does not work.
There is an art to how to apply controls and how long to retain them. As with rent control, keep them too long and you end up with secondary markets, grey and black. Keep them too short and you end up exacerbating the very thing you were trying to limit.
Nixon's controls did not limit or even slow inflation. They did, you can argue, break up a wage/price spiral, though that model is not necessarily accurate. In any case, since then wages have stagnated and slipped farther and farther behind prices, so you could say Nixon achieved something, though the permanent impoverishment of the working poor is not exactly legacy material.
--Melvyl
(To reply, click here)
A very sensible article, and what I have come to expect from Mr Gross. Few other journalists writing about inflation are willing to write (or even know) about the way government indices of inflation have been scrubbed of the very commodities - food and energy - which have made life increasingly difficult for the working class in America. He's also correct to point out that price controls can be a disincentive for investment to improve production of an inflating commodity.
He didn't mention this point, and I am happy to rush into the breach and make it for him: Markets efficiently set prices where there is adequate competition. Where there isn't - as when cartels are operating, or a monopoly - prices become extractive. This is an important point in the context of the article, because it's energy prices that are driving everything else, and energy prices are semi-controlled by cartels.
--Urgelt
(To reply, click here)
(10/31)