Archive for the ‘Price Controls’ Category

The communist economic system was a total disaster, but it wasn’t because of excessive taxation. Communist countries generally didn’t even have tax systems.

The real problem was that communism was based on central planning, which is the notion that supposedly wise bureaucrats and politicians could scientifically determine the allocation of resources.

But it turns out that even well-meaning commissars did a terrible job. There was massive inefficiency and widespread shortages. Simply stated, notwithstanding the delusions of some left-wing economists (see postscript of this column), the system was an economic catastrophe.

Why? Because there were no market-based prices.

And, as explained in this video from Learn Liberty, market-based prices are like an economy’s central nervous system, sending signals that enable the efficient and productive allocation of resources in ways that benefit consumers and maximize prosperity.

And just in case it’s not obvious from the video, a price system can’t be centrally planned. Or, to be more precise, you won’t get good results if central planners are in charge.

Now let’s look at a bunch of economic policy questions that seem unrelated.

What’s the underlying reason why minimum wages are bad? We know they lead to bad effects such as higher unemployment, particularly for vulnerable populations, but how do these bad effects occur?

Why is it bad to have export subsidies such as the Export-Import Bank? It’s easy to understand the negative effects, such as corrupt cronyism, but what’s the underlying economic concern?

Or what’s the real reason why third-party payer is misguided? And why should people be concerned about high marginal tax rates or double taxation? Or Obamacare subsidies? Or unemployment insurance?

These questions involve lots of different issues, so at first glance there’s no common theme.

But that’s not true. In every single case, bad effects occur because politicians are distorting the workings of the price system with preferences and penalties.

And that’s today’s message. We generally don’t have politicians urging the kind of comprehensive central planning found is genuinely socialist regimes. Not even Bernie Sanders. But we do have politicians who advocate policies that undermine the price system on an ad-hoc basis.

Every tax, every regulation, every subsidy, and every handout is going to distort incentives for some people. And the cumulative effect of all these interventions is like a cancer that eats away at prosperity.

The good news is that we don’t have nearly as many of these bad policies as places such as France and Mexico.

But the bad news is that we have more of these policies than Hong Kong and Singapore.

The bottom line is that America could be much richer with less intervention. But that would require less ad-hoc interventionism.

P.S. There’s a bit of economic wisdom in these jokes that use two cows to explain economic systems.

P.P.S. Here are two other videos on the price system, both of which help explain why only a decentralized market system can allocate resources in ways that benefit consumers.

P.P.P.S. A real-world example of the price system helped bring about the collapse of communism.

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Last year, I shared some libertarian humor relating to Valentine’s Day.

This year, we’re going to be a bit more on the wonky side.

Using roses as an example, we’re going to explore how the invisible hand of the market produces amazing results.

Here’s a great new video from Marginal Revolution University. Narrated by Professor Alex Tabarrok of George Mason University’s economics department, it explains how consumers have amazing access to millions of roses even though (actually because) there’s no agency or department in charge of Valentine’s Day.

And here’s a related video from MRU elaborating on the role of the price system.

The moral of the story in these videos is that a free and unfettered market is far and away the best method of allocating resources.

And the flip side of that lesson is that you get very bad results when politicians replace the invisible hand of the market with the visible foot of government.

Here’s some of what I wrote, for instance, when discussing proposals to give politicians power over wage levels.

…what’s really at stake is whether we want resources to be allocated by market forces instead of political edicts. This should be a no-brainer. If we look at the failure of central planning in the Soviet Union and elsewhere, a fundamental problem was that government officials – even assuming intelligence and good intentions – did not have the knowledge needed to make decisions on prices. And in the absence of a functioning price system, resources get misallocated and growth suffers. So you can imagine the potential damage of giving politicians, bureaucrats, and courts the ability to act as central planners for the wage system.

And here are some excerpts from a post about the damaging impact of subsidies to higher education.

Interfering with the price system is an especially pernicious form of intervention. When functioning properly, prices enable the wants and needs of consumers to be properly channeled to producers and suppliers in a way that promotes prosperity and efficiency. Unfortunately, governments hinder this system with all sorts of misguided policies such as subsidies and price controls. One of the worst manifestations of this type of intervention is the system of third-party payer, which occurs when government policies artificially reduce the perceived prices of goods and services.

And I could cite lots of other examples on issues such as the minimum wage, health care, housing, and agriculture.

Simply stated, you get all sorts of perverse results when politicians interfere with prices.

And that means lower living standards over time as the economy operates less efficiently.

Especially if a government really goes overboard and tries to regulate and control the entire economy rather than “just” interfere with a few sectors. Let’s look at the case of Venezuela. I’ve already written about how first Chavez and now Maduro have turned that nation into an economic hellhole.

It’s so bad that even the establishment media are taking notice.

Here are some passages from Matt O’Brien’s Wonkblog column in the Washington Post.

Venezuela…has the largest oil reserves in the world. It should be rich. But it isn’t, and it’s getting even poorer now, because of economic mismanagement on a world-historical scale. The problem is simple: Venezuela’s government thinks it can have an economy by just pretending it does. That it can print as much money as it wants without stoking inflation by just saying it won’t. And that it can end shortages just by kicking people out of line. It’s a triumph of magical thinking that’s not much of one when it turns grocery-shopping into a days-long ordeal that may or may not actually turn up things like food or toilet paper.

The government is trying to paper over its incompetence by printing money.

…the Bolivarian regime is to blame. The trouble is that while it has tried to help the poor, which is commendable, it has also spent much more than it can afford, which is not. Indeed, Venezuela’s government is running a 14 percent of gross domestic product deficit right now, a fiscal hole so big that there’s only one way to fill it: the printing press. But…paying people with newly printed money only makes that money lose value, and prices go parabolic. It’s no wonder then that Venezuela’s inflation rate is officially 64 percent, is really something like 179 percent, and could get up to 1,000 percent, according to Bank of America, if Venezuela doesn’t change its byzantine currency controls. Venezuela’s government, in other words, is playing whac-a-mole with economic reality.

And there’s also a pervasive system of price controls.

Venezuela’s government wants to wish away the inflation it’s created, so it tells stores what prices they’re allowed to sell at. These bureaucrat-approved prices, however, are too low to be profitable, which is why the government has to give companies subsidies to make them worthwhile. Now when these price controls work, the result is shortages, and when they don’t, it’s even worse ones. …it’s not profitable for the unsubsidized companies to stock their shelves, and not profitable enough for the subsidized ones to do so, either.

In the ultimate triumph of big government, Venezuela is even imposing controls on rationing!

…shortages, which had already hit 30 percent of all goods before the central bank stopped keeping track last year, have gone from being a fact of life to the fact of life. …People have lined up for days to try to buy whatever they can, which isn’t much, from grocery stores that are even more empty than usual. The government has been forced to send the military in to these supermarkets to maintain some semblance of order, before it came up with an innovative new strategy for shortening the lines: kicking people out of them. Now they’re rationing spots in line, based on the last digit of people’s national ID cards.

But you won’t be surprised to learn that all the problems are the fault of the private sector.

It’s a man-made tragedy, and the men who made it won’t fix it. Maduro, for his part, blames the shortages on the “parasitic” private sector.

It goes without saying, of course, that Maduro and the rest of the political elite avoid the consequences of bad economic policy. They all enjoy luxurious lifestyles, financed at the expense of ordinary Venezuelans. Moreover, I’m sure that Maduro and his cronies all have big bank accounts in New York or London.

So I can understand why they like the current system.

I’m genuinely mystified, though, why there are still people who think statism is better than capitalism.

I guess it’s mostly naiveté, a triumph of good intentions over real-world results.

Even though most of these leftists presumably would go crazy if they had to live without the products made possible by capitalism.

Just as portrayed in this video. And this satirical image.

Those of us who reside in the real world, by contrast, already understand the difference between capitalism and statism.

P.S. Venezuela is an economic basket case, but that apparently means it ranks higher than the United States on the “happy planet index” put together by some clueless statists.

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I’ve written a couple of serious posts about the death panels at the VA’s government-run health facilities.

I think it’s particularly important to understand that the problem has nothing to do with funding levels. Instead, it’s about the chronic inefficiency of government.

But sometimes mockery is more effective than analysis, and this Remy video, produced by Reason TV, is definitely worth sharing.


By the way, if you like the Remy videos from Reason TV, here’s one about Sandra Fluke and the birth control mandate, one about the TSA Hokey Pokey, and two more Christmas-themed songs about the TSA (here and here).

But I want to spend the rest of today’s column celebrating the fact that America is not Venezuela. No matter how much we complain about the inefficiency, waste, and corruption in Washington, things could be worse.

Much worse.

Here are three stories to give you an idea what total statism produces.

First, I’ve written about how government intervention is causing toilet paper shortages and food shortages in Venezuela (also in Cuba). Well, there’s also a shortage of water, as reported by Bloomberg.

The rationing of tap water amid a drought and a shortage of bottles because of currency controls are forcing people to form long lines at grocery stores and bottle shops as soon as deliveries are made. …a government-mandated water rationing plan in Caracas and hot weather are fueling demand as supply shrinks. “I haven’t been able to find 5-liter bottles of water in the supermarket for the past two weeks, and there haven’t been half-liter bottles this week,” Maria Hernandez, a 36-year-old secretary, said in an interview in Caracas today. “I have four at home, but I’m afraid that they’ll run out and that I won’t be able to find more. They ration water at my house on Wednesdays.”

Though maybe water rationing is a good thing. At least when you live in a nation where the water that does (sporadically) materialize is contaminated.

Some areas of the city receive water service only three days a week, with most neighborhoods going without water at least one day a week. When water does flow, few residents dare to drink it because of contamination.

So why is there a problem? Because the government doesn’t let the market operate.

Regulated prices for bottled water have not been raised since November 2011, industry association Anber said in a May 19 statement. Since then, consumer prices have risen 110 percent, according to central bank data, while the bolivar has lost 87 percent of its value on the black market, according to dolartoday.com, a website that tracks the value on the Colombian border.

Our second story also comes from Bloomberg. It’s about the one thriving sector of the Venezuelan economy.

The arrival of a Liberian-flagged freighter with Ukrainian, Arab and Filipino sailors spells one thing for Elena — dollars. And greenbacks are king in Venezuela, the 32-year-old prostitute says. …Prostitutes more than double their earnings by moonlighting as currency traders in Puerto Cabello. They are the foreign exchange counter for sailors in a country where buying and selling dollars in the streets is a crime — and prostitution isn’t. Greenbacks in the black market are worth 11 times more than the official rate as dollars become more scarce.

Indeed, some women may be turning to prostitution because the government is doing so much damage to the economy.

Prostitution has become the only boom industry in Venezuela’s biggest port. …“Before I was working to support my kid and my mom; now I support my entire family,” said Paola, a prostitute who like Elena comes from Zulia and declines to give her real name. “Dollars are the only way to get by. The bolivar wages of my uncles and cousins barely mean anything now.” …“We can make more in two hours here than working in a shop in a month,” said a prostitute who calls herself Giselle. …For women like Giselle, Elena and Paola, prostitution for dollars has become a lifeline keeping them from poverty. “We haven’t studied, we have no education. What would we do now if we stopped?” said Giselle. “Work for a minimum wage that doesn’t even pay for food? If we wouldn’t be here working the scene, we would be living on the streets.”

Amazing. Venezuelan women are famous for their beauty, but the economy is such a mess that they earn twice as much money by trading currency. Way to go, big government!

Last but not least, our third story shows that government intervention is even making death more difficult. Here are some excerpts from a report in the UK-based Guardian.

…even in death, Venezuelans are afflicted by shortages. Coffin production has dropped between 20% and 30% this year for lack of materials, forcing funeral and burial delays… Pedro Navarro, former president of Venezuela’s funeral parlor association, has blamed lagging production at the state-run foundry Sidor. …Demand for coffins has grown in recent years. Venezuela has one of the world’s highest murder rates. People have been coping with shortages since 2006, long before the death from cancer last year of the pro-socialist president, Hugo Chávez.

The moral of the story is that government interventions such as price controls and government policy mistakes such as inflation have very negative consequences for ordinary people. It’s not just shortages of water and a prostitution-encouraging desire to escape the local currency.

The entire economy is a mess.

Empty shelves in shops and long queues have become a fixture of the daily hunt for staples such as milk, cooking oil and flour. Pharmaceuticals and medical supplies are also scarce. The anti-government street protests that began in February by an emboldened opposition have grown with the shortages.

So when someone tells you that big government is good for people, ask them for an example of successful statism.

And if they’re open to rational evidence, show them this chart. It shows that Venezuela used to be twice as prosperous as Chile.

But Venezuela has stagnated because of statism and Chile has boomed because of free markets. Kind of hard to argue with these facts (though Chile’s current crop of politicians apparently don’t like success and are seeking to expand the burden of government).

Let’s close with some very accurate humor. This poster nicely summarizes the difference between capitalism and statism.

Or the parable of the two cows also does the job.

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Price controls are a spectacularly foolish idea, and that’s true whether they’re imposed by thugs such as Hugo Chavez in Venezuela or bureaucrats at the Department of Health and Human Services.

That’s why one of the 20th Century’s economic heroes is Ludwig Erhard, who unleashed the post-war German miracle by abolishing the price controls imposed by the allied powers.

Notwithstanding all this history, politicians oftentimes can’t resist doing the wrong thing, as you can see from this new Reason TV video.

A simple explanation for the stupidity of politicians is that there are more consumers than gas station owners. But I also think this is an example of their illiteracy about what Bastiat referred to as the seen and the unseen.

I hope you’re familiar with Reason TV, by the way. If not, you should peruse the great work they do. Some of my favorites include:

And if you enjoy humor, here are some more great videos from Reason TV:

Feel free to share these examples with friends and colleagues.

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Haiti may be the poorest nation in the Americas. Cuba may have the dictator with the longest lifespan. But Venezuela arguably has the worst government.

Not the clownish dictator, Hugo Chavez, is trying to repeal the laws of economics. How’s that working out for him?

Well, here’s some of what the New York Times wrote.

By 6:30 a.m., a full hour and a half before the store would open, about two dozen people were already in line. They waited patiently, not for the latest iPhone, but for something far more basic: groceries. …Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition. Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil. The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf. Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.” At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find. …many economists call it a classic case of a government causing a problem rather than solving it. Prices are set so low, they say, that companies and producers cannot make a profit. So farmers grow less food, manufacturers cut back production and retailers stock less inventory. Moreover, some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.

Here’s a chart that I’ve used before, using international data to compare living standards in Venezuela, Argentina, and Chile since 1980. One nation (take a wild guess) has tried statism, one nation has tried a mix of statism and capitalism, and the other has tried capitalism.

And just in case you need one more reason to despise Chavez’s despotic government, the regime is copying Hitler, Stalin, Mao, and other murderous tyrants in imposing gun control.

(h/t: Greg Mankiw)

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I’m still at the Liberty Camp in Slovenia, doing my best to teach young Europeans about the importance of individual liberty, free markets, and small government. (also doing a bit of sightseeing, as you can see from the pictures below)

This morning, one of the other presenters showed a short video taken from the first-rate “Commanding Heights” program. It told the brief story of how one man, Ludwig Erhard, single-handedly put Germany on the road to post-war recovery by doing away with price controls.

This video is a lesson in character – and an example of doing what’s right.

Erhard did not have authority to change the price controls, but, with a certain degree of cleverness that would make Bill Clinton proud, he decided that this didn’t preclude him from simply abolishing them.

In doing this, he showed personal courage. He did something bold. And he went against so-called expert opinion.

And he helped millions of people enjoy a better life by reducing the burden of government.

We need more people with this integrity. In America and everywhere else.

People who will go against the grain to promote freedom.

People who will take risks to advance liberty.

People who will do the right thing, even if it doesn’t advance their career.

Not that I’m asking for selfless gestures. As Erhard’s episode demonstrates, sometimes doing the right thing at least means people say nice things about you.

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While the politicians in Washington are poised to undermine the healthcare system with additional layers of taxes, spending, and regulation, Steven Chapman proposes to use markets to improve a part of the system that is suffering from a punitive form of price controls. Orgain donors are allowed zero compensation for their sacrifice. This policy – driven by an ideological impulse against markets and voluntary exchange – directly leads to the death of thousands of people each year

Consider the economics of an organ transplant. Everyone involved gets something of value. The doctors and nurses are paid. The hospital receives money. The organ recipient gets something that will save her life. …since 1984, it has been illegal to pay someone to surrender a body part, even posthumously. Campaigns to browbeat Americans into signing organ donor cards, however, haven’t sufficed. The transplant organ shortage has grown. Since 1989, kidney donations have doubled. But the number of patients in need of them is five times higher than it was then. Last year, 4,456 people died while waiting for a kidney transplant. The story with livers follows the same line. Among the losers from this guaranteed-shortage policy are victims of cancer and other lethal diseases who need bone marrow transplants. Some of them have filed a lawsuit, which goes to court in Los Angeles this week, asking to be allowed to offer compensation to donors — which is now a felony punishable by five years in prison. …The ban is particularly indefensible in this realm. Someone giving up a kidney loses an important organ for good. But bone marrow donors produce new marrow to replace what is lost. Given that it’s legal under federal law to buy and sell blood and sperm, why is bone marrow treated differently? …If Americans could be paid for bone marrow, more would step forward. Nobel Prize-winning economist Gary Becker of the University of Chicago, in a 2007 paper written with Julio Jorge Elias of the State University of New York at Buffalo, figured the kidney shortage could be eliminated for $15,000 per organ.

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