The High Cost of Low Prices

Politicians came up with a policy to help the most disadvantaged people. One problem: It hurt the most disadvantaged people.?

[SCRIPT]

Trying to buy a house? 50 percent more expensive than just a few years prior.

Cost of a dozen eggs? Nearly $5.

Gas? Over $5 a gallon.

Unless you’re in L.A., in which case … buy a horse.?

Those are all real prices from the last few years. And a few years prior to that … they would have been unimaginable.?

But that’s what happens when inflation takes hold of the economy.?

Is there anything government officials can do??

Lucky for us, there’s a tool that politicians have called on again and again over the years to keep prices down.?

And, unlucky for us … it’s usually a train wreck.?

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Food is too expensive.?

Fuel is too expensive.?

Housing is too expensive.?

Ladies and gentlemen, welcome to … the 1970s.?

As the decade dawned, inflation was hovering around six percent. But don’t worry: Richard Nixon was in the White House — and that guy had a plan for everything.?

OK, some of them better than others.?

In 1971, President Nixon developed an ingenious, meticulously crafted strategy to keep prices from rising. He would … say that prices weren’t allowed to rise.?

That’s it. That was the strategy.?

Richard Nixon simply decreed that the cost of everything wasn’t allowed to increase for 90 days. No price hikes, no wage increases.?

And it worked!??

For about five minutes.??

But as the price controls went on, businesses that couldn’t make enough money threw the economy into turmoil. As one writer recalled, “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.”

As a result of those shortages, the Nixon Administration finally ended the price controls in 1973 — at which point prices shot through the roof.

The ultimate result: Not only did Richard Nixon’s attempt to control prices not stop inflation, analysis from the Federal Reserve found that it actually made it worse than if he had done nothing at all.

What happened here? It’s actually as simple as the one phrase we all use to act like we understand economics: supply and demand.?

The price of anything is the result of how much of it there is (supply) and how much of it people want (demand).??

And this is why Nixon’s strategy didn’t work — because there’s no way for one guy sitting behind a desk to figure out what millions of people want — which means there’s no way for him to figure out the right price.??

Set it too low, like Nixon did, and businesses won’t make enough of it — so you’ll start running short of supplies. Set it too high and businesses will make too much — so you’ll have lots of stuff going unsold.?

Economists call these kinds of policies “price controls” and … they basically all think they’re a terrible idea. Not our judgment, by the way … that’s the Federal Reserve talking.?

Now, on the one hand, America has kind of learned this lesson. During our recent bouts of inflation nobody really talked all that seriously about trying to freeze prices throughout the economy.??

But on the other hand, there are lots of smaller instances where we keep doing this — and where we keep seeing similar unintended consequences.?

One area where this happens is in housing. In many parts of America, governments try to keep housing affordable through rent control, limiting how much you can be charged to rent an apartment.??

Well-intentioned? Definitely. Workable? Well, judge for yourself.?

When economists studied rent control policies in San Francisco, they found that they actually reduced the number of apartments available for rent in the area by 15 percent … and thus made housing in San Francisco more expensive.

The reason? Because landlords often decided to just convert their apartments into different kinds of properties that weren’t subject to those restrictions.??

And even when that doesn’t happen, landlords under rent control will often just skimp on repairs — because when the costs of maintenance go up they can’t raise rents to cover it. In 2021, New York City found that the stricter an apartment’s rent control, the more likely it was to have dangerous maintenance issues.

Not only can price controls keep you out of a place to stay, by the way, they can also eat into your paycheck.?

Minimum wage laws after all, are just another form of price controls, requiring that workers be paid above a certain hourly rate — which would be great … if it wasn’t for the fact that they often hurt precisely the people they’re supposed to help.?

When Seattle raised its minimum wage to $13 in 2016 low-skill workers earned less after the law took effect. How? Because while they earned more per hour, they were also asked to work … fewer hours.

And lower wages aren’t even the worst-case scenario. In 2021, when the Congressional Budget Office analyzed the case for a national $15 minimum wage, they projected it would lift 900,000 people out of poverty … while causing 1.4 million layoffs.?

All of which seems kind of depressing. Is every attempt we make to improve people’s lives just going to backfire???

Well, here’s the good news: The problem isn’t what we’re trying to do; it’s how we’re trying to do it.?

So, while a poll of many of the country’s leading economists found them almost unanimously opposed to rent control, another poll found that nearly 3/4 of them thought that simply building more housing actually would bring down rents.?

And while a poll of economists found only six percent of them thought a large minimum wage increase was the best way to help people in need, nearly 2/3 of them thought that giving those same workers that money through a tax credit — which wouldn’t risk making them too expensive to employ —?would be.?

All of which is good news. Because while it means that politicians can’t control the economy, it also means that there are still effective ways to help those in need — if we pay attention to the lessons of history … and the research.?

It also means, by the way — and this should go without saying … you never go full Nixon.?

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Kite & Key Media?is a research and evidence-driven organization. Our videos take as their sources cutting-edge research in universities, think tanks, books, and journalistic outlets. We rely on these sources because we believe that conversations about important issues should be rooted in an understanding of the underlying facts. Follow?our LinkedIn page for more updates.