WHY IS INFLATION A TAX? — PART 4

Here is the fourth post in this series.

  • Part 1: Introduction
  • Part 2: How Much Money Do Our Leaders Want To Spend?
  • Part 3: What Additional Factors Can Produce Inflation?

In this post we will consider the foolishness of price controls.

What Is Wrong With Price Controls?

What Happened To Productivity? ends with this nonsense.

I still think that some sort of price controls would help me and my fellow Americans that are struggling with the situation these days.

What Happened To Productivity? 

What is wrong with price controls? Price controls don’t work. Price controls don’t even work in theory. Consider the most basic law of economics.

What Is the Law of Supply and Demand?

The law of supply and demand combines two fundamental economic principles describing how changes in the price of a resource, commodity, or product affect its supply and demand.

As the price increases, supply rises while demand declines. Conversely, as the price drops supply constricts while demand grows.

Levels of supply and demand for varying prices can be plotted on a graph as curves. The intersection of these curves marks the equilibrium, or market-clearing price at which demand equals supply, and represents the process of price discovery in the marketplace.

from Law of Supply and Demand in Economics: How It Works (investopedia.com)

The Law of Supply and Demand is the key to understanding economics. We can use this law to easily explain why price controls don’t work. Observe that the supply of a product rises or falls in response to what people are willing to pay for it. The more people are willing to pay for a product the more enthusiastically the people who supply that product will produce it. The higher the price the higher the profits and the greater the amount of money producers can and will invest in labor, raw material, and land so as to earn those profits. Conversely, when the price of a product drops, producers MUST reduce their output. That is because people go to jobs where they can get better pay, raw materials are sold to producers who offer the best price, and landowners tend to use their land for whatever offers the most profit.

Contemplate what the Law of Supply and Demand says about the price of a product. The price represents what the buyer is willing to pay and the seller is willing to accept. That is, in a free market, the price is negotiated. Therefore, in a free market, the price is a fair price. It is what the product is actually worth to the buyer, and it is what the seller considers worthy of the effort to produce that product.

So, what do price controls do? Because price controls are almost always about keeping prices down:

  • Price controls eliminate the ability of the most eager buyers to pay more to get the products they want. That means the people who need the product the most — and are usually willing to pay the most — cannot get the product they want.
  • Price controls eliminate the ability of sellers to sell their product at a fair price to the people who need their products their most.
  • Price controls reduce the ability of seller to invest in production so that they can respond to the demand for their product.

What seems like high prices are usually the result of a situation outside of the seller’s control. Consider the shortage of oil, for example. After President Donald Trump got the government off their backs, oil producers produced enough crude oil to make America energy independent. Then the following happened.

The Liberal Democrat’s COVID-19 lockdowns created severe economic issues and probably resulted in more deaths than the virus. So, the COVID-19 lockdowns were bad idea. COVID-19 lockdowns also resulted in a decrease in oil production. Nevertheless, nobody but the oil companies regretted the price drop.

Biden’s attack on the fossil fuels industry and a resurgent economy drove oil prices back up. What else should we expect?

The invasion of Ukraine is a political mess that is almost directly attributable to Biden’s botched withdrawal from Afghanistan. Western Europe has made itself dependent upon Russia for fossil fuels. Now they have a problem, and they want to buy from us. So, demand from Europe is helping to drive our prices up. Surprise? Of course not. President Donald Trump pointed out the potential for a problem like this when he was in office.

The so-called Inflation Reduction Act is, unfortunately, just another huge example of Liberal Democrats stuck on stupid. It doesn’t fix anything. It just makes the USA poor and dependent on China, and China is building coal power plants as fast as it can (China May Boost Coal Power Plant Building Amid Energy Crunch (bloomberg.com)).

Liberal Democrats have no problem cutting the production of fossil fuels in the USA and then going overseas to our enemies and asking them to sell us fossil fuels. That is not just bad policy; it is treachery to make us so dependent upon our enemies. If the prices for fossil fuels are going up because of the awful policies being implemented by Liberal Democrats, why does anyone think trusting such people with price controls makes any sense?

Additional References

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