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.
But 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.