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The High Cost of Low Prices

Politicians have a solution for high prices — and it’s usually a trainwreck.

February 2024

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

Cost of a dozen eggs? Nearly $5.ii

Gas? Over $5 a gallon.iii

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.

[OPENING SEQUENCE]

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.iv 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.”v

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

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.vii

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.viii 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.ix

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.x

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.xi

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. xii

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,xiii another poll found that nearly 3/4 of them thought that simply building more housing actually would bring down rents.xiv

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.xv

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.

Sources

  1. Average Sales Price of Houses Sold for the United States — Federal Reserve Bank of St. Louis 
  2. Average Price Data (In U.S. Dollars), Selected Items  U.S. Bureau of Labor Statistics 
  3. Ibid.
  4. Databases, Tables & Calculators by Subject  U.S. Bureau of Labor Statistics  
  5. The Commanding Heights: The Battle for the World Economy — Daniel Yergin and Joseph Stanislaw
  6. Consumer Price Index: All Items: Total for United States — Federal Reserve Bank of St. Louis
  7. "A New Investigation of the Impact of Wage and Price Controls" (Charles H. Whiteman)  Federal Reserve Bank of Minneapolis
  8. “Why Price Controls Should Stay In the History Books” (Christopher J. Neely)  Federal Reserve Bank of St. Louis
  9. “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence From San Francisco” (Rebecca Diamond, Tim McQuade, and Franklin Qian)  American Economic Review
  10. 2021 New York City Housing and Vacancy Survey Selected Initial Findings  New York City Housing and Vacancy Survey
  11. "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence From Seattle" (Ekaterina Jardim, et al.)  National Bureau of Economic Research, pg. 38
  12. The Budgetary Effects of the Raise the Wage Act of 2021 Congressional Budget Office 
  13. Rent Control — Booth School of Business, University of Chicago 
  14. Zillow’s Panel of Experts: Fix Zoning To Improve Housing Affordability  Zillow Research 
  15. "Survey of U.S. Economists on a $15 Federal Minimum Wage" (Lloyd Corder)  Employment Policies Institute 

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Sources

  1. Federal Reserve Bank of St. Louis
    Average Sales Price of Houses Sold for the United States 
  2. U.S. Bureau of Labor Statistics
    Average Price Data (In U.S. Dollars), Selected Items
  3. U.S. Bureau of Labor Statistics 
    Databases, Tables & Calculators by Subject 
  4. The Commanding Heights: The Battle for the World Economy
    Book by Daniel Yergin and Joseph Stanislaw
  5. Federal Reserve Bank of St. Louis
    Consumer Price Index: All Items: Total for United States
  6. Federal Reserve Bank of Minneapolis
    "A New Investigation of the Impact of Wage and Price Controls" (Charles H. Whiteman) 
  7. Federal Reserve Bank of St. Louis
    “Why Price Controls Should Stay In the History Books”
  8. American Economic Review
    “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence From San Francisco” (Rebecca Diamond, Tim McQuade, and Franklin Qian) 
  9. New York City Housing and Vacancy Survey
    2021 New York City Housing and Vacancy Survey Selected Initial Findings
  10. National Bureau of Economic Research
    "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence From Seattle"

  11. Congressional Budget Office 
    The Budgetary Effects of the Raise the Wage Act of 2021
  12. Booth School of Business, University of Chicago
    Rent Control 
  13. Zillow Research 
    Zillow’s Panel of Experts: Fix Zoning To Improve Housing Affordability
  14. Employment Policies Institute
    "Survey of U.S. Economists on a $15 Federal Minimum Wage" (Lloyd Corder)

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