Category: Your Money

Every since the creation of civil society, governments have tried to influence economic and social trends by prescribing minimum or maximum price limits for commodities. And in almost every instance, price controls have done more damage than good.

Understanding price control

Price control is when governments pass a law to control the minimum or maximum cost of a product or service. Usually, it is a short-term measure that can get extended for political reasons. Price controls are meant to control inflation or offer short-term relief to citizens. These laws are usually implemented after or during emergencies such as natural disasters, wars or in situations where common people are deprived of basic amenities because of soaring costs or scarce supply. Unfortunately, price controls usually backfire, worsening the situation and crippling the economy in the long run.

How does that happen? During an emergency, essential goods become scarce because retailers, shops, and warehouses get gutted and the regular supply chain is disrupted. Since providers now need to get products from unusual channels or through extraordinary efforts, they charge more. This certainly angers people and affects them but at least the products are made available. When a price cap is imposed on the sale of products, providers are unable to sustain the supply chain and forced to close shop, creating greater shortage. Cheaper prices also attract greedy people wanting to capitalize on the opportunity to hoard.

Here are a few examples of how price control laws end up hurting the very people they intend to help. It’s the same story all over the world.

India drug price controls, 1995

India has a long history of drug price controls that go back to 1955. As per the provision of Drugs (Prices Control) Order, 1995, drug manufacturers had to abide with ceiling prices fixed by National Pharmaceutical Pricing Authority (NPPA) for scheduled category of drugs.

NPPA studies show that the law restricted many manufacturers from producing all the essential bulk drugs. In fact, only 47 of the 74 notified bulk drugs in the First Schedule of the DPCO, 1995 were produced. Furthermore, price control led to production loss and competition in the Indian ingredients supply which hurt the clinical trial sector.

Price controls intended to cub malpractice by pharmaceutical companies created imbalances between medicine affordability and availability and the growth of the industry. The price control law for drugs is still a point of debate and has undergone multiple revisions since.

US wage controls, 1971

In 1971, President Nixon implemented wage price controls to mollify the public in view of the 1972 elections, decrease unemployment and contain inflation. After a 90 day trial period during which the controls seemed to be working though unemployment did not reduce, inflation picked up again as the dollar weakened with increasing price of imported goods and other global factors. Under political pressure, Nixon reinforced wage controls but to no good – ranchers stopped selling cattle, farmers drowned their chickens, and supermarket shelves emptied. The system was finally abolished in April 1974, 17 months after Nixon’s triumphant reelection victory.

US gas and oil controls, 1970s

President Nixon sanctioned oil and gas price control during his term. These were continued by other presidents till 1981 when President Reagan entered office and immediately abolished what remained of oil and gas price controls.

In the previous decade, the oil price control system created several tiers of oil prices. With a clamp on prices for domestic production, producers were forced to subsidize imported oil and provide additional incentives to import oil into the United States. An elaborate and confusing system of price controls, entitlements, and allocations led to long angry lines at the pump. By the time the Iranian oil crisis hit in 1979, President Carter had waived most of the controls on oil and gas prices to make more fuel available.

The resulting price hike created new problems: double digit inflation that put the Federal Reserve in crisis mode, forcing it to make its largest ever increase in interest rates in October 1979, plunging the economy into a deep recession.

Pennsylvania commodity control, 1770s

Post war, Pennsylvania imposed price controls on “those commodities needed for use by the army” to support George Washington’s revolutionary army. This created severe shortages of just about everything needed by the army, almost starving them to death in the field.

The Continental Congress thankfully passed a anti-price control resolution on June 4, 1778 that read: “Whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of very evil consequences—resolved, that it be recommended to the several states to repeal or suspend all laws limiting, regulating or restraining the Price of any Article.”

By the fall of 1778 the army was fairly well provided for as a direct result of this change in policy.

French Revolution, 1793

During the French Revolution (1789-1799), politicians put into place the “Law of the Maximum” that imposed price controls on grain and later, on other items. The resulting situation is described as “in some [French] towns, the people were so badly fed that they were collapsing in the streets from lack of nourishment.” A delegation from various provinces appealed to the government in Paris stating that markets were supplied before the new price control law. As soon as the price of wheat and rye was fixed, those grains became scarce. Other grains not subject to the maximum law were the only ones brought in.

The French government finally repealed the price control law after the death of thousands.

Price controls are like short-term palliatives that do nothing to fix the root cause of problems. Yet, governments continue to implement price control laws to appease the public and attract vote banks. While the greater good of a nation is sacrificed at the altar of political agendas, the core issues for which price controls are implemented only grow worse, building up to almost irrecoverable situations. Instead of price controls laws, we need a law to ban price control.

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