As night follows day, economic problems caused by government are invariably followed by government solutions that would make everything worse. For a classic of the genre, consider the bill introduced by Democratic senators to fight inflation by tackling pricing “scams”.
Massachusetts Sen. Elizabeth Warren and seven fellow Democrats in the Senate and six in the House want to punish companies that raise prices more than they want. The result would be price controls by another name, and they would produce what price controls always do: supply shortages. If you like today’s formula mess, pass this bill.
Legislation unveiled last week would grant sweeping new powers to the Federal Trade Commission. It prohibits companies with revenues of $100 million or more from selling goods or services “at an unreasonably excessive price” during a market shock. Public sector employees in their Beltway offices would define what is “unreasonably excessive”, and they could then slap violators with a penalty of up to 5% of annual income. Not profits, mind you, but income.
The scheme is the latest attempt by Democrats to blame inflation on business. In a statement on the bill, Senator Warren denounced “companies taking advantage of the current crisis to prey on consumers” and listed grocery stores, car rental companies and pharmaceutical companies as price abusers. harmful. She wants you to forget that federal spending has contributed to soaring prices, as well as labor shortages across the economy.
The bill places the burden of proof on businesses, allowing them to avoid the penalty only if they can demonstrate that their price increases are the result of business costs beyond their control. Producer prices have outpaced inflation over the past year and unpredictable shortages of components are appearing in the supply chain.
But the current FTC, led by Warren sidekick Lina Khan, has already declared its intention to punish the companies for various alleged violations. Regulators who have been instructed to look for “widespread” abuse – as Senator Warren puts it – are likely to find it, even if the price increases have good commercial explanations.
The economic consequences would go far beyond the fines imposed on specific companies. The vaguely worded bill would force all major companies to think twice before raising prices to meet costs.
whom Senator Warren called by name. Grocery store margins are notoriously tight even when inflation is under control. If the retail giant is concerned that the FTC will fine it for raising prices to keep up with costs, expect economic consequences. Store shelves are reportedly shrinking as Kroger decides not to stock items politicians are targeting for scrutiny. Or maybe you’ll wait longer in the queue as the chain cuts down on labor costs.
The Democratic proposal is in a sense difficult to take seriously because price controls are patently stupid. President Nixon froze beef prices during the inflationary period of 1973, and ranchers responded exactly as you might imagine: withholding supply. Nixon also tried to control wages and prices throughout the economy. This produced so much distortion that Nixon had to repeal the controls and prices skyrocketed again.
More recently, price controls have been the crown jewel of a Venezuelan economic plan that has done away with basic goods while doing little to curb headline inflation. Even that country’s socialist dictator, Nicolás Maduro, was forced to ease price controls.
But Ms. Warren’s bad ideas have a way of influencing President Biden’s policies. Consider student loan forgiveness. The danger is that the idea of price controls will spread beyond the Venezuelan Senate caucus and into the Treasury and the White House. It’s the definition of economic insanity, which means that in this administration, it’s all too possible.
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Appeared in the print edition of May 17, 2022.