"Empty Shelves" by Reivax
https://flic.kr/p/2j6nmtn
History has a short memory. In recent weeks, as Vice President Harris’s policy proposals sparked a national conversation about price controls, that phenomenon is on full display.
Kamala Harris has promised to cap “unfair rent increases,” echoing support for a Biden-Harris administration proposal to limit rent increases to 5 percent. She is supportive of price controls on pharmaceutical drugs, and was the tie-breaking vote in the Senate to pass this policy in the Inflation Reduction Act. Prominently, Harris has also come out in support of a federal ban on “price gouging” grocery products, evoking (justified) fears of breadlines and food shortages.
Rather than taking accountability for her own hand in causing inflation, Harris has – without evidence – accused corporations and landlords of raising their prices simply because they are “greedy.” In reality, the net profit margin for retail grocery stores, for example, are razor thin and down under the Biden-Harris Administration, sitting at 1.18 percent.
For thousands of years, price controls have been imposed with “good intentions” and quickly led to disaster for citizens living under them.
Below are just ten of the hundreds of examples of the failures of price controls.
1. The Code of Hammurabi, a Babylonian legal text from 1792 B.C., laid out explicit controls regarding the prices of goods and wages. Historical records show a decline in trade under Hammurabi’s reign, citing that “prominent and wealthy [merchants] were no longer found in Hammurabi’s reign.”
2. Ancient Rome under Emperor Diocletian (301 A.D.) was subject to a fixed rates for several food items, clothing, wages, and more in response to a massive spike in inflation. According to an account by Lactanius, a Roman author born in 250 A.D. and advisor to Constantine I, Diocletian’s edict led to shortages and bloodshed:
“… then [Diocletian] set himself to regulate the prices of all vendible things. There was much blood shed upon very slight and trifling accounts; and the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside.”
3. 16th Century Antwerp, besieged by Spanish forces, unsurprisingly experienced food price increases during the fighting. This caused the City Fathers of Antwerp to pass a law establishing a maximum price for all food items. As historian John Fiske explained, this both led to food shortages and their resources depleting more quickly (eventually leading to surrender in 1585):
“But no merchant would run the risk of having his ships sunk by the Duke’s batteries merely for the sake of finding a market no better than many others which could be reached at no risk at all. If provisions had brought a high price in Antwerp they would have been carried thither. As it was the city, by its own stupidity, blockaded itself far more effectually than the Duke of Panna could have done…
In the second place, the enforced lowness of prices prevented any general retrenchment on the part of the citizens. Nobody felt it necessary to economize. So the city lived in high spirits until all at once provisions gave out.”
4. The Bengal Famine of 1770 was sparked/exacerbated by price controls that followed a drought in the region. An estimated 10 million people died – a third of the Bengal population.
5. During the American Revolutionary War, George Washington’s army was quartered in Pennsylvania in 1777. To “help” in the war effort, Pennsylvania’s legislature imposed price controls on commodities used by the army. The price controls resulted in food shortages and the prices of uncontrolled goods skyrocketing. After Washington’s army nearly starved to death at Valley Forge, the Continental Congress adopted a resolution condemning the use of price controls:
“Whereas… it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purposes proposed, but likewise productive of very evil consequences to the great detriment of the public service and grievous oppression of individuals resolved, that it be recommended to the several states to repeal or suspend all laws or resolutions within the said states respectively limiting, regulating or restraining the Price of any Article, Manufacture or Commodity.”
6. During WWII in the United States, the federal government imposed price controls on numerous goods like coffee, meat, gas, sugar, clothing, dairy, etc. and even issued ration stamps for these goods. In that time, meatpackers added more fat to their burgers, sold steaks with an extra bone, filled sausages with cheap additives like soybeans and potatoes, and shrunk the size of candy bars and loaded them with lower quality ingredients.
In fact, WWII’s price controls sparked a revolution in the creation and popularity of hyper-processed foods, the effects of which may have been detrimental.
After the war ended and Americans’ patriotism could no longer “cover” for these harsh restrictions, controls broke down and pent-up inflation skyrocketed. As Robert L. Schuettinger and David L. Meiselman explain in their fantastic book, Fort Centuries of Wage and Price Controls, “From August 1945 to November 1946, wholesale prices rose more than 32 percent and consumer prices almost 18.6 percent.”
7. In 1970, Cambridge, Massachusetts imposed harsh rent controls on residential properties. Over one-third of the city’s total residential units were subject to rent control. After years of suppressed investment and frustration, the citizens of Massachusetts banned rent controls in a referendum.
The failure of these policies became even more obvious after they were abolished. Within a few years, economists found that direct dollar investments in housing units doubled.
8. In 1971, President Nixon imposed price controls (below the equilibrium price) on crude oil and natural gas. This created a real crisis, characterized by massive shortages and long lines at gas stations.
As Gene Healy from the Cato Institute highlighted, this disaster had far-reaching effects:
“By the time Nixon reimposed a temporary freeze in June 1973, Daniel Yergin and Joseph Stanislaw explain in The Commanding Heights: The Battle for the World Economy, it was obvious that price controls didn’t work: “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.””
9. The 1994 rent control expansion in San Francisco led to higher prices and housing shortages. An NBER study revealed that the 1994 rent-control expansion in San Francisco led to landlords converting their properties to condos or tenancies in common. Instead of encouraging affordable housing, the government incentivized converting away from it.
The study also found that, as a result of rent control, there was a city-wide rent price increase of 5.1 percent. Because of existing tenants’ depressed rents, many will stay in apartments for longer than they otherwise would. This reduces the supply of rent-controlled properties for potential tenants, thus increasing the prices of other, non-controlled properties.
10. In 21st century New York City, the effects of rent control policies are persistent and devastating. As Amy Swearer eloquently states:
“To put it simply, if you’re a landlord in New York, you will remain a landlord until your tenants say you can stop being a landlord.
You must cede complete control of your property to the tenant, for a duration determined by the tenant, and under terms dictated by the city—even if it means operating at a loss for years.”
In fact, one family was bribed a whopping $1.07 million to finally leave a two-bedroom Upper East Side apartment where they were paying $1,500 in rent.
Because of these controls, uncontrolled rentals in NYC are unfathomably expensive and it is extremely difficult to find housing. There are lines for viewing, listings going off-market within a day, competitive bidding, and long waiting times. With such strong demand for housing, you would think builders would be eager to supply more. In reality, the incentive for providing housing is so bad that the city has an estimated 1.8 billion square feet of unused residential development space.