Can Price Controls Reduce Inflation?

EconBuff Podcast #35 with Rex Pjesky

Dr. Rex Pjesky talks with me about price controls and answers whether or not they could reduce inflation. Dr. Pjesky walks us through the difference between inflation and measured inflation. We discuss the Chicago Booth Initiative on Global Markets survey, and why economists might actually agree that price controls could reduce measured inflation. Dr. Pjesky explains what the argument against price controls is from economic theory and evidence. Dr. Pjesky addresses a careful reading of survey question. Dr. Pjesky lays out how price controls can reduce measured inflation and the other types of damage it would do. We discuss the impacts of price controls on the ability to even measure inflation. Dr. Pjesky argues price controls would naturally causes changes in consumption patterns, and that these changes could actually impact measured inflation, but carefully noted this would not impact inflation itself. Finally, Dr. Pjesky explains that a careful reading of the survey results shows not a single surveyed economist thinks price controls are a good idea and echoes the sentiment of economists everywhere about price controls; “Just Stop, Seriously”.

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Transcript:

Stitzel: Welcome to the EconBuff Podcast. I’m your host. Lee Stitzel. With me today is Dr. Rex Pjesky. Rex is a professor of economics at West Texas A&M University. Rex, welcome back.

Pjesky: It's good to be back again.

Stitzel: It's always good to have you on the podcast.

Pjesky: I enjoy it very much.

Stitzel: So, today our topic is price controls. And the reason that our topic is price controls is because the Chicago Booth Initiative on Global Markets sent out a poll, which included the following statement, and asked economists to agree or disagree with it. And that statement is “price controls as deployed in the 1970s could successfully reduce U.S. inflation over the 12 next months.” So, of the 43 economists polled --- and all of these are at prestigious universities --- they're asked to disagree, strongly disagree, state that they're uncertain, agree, or agree strongly. They also have the option of having no opinion or just not answering at all. So, we're getting this from David Henderson --- highly recommend any of his work. You can find it over at the econ blog. We'll put a link to the podcast, sorry to the post that got us started on this. But he makes this point --- and this is what we want to discuss here today --- that nobody strongly agreed with the statement in the poll. Ten agreed. Five were uncertain. Twenty one disagreed and four strongly disagreed. One had no opinion and two didn't answer. So, out of 43 --- 25 disagreed or disagreed strongly. And Henderson's question which is what we want to explore here today is --- why isn't it that 43 out of 43 economists, given our basic economic reasoning, didn't answer it this way? So, what I want you to start with is --- why does Henderson think 43 out of  43economists should disagree with that statement about price controls?

Pjesky: Well, I mean when you read the question carefully --- which to his credit Henderson eventually did talk about it and what he wrote about this about this poll, but --- the question really wasn't asking if price controls were a good idea. The question wasn't really asking if price controls would be an effective way or a desirable way to control inflation. The question merely said: could price controls like the United States deployed in the 1970s, when we were starting to have inflation in in the 70s, would that successfully reduce U.S. inflation over the next year? And I kind of imply that the question is inflation as we measure it over the next 12 months. So, when you read it carefully like that, the answer no longer becomes clear. And it's not surprising that we had a broad range of answers to this particular question, with some agreeing that yes we could control measured inflation with price controls; and some economists saying: well no, I don’t think that we can control measured inflation with price controls.

Stitzel: So, would you say there's a lot of nuance here in the way that economists answered the question? Or is there actual nuance in the question?

Pjesky: Both.

Stitzel: Interesting. So, unpack that just a little bit. So, I think your reaction as an economist is, you know, you see the word price controls. And your mind just fills in the rest of the question with are price controls good or bad? And that's not being asked here.

Pjesky: Yes.

Stitzel: So, unpack that.

Pjesky: Yes. Well so, let's talk a little bit about what price controls are. And let's talk about why exactly economists, most economists I would say, almost reflexively will disagree with anything about price controls; because economists as a group, vast majority of economists as a group, would think that price controls in the form that they took in the 1970s is a really, really bad idea. So, you know, think about what econ textbooks say about price controls. And this might be kind of hard because we/your listeners might not have an econ textbook in front of them. They might not have ever even seen an econ text books. So, let's go really quick back to the beginning, to the most basic notions of economics, and what it teaches about this. Sort of, the foundation of economics in this context, is we have a demand (concept called demand) which represents everything that a person or an economist would know about people's willingness and ability to buy something. The flip side of that is we have supply, which represents everything that a person or an economist might know about a firm or an individual's willingness and ability to produce or to supply something. So, these two forces together form what economists call a marketplace, basically. And again, supply and demand is the fundamental concept is the fundamental concept in economics. Everything in economics springs from supply and demand in one way or another, O.K.? So, we have demand representing buying behavior. We have supply representing producer or seller behavior. The one fact that we know about demand is that as price rises, the amount that people are willing and able to buy will go down. That is always true. The one thing that we know about supply most the time is that if price rises, the amount that sellers are willing to provide to the marketplace (to provide to society) will go up all right. This makes, I think, this makes fundamental sense.

Stitzel: This is intuitive.

Pjesky: Yeah. This is very, very intuitive. As something gets harder to obtain, you're going to do less of it. That's what economists call the law of demand. It's that relationship between price and quantity that we think happens along a particular demand curve. And the converse is true. If you're providing something --- if something gets more beneficial for you to provide, then you're going to provide more of it. So, supply curves slope upward. Demand curves slope downward. And in whatever we call a marketplace --- those two forces are going to be in (for lack of a better word) are going to be in tension, all right? There's going to be a point where a price is discovered, where supply and demand cross. And at that point, everyone who wants to pay the price that's dictated in the marketplace will be able to buy the quantity of goods that they want. Everybody who is willing to accept the price that is discovered in the marketplace will be able to produce and sell more or less as much as they want.

Stitzel: So, you've used --- I really like the way you use --- the phrase, you know, the price is discovered. And because we're gonna talk about price controls, this makes a lot of sense. People think of prices as being set right. And they're not a thing that emerge. And, right, you've talked about this idea of how those two things come together to give us that. Why are you using the phrase discover, rather than prices be set? Don't firms get to just pick the price that they put out there?

Pjesky: Actually no. And that, I think, in this whole discussion, and especially as this discussion leads into price controls, that is the most important point. That is the most important thing to notice about this concept. The world is not arbitrary, O.K.? The world is not arbitrary. So, when we see a price for milk, or a gallon of gas, or a price for a t-shirt, or anything else that has a price, [then] that price --- whether it's, you know $3.00 for a gallon of gas, or $4.00 for a gallon of milk, or whatever it is --- that's not arbitrary, O.K.? There are again (for lack of a better word), there are forces within the production of those goods that make it easy or difficult to produce, O.K.? There are attributes that consumers have, and conditions that consumers face, that make goods and services of a particular type desirable or not, O.K.? So, as consumers, we have preferences. We have things that we like. We have a certain amount of income to buy stuff. We face prices of all kinds of different goods that we might like to consume together or separately with any particular good that we're looking at and so forth. On the consumer side are --- sorry, on the producer side we have basically the same thing, all right? Goods have certain costs to produce. There are certain technologies that are available to make the production of good --- whether it's, you know, oil or milk or t-shirt or anything else more easy or more or more difficult. So, all of those forces --- and this is the point of supply and demand, all of those forces --- will, sort of, meet together in a marketplace. And the process of all of those forces meeting together in the marketplace will pop out or will discover a price of, you know, $3.00. I think gas is like $3.00 on the nose right now. You know, $3.00 for a gallon of gas.

Stitzel: So but, if I miss this reasoning [and] I say to you: but they get to pick the price that they sell us at the gas station. And then why can't they just set that? And if there's --- if they're able to set it, [then] why can't the government come along and put controls in place?

Pjesky: Well, I mean, at the gas station in some trivial sense that's true, right? The gas station has a board, all right? It used to be physical numbers. Now it's usually some sort of digital lights up there. And there's somebody who works for the gas station that types that in. So, if the price of gas is, you know, $2.999, all right, there is a time when somebody who is an employee of the gas station will type that in. But that's not the same as setting the price. And this is a very, very subtle point, a very, very subtle difference. The market forces that exist in the world basically dictate to the gas station what they can charge for that. So, if they want to mark the price at $5.00, [then] that wouldn't be good for them, because they would sell a whole lot less. And I think it's obvious to anybody listening why they wouldn't mark the price at $2.00. If the if the emergent price is $3.00, [then] they're not going to mark the price under ordinary circumstances at $2.00, because why would they? You know? Why would they? So, they're looking for the price that will maximize their profits. So, if they do mark the price higher or lower, [then] the amount that they will sell might go up or down; and based on the cost of gas, you know, that they have to buy, their profits would be lower if they mark the price higher or lower. So, that that profit maximizing price for, you know, any kind of firm that sells stuff --- it's somewhat dictated to them by the overall marketplace. They can't --- or very, very rarely do they --- have much real economic power to change the price one way or another. And from a consumer standpoint, it's easy to understand. You know, we're as consumers --- we're used to having to take it or leave price. So, if the price of gas is $3.00, [then] that's what I have to pay if I want gas. I can’t really negotiate that in any normal sense that we think of negotiating. So, the market sets this price of $3.00 for gas [and] $4.00 for a gallon of milk or whatever. And when price controls come into the play is it somehow, or sometimes the political process, doesn't like that price, all right? So, if we think that the price of gas is at that $3.00 --- if we think that is too high for whatever reason, [then] the political process can always step in and override that price and tell sellers of gas you can't sell gas for more than $2.00 a gallon, O.K.? That's what we call a price control, O.K.? So, the government can make it illegal for the price to go to $3.00. So, if market forces dictate a price of gas of $3.00, and the political process says: nope, that's too high, can't go over $2.00, then the price of gas is going to be $2.00 period, O.K.? Unless somebody breaks the law in some way and we won't consider that in this discussion. Although, it might happen under some really, really strange (or not so strange) circumstances. We might expect a lot of law breaking in that case. But let's just assume everybody follows the rule --- the price of gas is $2.00. Now in that isolated case, where the price according to market forces should be $3.00, but yet is set by the political process at $2.00, [then] that has some very, very predictable and consistent results when that happens. So, if the price of gas drops to $2.00, consumers are gonna respond in very, very predictable ways, all right? $2.00 dollar gas is a much better deal than $3.00 gas. I’m going to drive more at $2.00 than I would at $3.00. And, you know, we see this in our behavior as the price of gas has increased over the past, you know, couple of years or so. It's --- there's been a long, sort of, trend upward in the price of gas. You know, people might be having conversations about how they can economize on gas more. So, I know in our household we've been, you know, talking about, you know, consciously how do we plan our trips better so that we do not drive as much; because $3.00 gas is a much more expensive good than $2.00 gas. So, if the price of gas is $2.00, we don't have to worry about spending money on gas as much, as we do as much as we do at $3.00. So, [at] $2.00, people are going to want more gas, basically. They're going to demand a higher quantity of gasoline at $2.00 than they will at $3.00 from the producers perspective. They're in the opposite situation, all right? So, being able to sell gas at $2.00 is not near the deal that being able to sell gas at $3.00 is. So, the same kinds of conversations that households are having, producers are going to be having the opposite conversation. So, you know, they're going to be saying: well, you know, we can't, you know. Selling gas at $2.00 isn't as desirable for us as selling gas at $3.00. So, what other kind of activities can we do to sell something else other than gas? So, the quantity of gas that people who are involved in selling gas --- whether it's the people that pump oil out of the ground, all the way to the retail stores that sell the gas directly to consumers and everywhere in between --- they're going to be having conversations about how to, you know, perhaps do something else with their resources. So, they're going to be trying to cut back on the amount of gas that they sell, because each gallon is much less profitable if costs and technology and that sort of thing are constant. So, if you really think, you know, hard about that, [then] you'll realize very, very quickly that there's a problem, O.K.? So if we started at a point where more or less consumers desire to buy a certain quantity of gas is the same as producers desire to sell a certain quantity of gas, and we move away from that, all right --- and the price is forced down by the political process in such a way that consumers want more and producers want to sell less --- then there's going to be a gap that forms between the amount that consumers want to buy and the amount that producers want to sell. So, this gap has a name. It's called a shortage, O.K.? So, if you've got a higher quantity demanded than the quantity supplied, you know, [then] straight out of the textbook, straight out of econ 101, you're going to have a shortage which has predictable effects. You're going to have waiting in line. You're going to have sellers, you know, doing things one way or another to basically ration the gas. Then the marketplace itself is going to try to ration the gas, because now there's not enough, all right? At prevailing prices more people want to buy than want to sell, O.K.?  So, there's not going to be enough to go around. So, this ordered circumstance that we're used to at the gas station will break down; because, you know, for my entire life, you know, buying gas has been what I would consider to be a very, very ordered experience. If I want gas, [then] I just go to the pump. I almost never have to wait in line. I just go to the pump. I drive up, fill my car up, pay, and leave. It's absolutely no problem. In my entire life, I have never been able. You know, I’ve been driving for, you know, 30 years or a little bit longer than 30 years. In my entire life I have never had a problem buying gas at whatever price was on the board. So, if I had $30.00, and the price of gas was $3.00 a gallon, I would have absolutely no problem whatsoever in buying 10 gallons of gas and putting it in my car. And it's no concern whatsoever. But in the 70s it wasn't that way. In the 70s the government decided the price of gas was too high. So they put price controls on the price of gas, all right? So, I don’t know. I’ve confessed I don’t know what the numbers were back then. But to make them analogous to today's numbers, using what I said just a few minutes ago, the market price of gas is $3.00. The government says: no, that's too high. It should be $2.00 and we'll make it illegal to sell it over that price. You wouldn't have the order to experience buying gas than you do now. There would be lines, all right, because there would be less gas coming in from tanker trucks. And there would be, to a certain extent, more people wanting more gas. So, it would be an unusual circumstance where you just drive up to the pump, fill up your tank with cheap $2.00 gas, and leave, all right? You might wait in line. Sellers might have to do something like, well, you can only buy five gallons at a time, [and] all kinds of things like that would happen now. And we know that those kinds of things would happen now, both because our economic theory strongly suggests that, and we have a history of experience that shows us that those kinds of things would happen. This conversation is important right now because the political process is starting to seriously talk about price controls for the first time since the 70s, all right? There's been very little talk of introducing price controls into the marketplace since they failed in the 70s. They've disappeared from public discourse. But now with the advent of this new inflation that's coming over the past year or so, politicians and interest groups are starting to clamor for price controls again. So, that's why this this  discussion, and this question that was asked by University of Chicago’s economist becomes really, really relevant and really, really important again.

Stitzel: So, it's being asked because inflation is coming back around. And you've laid out this defense. You said econ theory is strong, and we have, you know, observed historical evidence that fits our models and our predictions. How do we have only 25 out of 43 economists disagree? Like, if you're right, these are good economists, right? These are not idiots. These are smart men and women here. Why not 43 out of 43? Why not a home run there?

Pjesky: Well, you know, I might --- when you actually look at the question, if I would have been asked this question, [then] I --- probably would have had the knee jerk reaction disagree. Price controls won't control and won't reduce inflation over the next 12 months. But if I would have read this question really, really carefully and thought about it for, you know, a few minutes, [then] I, you know, may have answered it --- I don’t know if I would have been the only one in the poll to strongly agree, but, I think, I would have ended up --- [as] agreeing with this statement; because what you have here is a nuanced difference between how we measure inflation, all right, whether or not it's desirable to reduce inflation in certain ways. And also, this seems to be completely separate about whether or not it would be advantageous, all right, to reduce (to implement) price controls at, all right? So, the economists agreed --- all of them, all right? Not one person in this survey from, you know, schools like MIT, Stanford Berkeley, Harvard, you know, [and] places like that --- not a single economist in their written answer said that price controls were a good idea, all right? So, it was perfect in that sense. Zero out of the 43  economists gave the wrong answer, which is very, very clear. Anybody that's an economist is that price controls due to economic theory, and due to the experience that we've had with them, are almost certainly a horrible, horrible idea, O.K.? But that really wasn't what they were asked. They were asked whether or not measured inflation could be reduced over the next 12 months with the advent of price controls. And the answer to that is almost certainly yes, of course. I mean, it's almost a --- when again, you think about it for a minute or so, it becomes a --- trivial thing, all right? If you stop prices from going up in many markets, of course, based on the way we measure inflation, [then] you're going to bring the inflation down. So, think about how we measure inflation. Our listeners can, if they don't know, you know, can be told now that, you know, think about how we measure inflation. What the government economists do --- various government agencies, or anybody who measures inflation --- is going to look at price changes of various goods, all right? So, what --- and there's all different contexts in which this this is done, but just consider consumer prices only. So what the economists in the government --- and who is it? The Fed that does this? Is it the BEA or the Bureau of Labor Statistics?

Stitzel: Yeah. There's a --- the BEA does it. And then, I forgot there's another.

Pjesky: Yeah. Well, I mean they all would have the same process, and they all work together. You know, they would all work together and would be pulling from the same data on this. But the economists that do that are going to look at, you know, 80 or so, or a array of goods that consumers typically buy. So you've got gas, milk, movie tickets, clothing, transportation, education, [and] health care. It's like, you know, the whole gambit of what consumers buy. And in order to come up with the inflation rate that's reported on the local news every couple of week (and probably more often now), they're going to look at the prices of those goods this year, and compare it with the prices of those goods last year, all right? And they're going to calculate the percentage change in those prices. And they're very, very sophisticated about it, all right? They understand that a change in the price of cars is going to have a bigger impact on a consumer's budget than a change in the price of a gallon of milk; or something like that because cars are much more expensive than milk. So, they take all of those things that you might be thinking: well what about this, what about this? They take those things into consideration, all right? They take into consideration changes in quantity of goods. They take into consideration the fact that as the prices of goods change, consumers might buy more of something and less than something else. They may not consider these things very well, but they do their best. Legitimately they do their best to try to control for all these things. And they look at how much the market basket of goods that consumers are buying this year, all right, compared to the market basket of goods that consumers were buying last year, all right? And once they've done that, [then] it's an easy calculation to figure out. Well, it's 5% higher this year than last year --- or 2%, or 7% higher than it was last year --- and that's the reported inflation rate, all right? That's the reported inflation rate. Well, if you have goods in this basket of goods that can't go up in price, because the government is saying it's illegal to increase the price of gas or increase the price of milk for instance, then obviously based on how inflation is calculated, [then] those price controls are going to suppress inflation, all right? And so, if we're looking, especially if we're looking, over a one-year horizon, [then] of course price controls can control measured inflation. You know, the way we measure it doesn't mean that it's a good idea. It doesn't mean that the adverse effects in the economy that make inflation happen, and make inflation devastating, it doesn't take those things away, all right? It doesn't take those things away. But the way we measure inflation would be extremely susceptible to manipulation by price controls. This might be why the government would do them, all right, because inflation is very bad. Survey after survey report, that everybody across the political spectrum across all age demographic groups, you know, inflation is pretty much uniformly and resoundingly hated by people who might vote. And so, you're not gonna want your voters hearing on the news every day inflation is going up. So, if you're a politician, [and] if you're interested in being re-elected, [then] you're going to want to do anything that you can to stop the measured increase in inflation. And price controls almost certainly would do that, all right? Price controls almost certainly would do that. Because if the government came out and said: you know, whatever the price of everything is today, [then] that's what the price is going to be for those things (for all of those things) for the next 12 months. Well, you know, inflation would be zero at that point over the next 12 months, because the price of everything that you would buy next year is going to be the same as the price of everything that you're buying now; because the government has made price increases of all of those things illegal, all right? So, you might have some price decreases, but, you know, we would expect that to really, really bring down the inflation rate, the way that we measure it.

Stitzel: So there's a lot to unpack there. And I think the first thing is because of this political pressure idea that you've talked about, you know, I think is straightforward, right? And that this might be a thing that an administration would want to do in order to try to enhance its odds and re-election, because people do hate inflation. I think you've nailed that on the head. Do people not hate price controls? I mean, if the alternative is price controls, and I’m a politician. I put in price controls, and then, there are long lines at the gas station. Does that hurt my chance of getting re-elected?

Pjesky: Well, I mean, I think that's a good question. I think a lot of people would hate price controls. But the problem is when inflation is happening, [then] everybody can see the --- fact that, you know, the reason that people hate inflation is because you can go to the store over weeks and months when inflation is happening, and you can see the --- price of all of the stuff that you're putting in your grocery cart going up. So, people associate inflation with that, all right? That might not be exactly inflation, but the reason that people hate inflation as much is because they associate those things with inflation. You hear non-economists talk about increases in the price of things like gas and milk. They think those things are inflationary. They may or may not be, all right, but that doesn't matter. That's inflation becomes the scapegoat a lot of times. And especially when the news and other reports that people are getting are saying that wow, you know, the government agencies that measure inflation, you know, inflation is 7.5%. Inflation is 6.9%, which are some of the things that, you know, so those are some of the monthly inflation rates that we've, you know, year-to-year monthly inflation rates that we've seen reported over the past couple of months. So, people see the prices of goods and services going up --- the things that they put in their cart, the gas they put in their car, [and] their utility bills perhaps. All of these things they have this sense that these things are going up. They're being told that inflation is on the rise. And so, they associate those price increases with inflation. And if we do have a general inflation, they're going to be exactly right, all right? Because that, you know, the prices of individual goods are still being set by individual markets (supply and demand in individual markets). But what inflation is going to do --- it's going to do the effect that inflation is going to have when it happens --- is it's going to have a, sort of, a uniform push on the nominal prices that we pay for everything, all right? So, people hate inflation because that is the single word, you know, boogie man (for lack of better term). That's the single word, single concept boogeyman that explains why they're having a more difficult time meeting ends meet (having ends meet, sorry about that) every month. And so, when a politician comes around and says: well, we're gonna stop gas price increases. So, you know, the price of gas is $3.00. We don't think that's a fair price. We're going to make the price of gas $2.00. And you're not going to pay more than that. So, it's going to be illegal. The gas station or the oil industry or whatever is going to get in trouble if you end up with a price of a gallon of gas more than $2.00 or whatever it would be set. The same thing might be true for milk or something like that, you know, other basic staple items that people buy when their prices increase, [then] everybody notices. So, you know, you're gonna pay $4.00 for a price of milk. We don't think that's fair price. We think $3.00 is all you're going to pay. So, there could be a lot of political support for those kinds of things from a really, really broad cross-section of people; because the only thing that they will realize is that the pressure off of their budgets looks like it's going to be less than it was before. Because, you know, help is coming from the government. The government has an incentive to do this, because again, it helps them get reelected [and] helps them look good; because they are the institution that's going to come in and, sort of, you know, stop these price increases.

Stitzel: There's a couple things that I thought about there --- one of which is, you know, another way to say some of the things that you've talked about when it comes to price controls --- is, like, one of these quintessential ideas in econ about unintended consequences. We put these policies in place and then people react and we didn't get it right. I think the idea of a price control is often, well, there's whatever 100 billion gallons every day being sold. And so, if we just reduce the price to $2.00, then that will save the American public $100 billion dollars a day, right?

Pjesky: Hmm mmm.

Stitzel: And then, ignoring that people react to those policies, which is what you laid out. It's just another way to say what you said. And there's with the problem with policy from a political perspective oftentimes is [that] we conceptualize the way a policy will work, rather than the way it's actually going to work. And so, you just think [that] oh, if the prices of things are held down, then I’ll just go to the store and get my milk, forgetting that people will react to the policy. And that's what actually matters. And when I go to the store, there won't be any milk for me to get. But it also occurs to me there's, kind of, another more sophisticated, sort of, public choice idea here might be. I might think as a politician: if this inflation --- if it isn't going to be curbed, it's going to cost me the election. So, I have to try something, right, and arguing I’m not going to do anything, because the alternative is worse than what we have now will not save my reelection chances almost assuredly. But if I try the price controls, [then] I at least have some chance potentially getting re-elected. I’m not sure inflation's to the point that the current administration would be to the point thinking that's their only recourse, which is probably why we haven't seen price controls yet. What's your take on that as, sort of, a “do-something-itis,” or a, you know, “hail Mary” kind of thing?

Pjesky: Well, I mean, that's something that generally the public wants us to. So, you know, the notion of well, you know, we have this calamity going on. No matter what the calamity is, [then] the last thing that we want to see from our government is: well, I don’t think that we're going to do anything about it. So, there is a bias towards action. I think in our political process. I’m not going to judge that one way or another. I’m just going to say in the context of this podcast --- it's there. And it makes the actual implementation of price controls a lot more likely than it would if there wasn't that bias.

Stitzel: There's also just probably a political memory, you know. I’ve never observed a price control “in the wild” as it were. And you were saying you've always bought gas at market prices. You never, but, you know, my folks remember this time period. They were fairly young when this happened. Probably may not even have been driving, you know. But, you know, if you ask people that from my grandparents generation, they might be more against this. They might actually remember that. But it might be difficult for people that are in the voting age, that are you or my age. They might say: well, I don’t know, let's try price controls. How bad can it be? Yeah. So, some of these things may come around on a cycle, I guess is my point.

Pjesky: Well they might. And, you know, the lessons can be forgotten. I think there's absolutely no doubt that during the 70s we learned the lesson that price controls cause shortages. So, I think we learned that lesson. That's why price controls haven't been in the national dialogue for, you know, almost two generations now.

Stitzel: So, I want to go back to the measured inflation versus inflation, which I think is key to what we're talking about here. But I’ve been thinking about this on and off over the week. And it just now occurred to me based on when you were talking about the inflation, right? Because inflation is extremely difficult to measure, right? It's an idea that is relatively well grounded. We have this idea that what's happening with the money supply can push all of prices (the general price level) around. And we even --- maybe you disagree with this we even --- have a good idea of how that might work. But when it comes to actually measuring it in practice --- then you tell me if you disagree with this too --- I think it's just a mess. I mean, it's just a disaster in terms of how we measure it. And it does give that mechanistic impression to inflation. And somebody says: well look, cars went up, so it's got to be what's causing inflation to go up. Or that is inflation, which like you said earlier may or may not be true. But it occurs to me that there's no reason I react to a price as a consumer. And that price includes all these other types of transaction costs. And that might actually change my pattern of consumption, which has implications for measured inflation. Doesn't have implications for actual inflation. That has serious implications potentially for measured inflation. This idea is a little bit half-baked, but go with me on this. If you're thinking about: O.K., gas prices do this, and I then begin to pay less price but higher cost, you know, [then] I don’t know about you, but I really hate it if I do have to sit in line at a gas station. I can only remember one time in recent memory that I did that is just traveling on a holiday, just a classic, right? And it's like --- what a waste of my time. I could be on a road getting where I’m going. This would be doubly bad if it were involved in my commute, rather than my travel plans, where I’ve got that big. So, I make other kinds of choices, then it might not limit inflation as much as we think, right? Because unless you've got price controls across the board, which I think is politically infeasible, price controls across the board would just be outright communism, I think. We might just see different things, right, push away from gas because of the price control, right? The demand for it goes up, but, like, our actual effective consumption of that, and then combine the budget constraint effect, and also not being pushed into some other. And now, that market is facing increase in demand; because I’m substituting, right, income and substitution effects. I’m being substituted away from that because of the price control. This is not inflation. This is just basic market forces. But it might look like measured inflation. So, it might --- maybe there's a really sophisticated, and it might --- be completely a matter of whether you'd measure it or not. There might be a really sophisticated argument though. And say, right, you're going to get price controls. It's going to mechanistically hold down the prices and limit inflation the way that we measure it --- not actual inflation, but the way that we measure it to be held down. And I’m proposing --- or maybe it won't --- it will just manifest in other markets. And there's, you know, infinite number of complexity there. So, I don’t pretend to have an idea of what that would look like. And almost certainly wouldn't fully offset it. What's your take on that?

Pjesky: Well, I mean, it's a lot of things to respond there. I mean, first of all, the way we measure inflation is a mess in some respects. We're not measuring inflation. We're measuring what we think the evidence of inflation would be. So, inflation relates to the overall money supply versus the presence of transaction for goods and services. So, holding everything else constant, when we measure inflation what we're trying to measure --- sort of the population parameter for lack of a better word --- would be this increase in the money supply relative to the number of transactions that are taking place (the value of the transactions taking place). So, when, you know, you say that the measure of inflation is a mess --- the reason for that is that we're not really measuring inflation. We're measuring what we think is the best proxy for inflation that we can observe, you know, directly. And I agree with everything else that you said as well. So, especially in the presence of price controls, the sophisticated measures that we would use to measure actual inflation would break down really, really quickly. So, the results of this poll saying that if we wanted to reduce inflation, we can have price controls; and inflation as we measure it would go down. Well, that's almost certainly true. You're gonna quit capturing the things that people buy. You're no longer going to be able to measure the cost or the price that people are paying to buy something. So, if you drive up to a gas pump and the gas is $2.00, all right, and you have to wait in line 15 minutes to get gas, that 15 minutes of your time is not going to be in the inflation measure, all right? So, we're gonna very, very systematically understate whatever inflation that we are measuring. Furthermore, all right, if there is no gas for you to buy anymore, then that's not going to be captured either, all right? So, if you start walking or biking or reducing your trips --- because you cannot make, you know, because you can't fill your gas tank up, [and] if you're limited to five gallons of time and you have to make more trips to the gas station those extra trips --- [those] are not going to be captured in the inflation calculation. So, the reality of the situation is this --- there is some force out there, all right? And I think you have other podcasts that talk about this really, really extensively. There are forces out there that are causing inflation. Those forces, as they cause inflation or causing destruction in the economy, you're not going to be able to change the way that you measure inflation and make those destructive forces go away. You can't just assume that while, you know, because measured inflation has gone down, then the destructive nature of whatever forces was causing the inflation in the first place has now gone away, all right? So, you know, in the extreme sense of what you're, you know, saying is that there's no way that this method that we use to calculate inflation --- which is namely we measure the prices of goods through time, and make appropriate adjustments, and we compare the basket of goods from one year to the next --- [as to] come up with the inflation rate. Well, if markets are functioning normally, [then] that's probably a pretty good way of doing it. And so, under normal circumstances if the, you know, rate of inflation is measured to be like 1% or 2.1% or whatever from year to year --- and nothing really, really particularly interesting is going on in this context --- and I'd be pretty confident that that's really what the inflation rate is from year to year. But, if you have a circumstance where inflation has gotten so bad that the government has come in and artificially capped prices, I think the method that you're using to measure inflation to begin with is no longer valid, all right? That process is going to drop out a number that's lower than it was, all right? But that doesn't mean that that's an accurate representation of what prices actually on average, on whole, are actually doing. So, if you want to go out and buy a good that no longer exists because of shortages, then as you are very, very well known for saying Dr. Stitzel the price for that good is infinite, all right? So, how is that going to enter into the government's calculation of inflation? It can't. It can’t. So, if I want gas today and the station is out of gas today, then the price of gas for me today is infinity, O.K.? There is no way mathematically or even economically to incorporate that into the methodology of calculating inflation that economists use today in absence of price controls. So, the method that we use for measuring inflation only works for its intended purposes if prices are free to go up or down. If you artificially limit prices from going up or down, then the entire idea behind the methods of measuring those price changes is no longer valid, all right? So, if you continue to use those methods, as most of the economists in this survey correctly I think answered, [then] of course using those methods inflation is going to go down. But that's not going to make the world better in any sense of the word.

Pjesky: So, I thought the smartest thing you were going to say today is to introduce this idea that price controls as deployed in the 70s could reduce inflation; [whereas] that you would make this point of measured inflation. But, I think, if they do this survey tomorrow --- and again, and for whatever reason they accidentally include me on the survey --- I might write an answer that said something like effective price controls might reduce measured inflation; except that they would actually destroy our ability to even measure inflation, and it would introduce these other hosts of problems that many of these economists correctly identify (rationing, and shortages, and all these things that you mentioned). So, suppose instead of accidentally sending it to me, [that] they accidentally send it to you (which they should get your opinion on these, you know). You should just be included on this all the time. But you don't work at Harvard or Stanford. So, tomorrow you get this, and you get the exact same question; because I don’t know how often they do these, but I know some of the same questions get included in there. They wouldn't do it week to week, but they might do it over some time period. Suppose it's still a question when it comes around again. You get this, and it asks you: price controls that's deployed in the 70s can successfully reduce inflation over the next 12 months? Agree or disagree? What are you writing?

Pjesky: Well, I mean, I’m going to steal some of the responses that were actually given; because I think, you know, I would like to think that I would come up with something as intelligent as spiffy as some of these individuals did. So, you know, David Otto from MIT? said price controls can of course control prices. Duh! Right? But they're a terrible idea! That's what he says. and then Darrell Duffie from Stanford said barring illegal price setting --- this seems to be mechanically true. A more interesting question is whether price controls are a good idea, all right? And also, you know, another effect that we forget from this from the 70s is that, you know, it's pretty obvious that political pressures will mean that (and economic pressures too) you can't price controls forever. And so, once you release the price controls --- what we saw in the 70s, all right, and I think our theory would almost predict this as well, but our empirical experience with this our actual observed result of price controls is that when they were lifted --- we got inflation really bad, right? So, it's, you know, you put the lid on the, you know, pressure. And then sometimes you got to take the lid off. And when you take the lid off, you're gonna, you know, at the very best you're just delaying whatever problem that you're trying to stop. So, even on its own merits, price controls are a terrible idea; because the best that you could hope is that you're just delaying what is inevitably going to happen.

Stitzel: So, one of the questions I wanted to ask you at some point --- and I think this is an excellent transition to that --- is one of the MIT economists said: well, you might could do this over 12 months, but it's going to have significant costs. And this is, kind of, what you're saying; but I think there's some nuance there too. One is eventually got to raise the price controls. This is a really insightful comment to add to this discussion. But even if we left them in long-term, could we control inflation? I think that's what this individual is getting at is over 12 months. Could you do it? Maybe. But what if you left price controls in for 24 months? What's your thought on that?

Pjesky: Well eventually if you if you left price controls in place for a long amount of time --- and I don’t know what a long amount of time is in this case. I don’t know whether it's more or less than 12 months. But eventually, you're going to have an unraveling of the coordination that prices give us in the first place. So, prices are incentives and signals that tell us what to do, that tell us what we need to do, and to tell us what is possible to do. So, if the price of gas increases due to market forces, then that is a signal from the marketplace to producers that they need to find more gas, find better ways to make gas, or find alternatives to gas. If the price of gas increases, that is a signal to consumers telling them that you need to make less [gas]. You need to use less gas. You need to buy less gas. You need to find alternatives to gas. So, you need to get a more fuel efficient car --- whether it's an electric or a hybrid or just a lighter one. You need to move closer to your work if you can. You need a bike if you can. You need to consolidate your trips if you can. And so, prices are signals to these groups --- consumers and producers to actually do these things. Also, prices are incentives. So, you know, prices are not just suggestions [of] use less gas, find more gas, or, you know, find alternatives to gas or whatever. Prices also provide the actual incentives to do that. So, prices just aren't a statement. We need more gas, all right? Because anybody could say that, all right? But what are you going to do about it? Well if gas becomes more expensive to me as a consumer, I’m thinking about how to conserve it. I’m thinking about how to economize on gas through a variety of means. If gas becomes more valuable and goes up in price, then that provides incentives to producers to find alternatives, basically to gas. So, you know, if the price of gas is a $1.00, we're not going to have electric cars. If prices, you know, if the price of gas is a $1.00, for instance, then, you know, my next vehicle is going to be a gas guzzler. But if the price of gas is $5.00, then, you know, I’ll look into electric cars. I will look into more fuel efficient cars. I will look into moving closer to the office so that I can walk or bike to work. You know, I will do activities that require less gas over time. So, the price is both the signal and incentive for me to do that. And if market forces are pushing the price of gas up, that is tremendous evidence that real conditions in the world, that real conditions in the economy, are basically making the case that that needs to happen. So, with long-term price controls, you lose that language of the economy, O.K.? Long-term price controls would basically be the equivalent of preventing people from talking. So, imagine how your relationships with would be if you couldn't talk or couldn't communicate at all, right? So, there was no communication all. No hand signals. No typing. No writing. No talking at all. You would not really have very productive relationships with anybody if you couldn't communicate with them in other means. Prices are the means of communication in the economy. And if you take away price's ability to do that communication, you're just going to have an utter unraveling of the way that we live our lives. I don’t mean to be melodramatic about this, but in the extreme sense that is what would eventually happen if prices are not allowed to move up and down. We would have absolutely no idea what to produce [or] how to produce it. We would have no idea about who should get things that are scarce, and no idea about what areas we should focus on conservation, [or] what areas are less important for conservation. Just all of these bad effects would happen.

Stitzel: So, I want to go back to this idea about making choices about your consumption patterns, and specifically related to cars and gasoline, because I think it's very instructive. You said if the market price is a $1.00, or the market price is $5.00, you'll make different choices in your vehicles. This is just --- it's so obvious it borders on the trivial, right? It's like, I’m not driving a Hummer every day if I gotta pay $5.00 per gallon. But I very well might pick that vehicle if I’m only having to pay a $1.00 per gallon. And we know those prices are going to move around. There's going to be a lot of forces on them. And what's interesting about that is what happens if there's an extended price control in place? You can't stop the analysis that well, I’ll just pick a bigger vehicle; because I’m I would be doing that off of this price signal that isn't capturing all of my costs. Now insert all the reasons you said --- price controls are bad ideas. Rationing and shortages would be two very interesting components of my decision about what vehicle I choose. Can I even realistically pick a large vehicle if I can only buy five gallons?

Pjesky: Yeah. I mean, exactly. And that wouldn’t, you know, this wouldn't be as one side as I, you know, said that it was.

Stitzel: So, this is not a criticism of your point. I’m just thinking of the dynamics.

Pjesky: But I mean it would it would have all sorts of unforeseeable and unknowable effects on people's decisions. So, under normal circumstances, if the market price of gas was going to be a $1.00, and I knew that it was going to be a $1.00 for the next years, all right, my next vehicle might be a Hummer or something like that. Something that's just, you know, [that] I wouldn't take the price of gas into consideration, O.K.? But yet, on the other hand, if the price of gas were going to be artificially held at $1.00, and that was going to create perpetual shortages for the next 10 years, [then] that would cause me to make decisions that I also otherwise wouldn't make, all right? So, you know, I might have a really comfortable bike, you know. I might spend money on a really comfortable bike to ride, because I know I’m not going to be able to get gas. So, instead of buying a car at all, I’m going to buy a bike, you know.

Stitzel: It might end up in a really weird equilibrium.

Pjesky: It would be a very, very strange equilibrium.

Stitzel: I can buy a big vehicle that has a big gas tank. And so, when I can fill up, [then] I fill up and I drive it around. And then, when I’m out of gas, I end up riding the bike because I can’t get gas back in my view.

Pjesky: Yeah. I mean, that might be another.

Stitzel: I’ve made this, sort of, absurd purpose.

Pjesky: You know.

Stitzel: It highlights that.

Pjesky: It's not absurd, because we don't know how the rationing would take place, all right? So, you know, it might be the case that the market for gas --- whether it's government fiat, or whether it's just, sort, of the new normal, the new, you know, how we behave towards one another, the new morality for, you know, lack of a better word --- is that we only get five gallons at a time, O.K.? But if that didn't materialize --- and when you were lucky enough to get gas, then if you could buy all you wanted for $1.00 --- then yes the big vehicle would be the choice, right? You would want, like, a pickup with, like, a  300 gallon gas tank on the back. And when you were lucky enough to get first in line to get the gas, [then] you take all of it. You take 300 gallons. You pay just $300 for it. And you could drive your big expensive, you know, gas guzzler a long time before you needed another one. Of course, everybody else would be left out because you're taking it all; because, you know, remember not as much of this is going to be produced. So, that's a fact that, I think, most people miss. It's really, really good for us when the price of gas goes down, O.K.? So, that makes the government coming in and saying: well, you can only charge a $1.00 or $2.00 for gas. I mean, that’s very attractive for us at first pass. But, you know, imagine if the government came in and said: well, your wages are too high, right? So, you make $50,000, but we think a fair wage for you is $30,000. So, we're gonna put a cap on your wages, and you can only earn $30,000 doing this. Well, you're gonna change, right? You might even quit your job. You're certainly gonna start looking for something else to do, especially if not all wages are capped, right? So, you know, if the government came in and said that: well good grief, you know, $20,000 a year is --- that's enough money for any college professor, [then] I'd be very, very quickly looking for something else to do as would you. Everybody who teaches here at our university and probably everywhere would want to go do something else. So, the equilibriums that we would end up with here are --- they're unknowable. We don't know what the effects would be, but they would be compared to the baseline where prices are free to move. It's going to be worse on average for everyone. You know, there will be winners and losers; but on average, the effect is going to be negative.

Stitzel: And it might be the case that the individuals with more financial resources can more readily avoid those costs, right? Because your instinct is [that] oh, [the] price went down. That's going to be good for poorer individuals. Well, not if the answers to a price control are moving closer to your work or are swapping out vehicles that give you a better chance (whatever that looks like --- bigger, smaller, more gas efficient, or less gasification). Whatever those are --- that's going to be more readily done by the financially better off. And then now, add shortages, and rationing. And, you know, one of the features of the more financially well-off might be more flexible schedules for example. Allow them to more readily avoid the lines and deal with shortages and this, you know. So, I think the likely outcome in terms of inequality could be pretty striking. Do you have some comments?

Pjesky: Yeah. Well, I mean, the one thing that I would know about this discussion is that gas at $4.00 is better than no gas at all for everyone. It doesn't make any sense whether you're poor or rich or anywhere in between, having the option to buy gas at $4.00 is better than an empty gas station for, you know, anybody. So, the one thing that we know is that these shortages means that there's less gas in the world, all right? So, that means that there's less gas to distribute to everyone. So, if you want to get, sort of, really into [it] --- you know, jumping ahead two or three steps and you're thinking, you know --- my guess is that in a system of rationing, my guess is that rich folks would win that game. So, you know, if you're somebody of significant means --- if you're whatever it means to be rich or wealthy and you know that you're in a situation where you cannot get gas whenever you want it to, then you are also going to be in a position to have the economic power to --- [you will] make sure that you are in the front of the line using whatever methods that you want to use. Now that I don’t want to say it's speculative, because I don’t think that's speculation. I think that's right. But that's, you know, two or three hops down the road from our thinking about this. So, you know, people when in discussions about inequality --- sort of the root of those discussions is that rich people have an advantage over poorer people because they have more money to buy stuff. But if we distributed goods in ways other than just paying money for

Them, my guess is that rich people would have an advantage over poor people in non-money aspects as well. Now that that might not be true, all right? That might not be true. But I think in inequality discussions, at least in this narrow context, the discussions about inequality are much broader than this point, I know. But in this context, I think that's a fact that's, kind of, lost on a lot of people when they talk about inequality.

Stitzel: It's really interesting that you say that. Because one of the things that happens, and this goes back to that idea of you sometimes there's if you don't have access to something's not on the shelf, [then] there's no money value that can buy that. What's really interesting about wealthy people is they just have connections and situations that we don't have. Even if I saved my money, and I had whatever dollar figure it was, there's no amount of money that's going to allow me to be sitting in the suite next to, you know, (pick your famous favorite famous person) Lebron James at the Super Bowl. And yet, he's, you know, in there with different kind of connections. And there are people -- I don’t know who it was, but people --- in there with him that have connections that's related to their financial wherewithal, but is not fundamentally their financial wherewithal, right?

Pjesky: Yeah, I mean, people have these implicit, you know, sort of, advantages as well that may or may not be correlated with their income or wealth, but often they are. And so, you know, if the playing field is uneven, [then] it is very, very difficult to level the playing field. It's --- this is a completely different topic, but it's the same thing as inflation. So, if inflation is happening --- being caused by whatever forces cause inflation --- and if that is damaging to the economy into people's lives (which we know it is), [then] those things are incredibly difficult to stop with some, sort of, fiat, with some, sort of, just, you know, proclamation from on high. Things aren't like this anymore now. They're like this, which is what a price control is, all right? They're just changing the cost of a transaction, just by, you know, government order in the case that we're talking about. So, you know, whatever damage was being caused by the high prices in the first place, the fundamental forces causing that are still in place. So, the action hasn't done anything to treat the underlying condition in the economy at all.

Stitzel: So, this I think is a good place to bring this in for a landing, kind of, give us this bottom line. And to do that, I kind of want you to give listeners a sense of once we take into account the points that you're making, you know, what are the economists that are being surveyed here saying? And then, kind of, give us the bottom line --- the bow on top of it.

Pjesky: Oh well. It's just really, really easy. I’ll use that. I’ll  borrow one of the statements from one of the economists Austan Goolsbee from the University of Chicago. I mean, his written response to this was: just stop seriously. And that that's the exact quote here. That's what professor Goolsbee said is: just stop seriously. So, you know, just say no to price increases. It's there. It's a price control. Sorry. Just say no to price controls. They're just not a good idea, and things will not work out how the political process wants them to.

Stitzel: My guest today has been Rex Pjesky. Rex, thanks for joining us on the EconBuff.

Pjesky: Thank you very much.

Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at www.econbuffpodcast.wixsite.com. You can contact us at econbuffpodcast@yahoo.com.