Presumptive Democratic Party presidential nominee Kamala Harris released her economic plan last week and it is a nightmare to say the least. It is also blatantly unconstitutional. Even so, some are heralding it as a fantastic plan. With the sad state of many parts of our educational system math skills are seriously lacking, to say nothing of understanding economics. We are going to tackle one part of this Marxist plan and explain it in a straightforward manner.
What are price controls?
Price controls exist when parties other than the producer and consumer determine the price for goods and services. The federal minimum wage is a price control. It is an artificial value placed on labor by the federal and state governments. The government is the worst entity to make these decisions. Government has minimal understanding of the specific dynamics of the marketplace. They also have the ability to coerce, fine and even imprison individuals or companies who fail to follow their dictates.
How do price controls affect the market?
We are going to look at this from three points of view: the producer, the consumer and the government. The government is not an equal actor in the market since they are the only participant with the aforementioned police power. The example we will use is something we all purchase and what Harris used in her misguided example – a loaf of bread.
Let’s say the federal government placed an arbitrary price limit for a loaf of bread of $3.
There are many types of bread in the supermarket. This is a result of consumer demand and producer innovation. Some loaves of bread cost more than $3. Some cost less. How does this price control affect the market?
Producers
Producers of bread that sell for more than $3 (due to the cost of ingredients, quality, nutritional value) will look at their options. Can they cut costs to get to the $3/loaf price? Do they decrease the quality of their bread to profitably sell at the government-imposed price? Do they develop a new bread line they can sell at or below $3/loaf? Do they scale down operations and decrease the amount of bread they produce to remain profitable at $3/loaf?
Maybe they do make changes and begin producing lower-quality bread or decrease production to sell at or below $3/loaf. The company will have fewer dollars to innovate, less incentive to produce new types of bread, less capital to grow and be able to employ fewer people.
Maybe they decide they cannot make the changes to the company or their product to meet the new arbitrary price for bread and close the business or move into other markets where there aren’t price controls (yet). Some supermarkets and small business bakeries do not have the ability to absorb these costs like a large corporation so, they are forced out of the marketplace.
Consumer
The consumer may have lower bread prices but they also have fewer breads to choose from. The bread that is available is likely at a lower quality and nutritional level. That bread may have more chemicals that replaced natural ingredients to reach the government set price. Maybe health issues result from this? The consumer is stuck with an inferior product.
That consumer may have been employed at a bakery that had to lay them off or close completely since they were unable to continue operating due to the government-imposed price of bread. This could add to the stress of the welfare system and cause an otherwise able-bodied person dependent on the government.
Perhaps that consumer is a farmer who grew the wheat to make the bread that is no longer produced. Maybe that consumer was a truck driver who transported the grain from the farm to the mill and the bread from the producer to the supermarket. That consumer could have been the owner of a local bakery that closed because it was no longer able to compete in the new government environment. That business no longer employs workers who were also consumers and no longer have the income to buy goods and services. This affects the ability of other businesses to operate or expand and employ people who are also consumers and so on.
Government
Government may look at these developments and say, “Gee! I wonder why this is happening? Maybe we should raise the price of bread to $6/loaf?”
The producers of the previous $6/loaf bread are happy because they are back in business. The small business looks at this and thinks, “It’s nice the government does this now but, I closed my business and cannot reopen it.” The corporations do not care. They have the size to scale operations up or down and decrease the quality of the bread to be profitable. The producers of bread they were selling at $3/loaf look at this and say, “Hey! The federal government says bread cannot cost more than $6/loaf. Other bread companies have moved their prices to $6/loaf. Let’s start selling our $3/loaf bread for $6!”
The consumer goes to the store and sees the bread they were willing to pay $6/loaf for is now available again. They are happy. They missed that loaf of bread. Other consumers walk down the bread aisle and see the bread they paid $3/loaf for last week is now $6/loaf. Did the bread change? It looks and tastes like the same $3/loaf bread. I cannot afford $6/loaf for bread and even if I could, this is $3/loaf bread and now the same bread is $6/loaf. The consumer also notices there are a fraction of the bread choices there were before the federal government-imposed price controls. This sucks!
Wage and price controls always fail and always do harm to the people and the country. The only entity that benefits is the government which increases their control of society.
In liberty,
Brett
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