Monday, March 2, 2009

The Economics of Price Controls

The Law and Economics of Hoarding (pdf)

Before I start ranting about price controls, I feel the need to offer the following quote from the article.

If one has confidence in markets as a general matter, it is difficult to object to hoarding.

I strongly object! I have no confidence! What was the question again? Should I be allowed to hoard? Seriously? Oops. What I meant to say is that I have the utmost confidence in the markets. Never been stronger actually. Please ignore what's in my pantry. It's just that I eat more canned goods and rice than most it would seem. It's certainly not hoarding. Of that you can be sure!

Okay, now on to price controls.


However, when a market is not clearing for some reason, such as when there is a state-mandated price ceiling on the relevant commodity, a queue or some other form of non-price rationing inevitably develops. In such a market, suppliers of the good simply receive the subcompetitive cash price. Buyers of the good, on the other hand, pay the cash price but also incur an “effort” cost waiting in the queue. To defray some of this effort cost, buyers will elect to purchase larger quantities of the good in each transaction and, in the process, incur a “storage” cost in the time they hold the commodity prior to its consumption. The actual price that buyers “see” in a shortage economy is thus the cash price plus effort and storage costs. In other words, while the seller sees a subcompetitive price, the buyer in effect sees a higher price “as if” the market were clearing.

That section and what follows it is very thought provoking. It does a fantastic job explaining why state-mandated price controls cannot create the desired effect. It is the intent to remove costs, but in reality costs are actually added. It is not efficient to stand in line and people will factor that in. Hopefully we won't revisit the failed policies of the 1970s again. What are the odds of that though? Surely we've learned our lesson.

Accounting magic: Suspend one rule and watch banking woes disappear

"Suspending mark-to-market accounting could fix major problems at no cost," they wrote, later adding, "In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting."

Let's replace mark-to-market accounting with state-mandated prices. All houses are worth a billion dollars. That should instantly clear up all those bad loans. Problem solved. While we are at it let's fix the price of gasoline at 5 cents per gallon and the value of all stocks at $100,000 per share. Imagine how prosperous we would be!

It's amazing the problems we can solve at no cost if we simply ignore current prices. It is similarly amazing the problems we can solve at essentially no cost if we use monetary printing presses. It's certainly done wonders so far!


Buffett Addresses Mark-to-Market

Berkshire Hathaway chairman Warren Buffett said in his annual letter to shareholders that he endorses mark-to-market accounting, even though it helped produce the worst financial results for his company in the 44 years he has been running it.

6 comments:

Anonymous said...

They just need to throw more money at it, that's all. The Feds should send flowers to every mother in the world on Mother's Day. That would create a lot of jobs. Maybe $100 billion for Frito Lay and $200 billion for Budweiser and maybe $300 billion for...

Stagflationary Mark said...

VegasTaxiDriverDotCom,

I really like your plan!

Start with $100 billion.
Add $200 billion.
Add $300 billion.
And so on it would seem.

The beauty of it is that it is not based on exponentially increasing sums. It is based on linearly increasing sums, which is far more sustainable. Further, it takes a full 10 iterations before we even hit a trillion dollars. Genius!

You have inspired me to come up with a supplemental plan.

For each $100 billion your plan requires, we'll borrow $200 billion at a fixed 0% interest rate and make the payments interest only. That will leave us with a full $100 billion extra. We'll set that money aside for our grandchildren to use when they grow up! That way nobody has to be a loser.

Why hasn't anyone thought this up before? It's free prosperity at essentially no cost!

Anonymous said...

Mark, you previously mentioned not being easily bored. Well, this guy is calling you out. Sail the South Pacific, following Capt. Bligh's famous route, in an open air skiff.

http://www.bountyboat.com/

Be sure to check out the leader, Don's, bio:

"He then embarked on numeros Antarctic sailing Expeditions, including in 1995, living in a 2.4mtr X 3.6Mtr box for a year, together alone in Antarctica, with his wife Margie, chained to rocks at Cape Dennison, the site of Sir Douglass Mawson’s Hut and an area called the Home of the Blizzard."

Hopefully Don's big on sarcasm (in which case you two could get along fabulously), because irony seems totally lost on him.

Stagflationary Mark said...

AllanF,

I may not be easily bored, but I am easily tortured, lol.

Maybe I should list my basic minimum requirements.

Food, fresh water, air, and toilet paper would be greatly appreciated! I'd also like one book of my choosing per year if there's no tv, radio, or computer.

I added air on the off chance there is some sort of nearly fatal Apollo space mission reenactment you think I might be interested in. ;)

Anonymous said...

I kind of figured the TP thing would be a deal-breaker for you.

Stagflationary Mark said...

AllanF,

At the rate we're going, they might find 6 billion people willing to be crewmembers as an alternative to trying to survive the global economy! ;)