by Rand Paul
Within a few years, widespread shortages were apparent. The result, as Niño reports, was “images of citizens waiting in lines to get basic goods—toilet paper, flour, milk” plastered across the Internet.1 A fundamental law of economics is that if government sets a price of a good below the market price there will be shortages and a thriving black market. Even in the United States, when we’ve experimented with price controls, shortages have arisen.
Rutgers professor Hugh Rockoff explains that the vast majority of economists are generally opposed to price controls. He paraphrases Milton Friedman to show the havoc price controls wreak:
. . . economists may not know much, but they do know how to produce a shortage or surplus.
Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time. Suppose that the supply and demand for wheat flour are balanced at the current price, and that the government then fixes a lower maximum price. The supply of flour will decrease, but the demand for it will increase. The result will be excess demand and empty shelves. Although some consumers will be lucky enough to purchase flour at the lower price, others will be forced to do without.2
Even in the United States, we have not been immune to the economic foolishness of price controls.
I’ll never forget the gas shortages of the Carter era. I had just turned sixteen and was allowed the great “privilege” of driving my parents’ red Vista Cruiser station wagon (with brown faux wood panel stripe, a real girl magnet). Carter put price controls on gas, and within weeks we had long lines at all the gas stations, while down at our local beach the talk was of full oil tankers floating offshore refusing to sell their oil below the market price. I remember being so angry. I had finally graduated from riding my bike everywhere to having my own wheels, only to be stymied by gas lines.
So, too, the havoc of price controls in Venezuela, only Chavez and Maduro refused to admit failure as Carter ultimately did.
By 2014, as inflation soared to several thousand percent, the Venezuelan government banned “profit margins over 30% and tightened price ceilings on basic goods.”3 With food shortages across Venezuela, the government set up committees to distribute what little food was available. And to no one’s surprise, the Maduro supporters were granted front-of-the-line access.
With Venezuela dependent on foreign trade and multinational companies for much of its food and consumer items, companies chafed at price controls, and many shut down completely. Colgate-Palmolive and Nestlé plants shut down. Mexican bottler Femsa threatened to shut down. “Thousands of companies across the country have slowed production and at least 20 percent have stopped operating for lack of raw materials or customers.”4
Are price controls socialism? Perhaps not precisely, but prices are a vital component of a market economy. Without prices consumers cannot judge how much to buy, and producers cannot judge how much to create. Without the feedback loop of prices, imbalances quickly arise, and only the outlet of the black market keeps complete collapse from occurring.
As Niño explains: “For producers, prices communicate whether it is a good time to enter or leave a certain market. Falling prices and the potential for losses signal to employers the need to leave a market. On the other hand, rising prices and potential for profit-making incentivize producers to enter a market.”5
Some economists do argue, as George Reisman does, that price controls establish a “de facto socialism.” The de facto socialism arises because price controls lead to shortages, which then lead to rationing, which is only enforceable with a price control police and ultimately a policing of production as well. While socialism is typically defined as government ownership of the means of production, Reisman argues that “socialism is not actually a positive economic system. It is merely the negation of capitalism and the price system.” So, price controls that destroy freely fluctuating prices require centralization of power and essentially control also of the means of production.6
Reisman does a great job arguing that the enforcement of price controls inevitably “requires a government similar to that of Hitler’s Germany or Stalin’s Russia.” Why? Because man’s natural impulse to self-interest and self-preservation always leads to a black market. As shortages and famine appear, the black marketers are not deterred by penalties alone or even the threat of jail. Finally, because the people starve unless they purchase food on the black market, it becomes difficult to get juries to convict black marketers.
In turn, the state becomes desperate, and as Reisman concludes, “in order to obtain convictions, the government must place the decision of guilt or innocence in the case of black market transactions in the hands of an administrative tribunal or its police agents on the spot. It cannot rely on jury trials.”
Some will argue that that’s far-fetched. Certainly, price controls don’t always lead to totalitarianism, yet, even in America, punitive cigarette taxes created a black market in “loose cigarettes” in New York, which resulted in tragic extrajudicial violence. The state, in the form of at least one police officer, delivered a deadly choke hold to Eric Garner, who on the day of his murder didn’t even happen to be in possession of any “loose cigarettes.”7
Price controls and their disastrous effects are not new. The Romans tried price controls to thwart the state-created inflation. Nixon tried price controls as well. (Although Milton Friedman warned him that price controls would “end in utter failure and the emergence into the open of the suppressed inflation.”8 And Friedman was proved right.) The Cato Institute’s Gene Healy retells the story of Secretary of the Treasury George Shultz telling Nixon in 1973, “at least the debacle had convinced everyone that wage-price controls are not the answer.” Of course, politicians are slow learners. So, even after Nixon’s price controls failed, Carter tried them again.9
Nixon’s wage and price controls did, however, have a direct impact on my father’s medical practice, his future, and ultimately, my future. Three years after Nixon instituted wide-ranging wage and price controls, in 1974, my father decided to run for Congress, in part because of his opposition to Nixon’s wage and price controls and his severing the dollar’s link to gold.
Nineteen seventy-four turned out to be a terrible year to run as a Republican and my father only garnered a little over 28 percent of the vote, but came back two years later and won a special election. My dad was in Congress when Carter resurrected Nixon’s price controls, and he raised Cain about the terrible consequences to come. Dad was right, and ultimately saner minds prevailed as Reagan ended price controls during his first month in office.
In the Soviet Union and Eastern Europe, price controls and shortages were omnipresent.
One joke from communist Poland tells of a fellow who comes into a store and asks: “I guess you don’t have any butter, do you?” To which the shopkeeper replied, “No, we’re the store that doesn’t have any toilet paper. The store across the street is the one that doesn’t have butter.”10
Venezuela is the country that doesn’t have butter, toilet paper, or any consumer items and yet they persist with price controls that have trapped them in a historic disaster.
Girish Gupta describes the chaos of price controls.
“In Petare, a giant slum overlooking Caracas from the east, hustlers known as buhoneros sell their goods at a busy intersection. ‘I’ve got milk, toilet paper, coffee, soap . . .’ said 30-year-old Carmen Rodríguez, pointing to her wares by the side of a road busy with honking motorbikes, cars and buses.”
Rodríguez admits, “Of course my goods cost more than the government says they should. We’re helping people get the basics.”
Gupta writes that the “scenes at Petare’s intersection, 23 de enero’s streets and Catia’s supermarkets are manifestations of an economy in tatters: one in which people buy milk, toilet paper and shampoo at inflated prices because supermarkets, with long queues outside, are near empty; in which engineers an
d lawyers smuggle pasta and petrol across borders to earn many times more than they would carrying out their profession; and in which surgeons complain that people are dying on the operating table because they cannot import medicines and equipment.”11
In Venezuela, price controls affect at least “fifty essential goods, from eggs to soap. . . . The products usually become unavailable within hours of the prices being fixed because they are bought up for resale on the black market.”12
Those who might argue, “Oh, it’s okay, it’s democratic socialism,” should realize that store owners who do not comply with price controls are imprisoned, and as the chaos empties store shelves across the country, Maduro has deployed the army to police prices.13
According to John Stossel, under Chavez’s “democratic socialism,” “30,000 businesses were confiscated.”14
And yet Maduro persists and his socialist comrades around the world fail to wake up to the disastrous effects of price controls.
Marian Tupy describes his experience with price controls: “Say what you will about socialism, it always follows a predictable pattern. In an attempt to make something available to everyone, the socialists ensure that it is not available to anyone (except for the politically well-connected).”
Tupy writes: “As a child growing up behind the Iron Curtain, I recall constant shortages of basic foodstuffs. The price of meat, for instance, was kept artificially low due to political considerations. Low prices created an impression of affordability. On their trips abroad, communists would often boast that workers in the Soviet empire could buy and produce more meat than their Western counterparts. In reality, shops were often empty.”15
Chapter 4
Capitalism Is the More Moral System
The inequality discussion became all the rage with the release of Thomas Piketty’s 2015 book, Capital in the Twenty-First Century. America’s admitted socialists, like Bernie Sanders, swooned while the Democratic Party’s closet socialists chimed in with: “I told you so. I told you capitalism doesn’t work.” Piketty himself applauded Bernie’s call for a progressive estate tax and for special new taxes on the wealthy. Piketty’s book became a bestseller and brought the debate over inequality to the evening dinner table.
As David Harsanyi writes at the Federalist: “Piketty’s book . . . [has] been deemed an ‘important book’ by a bunch of smart people. Why not? It validates many of the preconceived notions progressives have about capitalism: Inequality is growing. Mobility is shrinking. Meritocracy is dead. We all live in a sprawling zero-sum fallacy. And so on.”
The central premise of Piketty’s theory is that when the returns on capital grow faster than the returns for workers, income inequality between those who have capital and those who labor widens and does not self-correct.1
In reviewing Thomas Piketty’s propositions on correcting income inequality, Daniel Shuchman writes at the Wall Street Journal: “Piketty likes capitalism because it efficiently allocates resources. But he does not like how it allocates income.”2
Piketty asserts that “when the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”3
How would Piketty fix these “unsustainable inequalities”? With massive income taxes on the wealthy. Piketty proposes an 80 percent bracket for incomes over $500,000 and a 60 percent rate for incomes over $200,000. Shuchman explains that Piketty is less concerned with raising tax revenue and more concerned with “putting an end to such incomes.”4
Shuchman explains that Piketty believes that there is “a moral illegitimacy to virtually any accumulation of wealth, and it is a matter of justice that such inequality be eradicated in our economy. The way to do this is to eliminate high incomes and to reduce existing wealth through taxation.”5
Adamsmith.org’s Sam Bowman does a good job answering some of the standard accusations from the left on inequality. To those who, like Piketty, claim inequality slows growth, Bowman points out that studies that conclude that inequality slows growth are flawed and “end up comparing Sweden with Mexico, leaving out a lot of other factors that might be the cause of both Sweden’s lower inequality and its lower crime and poverty rates, and assuming what they’re trying to prove. But even though countries with lower inequality might have higher growth rates, that doesn’t mean that cutting inequality will boost growth rates.”
For example, while the Swedish population has longer average life spans, lower levels of violence, and higher overall education than the U.S. population, Swedish-Americans also have the same statistics while living in the United States.
Bowman cites a paper by Kristin Forbes that found the opposite of what liberals argue. She found that “an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth.” So much for Piketty’s argument that too much income inequality impedes economic growth.
Bowman concludes: “It’s not inequality that matters, it’s poverty and overall living standards.” In other words, would you rather make $10,000 where the rich earn ten times that or make $30,000 where the rich earn 20 times that? What really matters is your standard of living, not your neighbors’. In reality, the poor are getting richer all the time, and the rich are also.6
HumanProgress.org does a good job analyzing the amazing leaps of prosperity over the past two hundred years. According to their website, in 1820 over 90 percent of the world lived in extreme poverty, measured as less than two dollars a day. In 1990, when I got married, the percentage of the world’s population living in extreme poverty represented around 30 percent (in constant dollars). Fast-forward to today, where less than 10 percent of the world lives in extreme poverty.7
Dwelling on income inequality ignores the dramatic decrease in poverty that has occurred as capitalism and the division of labor have spread worldwide throughout the past two centuries.8
Perhaps part of the problem in examining unequal incomes is that we fail to acknowledge that it may be more important to analyze what you can buy with your income, rather than the actual dollar amount in your paycheck. Tim Worstall at Forbes writes that while we do “have widening inequality of cash or money incomes, . . . we’re also seeing something of a shrinkage in inequality in terms of consumption.”9
Before the industrial revolution, the poor lived a life of bare subsistence, lucky to have enough to eat. They lacked clean water and basic sanitation, resulting in epidemics of contagion, while the rich lived a pampered existence far removed from the vicissitudes of the street. Today, rich and poor alike enjoy the same basic necessities of food, clothing, housing, technology, antibiotics, etc.
As Worstall puts it: “Today’s inequality might [peak with] the plutocrat with many mansions, jets and cars, but poverty on the bottom these days, absent mental or addiction problems, is about not having good food rather than having none, not having good housing rather than having none. We’re all on the same spectrum now, not the poor falling off the bottom of the subsistence level altogether.”10
Dalibor Rohac, at the Washington Times, explains how “despite greater numerical income inequality, cheaper consumable goods have really equalized the comforts available to people of all income levels.” Because of trade and cheap consumer imports available at discount stores like Walmart, “low-income groups [have] access to goods that previously were enjoyed only by the rich,” from flat-screen TVs to video games to cell phones and computers.
As I have noted on national television, much to my wife’s chagrin, I buy shirts at Target for $7. Rohac writes that “[i]n terms of the actual material conditions of living, developed countries appear to be more equal than ever before.” You can see this firsthand. Just go to Target or TJMaxx and you, too, can experience the equalizing effects of worldwide free trade and the divis
ion of labor.11
Deirdre McCloskey explains the equalizing effects of the worldwide economy. Despite income inequality, the poor have made incredible gains.
“In relative terms, the poorest people have been the biggest beneficiaries. The rich became richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.”
McCloskey points out that at no other time in history have so few lived in poverty: “not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.”12
Chapter 5
Capitalism Benefits the Middle Class
Today’s young socialists harangue on and on about income inequality. Deirdre McCloskey wants no part of it. “[Y]ou will have heard that our biggest problem is inequality, and that we must make all men and women equal,” she writes. “No, we should not—at least, not if we want to lift up the poor. Ethically speaking, the true liberal should care only about whether the poorest among us are moving closer to having enough to live with dignity and to participate in a democracy. They are.”1
Productivity gains have brought what were once considered luxuries to the masses, making income disparities less noticeable. Don Boudreaux, an economics professor at George Mason University, provides an excellent analysis of how each generation works far fewer hours to purchase goods like refrigerators, calculators, music gadgets, cell phones, dishwashers, washing machines, and clothes.
For example, in 1956 it took the average worker 116 hours of labor to earn enough to buy a Sears refrigerator. In 2013, the average worker could buy a similar refrigerator with only 15 hours of wages even though income inequality increased significantly over that time.2