The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy

The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy edited by Ryan A. Bourne

Prices are an indication of the marginal value that buyer and seller place on an exchange. They don't explicitly represent the value that went into creating something or even the worth of the object. Water is required to live, but is cheap. Prices help allocate resources to those who are willing to pay for them.

Prices of individual items go up and down to match the desires of buyers and sellers. Inflation is typically caused by changes in money supply and velocity. Price controls may cause mismatches in supply and demand and may not alter inflation. Consumers will respond to artificially low prices by consuming more. Producers will respond by producing less or reducing quality. This can lead to shortages and lead to everyone being worse off. (Though it could possibly lead to alternatives.) Artificial prices may often substitute one cost with anther. Instead of paying in money for something, people may need to pay in time by waiting in a long line or hunting for a hard to find item.

The negative impacts of price controls can be far reaching. During World War II, the US implemented wage controls. To get around these, workers offered fringe benefits, such as health insurance. This became the de facto way that health care is obtained in the US and results in a complicated system that exists today and is very difficult to disentangle.

People also are not stupid. Is there a "pink" tax requiring women to pay more than men for the same products? If it were truly so, women would just buy the men's version. However, the female products are often different in ways that females value more. The "gender wage gap" is also explained by forces. (After all, what company wouldn't want to employ as many people as possible for a fraction of the cost?) Early career men and women in the same profession tend to earn the same. However, women tend to gravitate to less risky and less remunerated careers. They are also more likely to take time off for childbirth and child rearing. They are more likely to value flexible work schedules. (Increasing maternity leave for women can make this even worse, by encouraging them to take more time off, thus limiting experience. Perhaps more paternity leave is the answer?) 

The book looks at many other examples. The general theme is that meddling with prices will impact the economy and will often have unforeseen consequences. People are quick to adapt to find new loopholes in a regulatory environment. The more more friction there is in pricing, the slower the economy will adapt. It reminds me of an interesting analysis of the German industry. Labor has a seat at the board and influences actions of the company. This makes it very friendly to existing workers. However, this also makes it difficult for pivots to electric cars and other significant changes. Will they have much of a role in the future industry?

What is the best way to regulate a market? Is allowing uber-wealthy a necessary cost of doing business? How do we appropriately set markets for externalities (like emissions, deforestation, etc.)? The current regime of regulating the response to regulations doesn't help.

Economics in One Virus

Economics in One Virus: An Introduction to Economic Reasoning through COVID-19 by Ryan A. Bourne

The Covid-19 pandemic was a big mess. The world did not understand the virus well and was ill prepared to respond. Subsequent actions counteracted each other and made things worse. We gave too much latitude to public health experts to implement solutions without looking at societal impacts. The result was economic devastation, high inflation and a multitude of societal ills.

This book explores many of the responses to the virus and the associated economic principles. Each chapter discusses the pandemic and then summarizes specific principles and terms that are related. Often it becomes self-evident that basic economics were missed in the response. In some cases, policies worked against each other. Unemployment benefits were ramped up quickly to give consumers cash. Then aid was given to small businesses to keep employees. However, many employees could earn more by taking unemployment than by working. Why go back to work? This created a cascading problem as business such as child care were not fully start back up, making it difficult for others to go back to work.

The pandemic response failed to properly analyze cost and benefits. A politician would proclaim that society would spare no expense at saving a life. Alas, those measures could make the life less worth living. Grandma may hope to live to see her granddaughter's wedding. How would she feel if we preserve her life a few months, but prevent the wedding from happening? 

Centrally managed one-size fits all approaches also caused problems. Rather than let different approaches be experimented, there were similar policies enacted. Everyone was asked to isolate, regardless of risk. However, "essential" workers were still actively interacting with people, even if they did not have protective equipment. The result was both too much isolation and not enough. Things got even more bizarre as the pandemic progressed. People were arrested for solo outdoor activities, but large group protests were allowed. Stores were allowed to be open, but a section selling seeds was roped off. Central planning seemed to create ridiculousness, but didn't have a huge impact on virus spread. People were adapting better than policies. Those with minimal risk were more willing to participate in risky activities. Those at risk were isolating and protecting themselves. The "natural adaptation" was better than the centrally planned policy.

The speed of government change was also a problem. Testing was extremely helpful in containing the spread of the virus. Tests were available early in the pandemic. However, US authorities did not allow them because they were not 100% accurate. Instead, we were left with 100% inaccurate non-tests. The tests provided a better signal for those that were most contagious, but even that was lost on authorities. The problem was later repeated with rapid tests. The delays resulted in excess pandemic spread and economic lockdown.

Shortages were also caused by lack of economic signals. Rather than let important supplies sell at their value, retailers were discouraged from price gouging. Thus prices were kept artificially low, while those that could find things were encouraged to excessively stock up. If prices were allowed to better float, items like hand sanitizer would immediately spike. However, new entrants would be more encouraged to come in and meet demand.

The pandemic was great example of the flaws of centrally managed economies. It is hard to create a universal policy that works for everyone. People will try to adapt to do what they feel is best. If they feel the policy is out of touch with their reality, they will attempt to circumvent it. Many people naturally locked-down and isolated, even without government mandates. Many people later interacted publicly when they deemed their personal risk was low. The economy became a big mess because people did not understand economics.