As food and energy prices soar worldwide, leaving the poor unable to afford life’s necessities, price controls seem effective and ethical. However, they would be a grave error, harming the very people they are trying to help. Targeted subsidies for those struggling to make ends meet are the right course of action.
According to data from the Food and Agriculture Organization of the United Nations, in April 2022, global food prices were 60 percent higher than their level in 2020. Among the complex causes is food production decreases brought about by climate change and supply chain problems resulting from COVID-19 and other logistical difficulties. The Ukraine conflict has exacerbated both. Energy prices are following a similar pattern.
The effect on the living standards close to the poverty line has been acute because food and energy are two of the largest elements of a household’s budget. Many call for legally enforced price controls to check inflation and help families afford the goods they need to live.
This grassroots sentiment is echoed at the highest echelons of government, with US Senator Elizabeth Warren attributing the consumer price inflation to greedy corporations extorting the impoverished masses.
Yet such a move would not only fail to address the pressing needs of low-income families – it would backfire by slowing the return to normality. The International Monetary Fund subtly but firmly made this point when its managing director, Dr Kristalina Georgieva, called for targeted subsidies as the correct remedy. Having earned her PhD in economics from the Karl Marx Higher Institute of Economics, she can hardly be accused of being a neo-liberal firebrand.
There are two general problems with capping food prices. The first is based on a false diagnosis of the underlying problem. When prices rise, and people can’t afford the food they need, they imagine that households would recover their ability to purchase the food they need by legally restoring the price to its prior level.
However, contrary to Senator Warren’s disinformation, the price rise was caused by a supply contraction, meaning a lower volume of food than before. Lowering the price won’t make the missing food suddenly rematerialize. Instead, it will create an imbalance between the demand for and supply of food, which will be resolved by people lining up in stores to receive a ration or black markets that evade the price controls.
The second problem is that high prices are usually the quickest solution to the food production and transport problems driving the shortage. They act as a sharp incentive for suppliers to resolve the issues disrupting the market by ensuring that there is a lot of money to be made for those who come up with a novel solution.
These arguments are not new or hypothetical; the world has extensive experience with price controls, and they are almost always an unmitigated disaster. The most famous example is housing, where rent controls consistently result in protracted housing shortages and low-quality housing. Moreover, the group most affected by these problems is the low-income households these diabolical policies are supposedly trying to help.
Fortunately, nobody is proposing “every man for themselves” or the economic version of a Hobbesian state of nature. A far more effective alternative to price controls is to give either financial subsidies directly to those with limited means to afford the more expensive food; or give them food and energy vouchers.
Either solution avoids exacerbating the prevailing shortage and ensures a healthy incentive for suppliers to get their act together. Both also spare the recipients the indignity of standing in long lines that the rich can evade through their more effective means or personal connections.
Critically, they target the disadvantaged group, and the rich are excluded. That’s why Dr Georgieva from the IMF is someone with extensive knowledge of economics, rather than a populist, like Senator Warren.
High food prices are causing great distress to many families across the world. Addressing the issue requires policies grounded in science that reflect a sound understanding of what has worked well in the past. However, social media serves us a steady diet of economic disinformation made by the ignorant and the power-hungry.
Athenian playwright Aristophanes warned us when he quipped: “You [demagogues] are like the fishers for eels; in still waters they catch nothing, but if they thoroughly stir up the slime, their fishing is good; in the same way, it’s only in troublous times that you line your pockets.”