Too Late! The Government Already Did Do Something
by Charles Goyette: Bernanke:
Wealth for Wall Street, Poverty for the People
excerpted from The
Wage and price
controls are the first refuge of the governing classes in inflationary
times. Price increases are first noted by the public at the grocery
store and gas pump. When it becomes apparent the household budget
is being stretched to its breaking point, a cry goes out: "The
government must do something." The call for the government
to put a lid on prices by fiat or by edict reflects a confusion
of cause and effect, because the government already did do something.
It inflated the supply of money and credit. As long as the public
perception of inflation is that it is a natural and spontaneous
phenomenon, politicians, both the crafty who know better, and the
clueless that don’t, will escape accountability for it and will
propagate schemes to cap prices. Late in his first term, with consumer
prices rising at about 5 percent, Nixon announced his distinctly
Leninist-sounding "New Economic Policy." He ordered a
freeze on all wages and prices in the United States. It is not exactly
clear how Nixon derived the authority to do this, but rather than
an outcry of indignation, many of the nation’s business leaders
and the public at large supported the plan. The stock market responded
the next day with a record price rise.
and price controls included a freeze on wages, prices, rents, and
extended to calling for a freeze of corporate dividends. He also
announced the creation of a "Cost of Living Council,"
that would be run by Donald Rumsfeld and his deputy Dick Cheney.
Although Nixon’s August 1971 announcement was for a 90-day price
freeze, the program went through four separate phases that lasted
ten time that long, until April 1974. An iatrogenic disease is one
introduced by the treatment of a physician. If rising prices were
the ailment from which the economy suffered, Nixon’s prescription
of wage and price controls proved to be bad medicine with its own
iatrogenic disease. Its most debilitating symptom? Shortages.
Costs of some
raw materials such as cotton were allowed to rise, but the costs
of finished products made of those materials were not. So the finished
goods were not made. Store shelves emptied. Farmers discovered it
cost more to raise poultry than they could recoup selling it at
the controlled prices. Chickens were drowned before they consumed
more costly feed. The same thing happened with ranchers and feedlots
that would lose money bringing cattle to market at the controlled
prices. There were low prices for beef posted in the supermarkets,
but the meat counters were empty. Because Nixon was afraid of political
reaction to the creation of swarms of officers and price inspectors
crawling under the tables and peering from behind curtains at every
American business transaction, he styled the mandatory price controls
as "voluntary." But they were only voluntary in the sense
that paying income taxes is "voluntary." And he held the
threat of IRS audits over businesses that failed to comply.
The wage and
price controls required some manufacturers to cut quality and retailers
to cut warranties to meet the artificial prices. If balancing your
new tires had been free, now it was extra. If delivery had been
free, now it cost. As an unintended consequence some prices ended
up higher as middlemen proliferated to evade the price controls.
Some products were sold to straw men in Canada only to be sold back
into the United States at the uncontrolled prices of imports. Oil
passed through additional and unnecessary hands as price markups
were allowed in the subsequent sales of petroleum. In the end Nixon’s
burlesque created distortions, inconvenience and shortages, but
prices continued to rise. During the period of the controls prices
rose at an average annual rate of 6 percent; when most controls
expired, prices quickly played catch up and hit an annualized rate
of more than 12 percent in late 1974.
of wage and price controls it is tempting to think that perhaps
something has been forgotten in the American character, because
price controls really aren’t about controlling prices, which after
all, have no volition of their own. They are about controlling free
people who are now forbidden from engaging in non-coercive commercial
But maybe there
is no DNA code for freedom in the American psyche. Maybe the nation
has coasted for more than 200 years on the vision of a few of the
founders and the experiment with freedom has run its course. Perhaps
it is a replication failure of the liberty gene. If so, it began
several generations ago. Germany’s stunning Economic Miracle took
place over American and British objections. In 1948 the German economy
was a still as broken and as non-productive has it had been three
years earlier when the war ended. The Allied occupation government
had a command economy in place complete with wage and price controls
and rationing, some of which were remnants of the defeated Nazi
government. Goods were scarce. What commerce there was consisted
of primitive barter in cigarettes, chocolate, and nylon stockings.
It was in this environment that economic official Ludwig Erhard
went on nationwide radio on a holiday weekend, knowing that the
occupying military governors would be away and not quickly able
to object, and abolished the controls.
Clay was the American military governor in Germany at the time.
He told Erhard that his advisors insisted lifting the controls was
a terrible mistake. "Pay no attention to them, General;"
said Erhard, "My advisors say the same thing."
of lifting price controls were immediate and dramatic. Stores that
had been all but bare were stocked full of goods in no time at all.
Instead of spending their hours in miserable lines waiting for the
scarce staples of life under a command economy, people returned
to productive activity. Employment expanded as the economy added
6 million new jobs between 1950 and 1960, while the unemployment
rate fell from 10.3 percent to 1.2 percent. Over the decade economic
growth averaged 8 percent. Industrial production soared by 25 percent
in 1950 alone, and by 18 percent the next year. Germany was rebuilt;
prosperity was restored. Truly it was an economic miracle.
post war occupation of Germany, the American and British authorities
banned F.A. Hayek’s seminal 1944 book The Road to Serfdom,
for fear it would offend the Soviets. Hayek’s work described the
way in which a central economic authority’s planning put a government
at war with its own citizens, how it must become increasingly coercive
in order to prevail, and how the coercive machinery of the central
plan, once erected, can be employed to any coercive end. Violations
of price controls was a capital offense in Diocletian’s Rome and
in the French Reign of Terror. But those are not the exception;
price controls have been accompanied by brutality throughout history.
Dr. Murray Rothbard cites more recent episodes, cases that have
been widely overlooked:
Why did Chiang-kai-Shek
"lose" China? The main reason is never mentioned.
Because he engaged in runaway inflation, and then tried to suppress
the results through price controls. To enforce them, he
wound up shooting merchants in the public squares of Shanghai
to make an example of them. He thereby lost his last shreds
of support to the insurgent Communist forces. A similar
fate awaited the South Vietnamese regime, which began shooting
merchants in the public squares of Saigon to enforce its price
dangers and their demonstrable ineffectiveness throughout the ages,
wage and price controls remain a political favorite. It is inevitable
that a thunderous demand for them will arise in the high inflation
periods ahead. Often in their initial appearance wage and price
controls will masquerade as "voluntary." (Question: What’s
the difference between voluntary and mandatory wage and price controls?
Answer: About six months.) The more aggressively they are
implemented, the more certain it is that the economy will grind
to a halt. As a commercial collapse proceeds it is soon joined by
a collapse of the social order.
© 2011 Charles Goyette
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