Late last week Senate Democrats, led by Senator Elizabeth Warren, introduced a new piece of legislation that aims to limit the ability of companies to increase prices on consumer goods and services during crises. It would require that companies only raise prices to the extent that their cost of production has increased or else face stiff financial penalties. The inspiration for the bill is an idea gaining traction in a certain corner of the left: that greed and “price gouging” are to blame for recent inflation.

As great as this Robin Hood-style
approach might sound, price controls are a fool’s errand. When policy makes it
difficult or impossible for producers to raise their prices, it reduces the
incentive for companies to produce goods and services or to innovate. Just as
you and I are motivated to show up at work each day by the promise of a
paycheck, so too are companies motivated to “show up” by the promise of
profits. When the opportunity for profit is constrained, the inevitable result
is constrained production which will result in shortages. And as the current
shortages in baby formula are so tragically illustrating, shortages can be even
more problematic than high prices.

As is often the case with proposals
for government interventions to “fix” problems with markets, price controls
might sound good at first blush but in reality will only make matters worse.

The introduction of the price control legislation kicked off a lively debate among economists and policy experts from all points on the political spectrum; with conservatives and moderate liberals joining forces to denounce the policy as misguided, nonsensical, politically damaging for democrats, and even dangerous.

Most economists agree that the inflation we’re seeing today is being driven by surging demand paired with constrained supply. Consumers have on-hand cash and a pent-up desire to spend after two years of being stuck at home. Goods sellers are struggling to keep shelves stocked thanks to supply chain disruptions. And service providers are short-staffed due to a tight labor market with low unemployment. It’s a cocktail of conditions that unambiguously point toward rising prices.

The intensity of this “greedflation kerfuffle” (to borrow Jason Furman’s description) reflects the intensity of concern Americans have over current levels of inflation. Results from a recent national survey indicated that 70 percent of Americans see inflation as a “very big problem” for the country, topping the list of concerns and markedly ahead of COVID and unemployment.

Given that level of attention from potential voters, it’s not a surprise that policymakers are stepping forward with plans to address the problem head on. And while price controls like the ones included in this new proposed legislation might sound good to someone without the luxury of time to think deeply about the problem (which is probably the point), they won’t help consumers and can easily make matters worse.

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