Thursday, November 20, 2008

Well Meaning Leftist of the Week.

Sorry we're a little late with this, but let's go with Richard Nixon.

Faced with rampant inflation (and pressure from Senate Democrats), President Nixon announced in June of 1973 the implementation of price controls to ease the burden of rapidly rising prices of produce, oil, and other necessities.

3 comments:

  1. what's wrong with that?

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  2. It boils down to what prices actually are. The price of a given commodity is driven by two things: the scarcity of the item and how much people desire or need that item. Prices only exist because people want more of something than actually exists (or is difficult to obtain). If something were infinitely abundant then the price would be zero. Similarly, a scarce item that absolutely nobody wanted would also cost nothing.

    For the sake of simplicity, we'll focus on gas and gas prices. In 1973, OPEC banned oil exports to the United States. This greatly restricted the supply. In response to this, since people needed the same amount of gas for their cars (demand was constant), but the supply was less, the price rose to reflect the new supply levels.

    Allowing the price to rise does two things: it encourages consumers to drive less and since there is more profit to be gained, encourages suppliers to invest in fuel production - even though it costs more to produce.

    Holding down prices removes those incentives - and actually encourages oil companies to hold on to what they have.

    For more on this topic, see this post.

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  3. I should add that history bears out this point of view regarding price controls.

    Nixon's action led to severe gas shortages.

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