When we talk about opposition to prices, we’re usually talking about price controls. This isn’t unreasonable. There are still calls for them in response to short-term higher prices after a disaster, or longer-term cost-of-living increases, as for rent or food. It’s important to explain the negative unintended consequences of such interventions.
But sometimes, people who argue that there are negative unintended consequences don’t seem to understand why. In particular, when those who are against price controls also support policies that intervene in price signals less directly. In other words, opposition to price controls doesn’t necessarily translate to an argument for letting markets work. What’s needed is an argument against interfering with market signals sent by prices.
For example, in response to the housing crisis, Canadian governments have arrived at a near-consensus about the need to cap immigration. Neither the Liberal nor the Conservative Party campaigned on price controls. But both promised demand controls.
The housing crisis is itself a result of market distortions. Overlapping laws and regulations prevent (and slow to a crawl) the building of enough homes where people want to live. There’s a consensus that we need to allow new housing. But we face the usual problems: too many people with homes in the places where demand is highest don’t want to allow their neighbourhoods to become denser or change in character.
In response to the resulting high prices for housing, governments promise to distort the market further by both boosting and suppressing demand.[1]
Canadian governments have boosted demand for new homes by providing an array of policies (both incentives and tax credits) that subsidize demand. They’re also suppressing demand with more restrictive caps on immigration. One party suggested tying immigration caps to housing growth, job growth, and healthcare accessibility. (Put a pin in this.)
More homes drive down prices through competition between home sellers and landlords. More people needing homes drive up prices through competition between home buyers and renters. On some level, it makes sense that if government policy is causing the price to go up, simply implementing another policy that will relieve the upward pressure on prices should help.
And maybe it would if we lived in an economy where people were buying and selling one good. But we don’t! The people who need homes are the same people who work in the rest of the economy—including home construction. This is the whole reason we need prices: they are the only tool we have that can make market knowledge useful.
Recall the policy that suggests tying immigration to housing growth, job growth, and healthcare accessibility. All of these factors also need immigrants! Immigrants to build homes, immigrants to fill and create new jobs, immigrant doctors to address a nation-wide shortage. Every worker, and all of their resources, have demands and offer resources that no one can even know, let alone deftly manipulate, without market prices.
There’s no proposal to end immigration completely, so the government might choose to interfere further to address the problems immigration controls create. They might prioritize immigrants with the relevant expertise in skilled trades. But that means choosing one sector to support over others, with a cascading effect across the economy. Ending paths to immigration might ease the pressure on housing costs, but affect the food supply. Piling intervention upon intervention, in both housing and immigration, gives us a government that looks like it’s playing whack-a-mole.
This is the knowledge problem at work. Once the government creates a problem with a market intervention, subsequent interventions meant to mitigate the first problem risk creating new ones, in new sectors of the economy. With each intervention, resource use is likely to get less efficient, and we should expect to see higher prices or, if things get bad enough, shortages.
A better understanding of prices, of how consumer demand can reach back through supply chains to give raw materials their value, and how prices balance consumers’ competing demands with the availability of resources to encourage service providers and producers to put those resources where they’re most valued, is needed. There’s more than one front in the war on prices. Simply convincing everyone that price controls are bad won’t cut it.
——[1] Cue joke about the government interfering on both sides of an issue.
