War on Prices Latest: Macro Musings, Rent Control, and California Minimum Wage

Macro Musings with David Beckworth

This week, Ryan appeared on the Macro Musings podcast, hosted by fellow contributor David Beckworth, to talk all things The War on Prices. They discussed the coordinating role of the market price mechanism, price controls during World War II, rent control, ways firms adjust to minimum wage hikes, and who was to blame for the recent inflation surge. You can listen to (or read) the full interview here. 

Some have tried to revive the idea that erring on the side of doing too much stimulus was a reasonable bet with few downsides. Yet aside from the economic costs of the resultant high inflation, Ryan thinks this ignores the inevitable policy reaction to price volatility:

How’s that working out for you politically? I mean its facilitated a world in which one of the presidential candidate's campaigns is openly talking about moving away from central bank independence and having the president involved in determining the monetary stance of the Federal Reserve. I think the public really hates high inflation. This is something that I’ve always said to people who’ve talked about running the economy hot in nominal terms: if you think about the delta between having unemployment at 5% or 3%, obviously for that 2 percentage points of the population it’s massive, but that’s still two percentage points of the population. Everybody is affected by inflation. And it's not been a surprise to me that because inflation affects everyone, it’s been the dominant political issue for two years. It’s led to a range of economically unserious policies and a regression in the public’s understanding of these issues as a result of the incentives at play.

This point about how only a small percentage of people lose their jobs if the Fed under-stimulates the economy, while everyone is affected by inflation, was reiterated in a Financial Times interview this week with Neel Kashkart, president of the Federal Reserve Bank of Minneapolis:

You know, I do a lot of roundtables with small businesses and labour groups and workers. And one of the most profound comments that I’ve heard over the past couple of years was with a group of labour leaders in my region and a labour leader who represents low-income service workers. So these are not autoworkers. These are not welders, really highly paid people. These are low-income service workers who work in grocery stores and hotels. She said to me, inflation is worse than a recession. That is contrary to conventional economic thinking. And I said, I don’t understand that, how can inflation be worse than a recession? In a recession, you lose your job. Inflation, you just pay higher prices, you still have a job. She said, because her members are used to dealing with recessions, and the way they get through a recession is they rely on friends and family. I lose my job, I lean on my sister or my parents or my friends, and they help me through it. But high inflation affects everybody. There’s no one I can lean on for help because everyone in my network is experiencing the same thing I’m experiencing. That was a profound comment for me to hear, and that really flies in the face of conventional economic thinking.

Progressives Urge Biden To Go Hard on Greedflation

The Biden campaign has not focused its television or online advertisements on messages berating companies for high prices, unlike Senators Bob Casey of Pennsylvania and Sherrod Brown of Ohio, who have made the issue a centerpiece of their campaigns — and who are outrunning Mr. Biden in polls.

Now, some progressives are urging Mr. Biden to follow those senators’ lead and make “greedflation,” as they call it, a driving theme of his re-election bid. They say that taking the fight to big business could bolster the broader Main Street vs. Wall Street argument he is pursuing against former President Donald J. Trump, particularly with the working-class voters of color Mr. Biden needs to motivate. And they believe polls show voters are primed to hear the president condemn big corporations in more forceful terms.

So reports The New York Times. Unfortunately, the progressives may well be right about the politics here, but the economics remain awful.

As Ryan has written before: are we really to believe that corporations across vast sectors of the economy suddenly engaged in implicit collusion to withhold output and raise the price level? And how does that chime with the empirical fact that real GDP growth was strong just as inflation was high?

In any case, doesn’t this argument ignore consumers? Even if we believed some companies gained market power to increase prices and consumers paid those higher prices, customers would then have less money left over to spend elsewhere, putting downward pressure on demand and prices for other goods. The only way to explain the sort of broad inflation we’ve seen is if you see higher overall spending relative to production. Whatever could have caused that? Might it have been all the extra stimulus flowing around?

Swedish Rent Control Parable

The Economist had a great piece last week on the economic costs of binding caps on rents. A slice: 

No city today better demonstrates the distortions Friedman warned of than Stockholm. On paper Sweden’s system of rent controls, the hyresreglering, is the strictest in the world. A powerful tenants’ union negotiates with landlords, holding rents as much as 50% below the market. In practice lots of people lose out. Swedes must join waiting lists for a rent-controlled apartment: in central Stockholm the average wait is 20 years; across the city it is about half that. Many who reach the front of the queue are in their 50s and own a home. Young Swedes often have to put up with expensive sublets agreed to under the table, laments Mr Persson.

Those lucky enough to have a flat refuse to move. Families come up with ingenious ways of passing contracts to distant relatives. If a couple is so bold as to want more space for children, they must engineer a complex chain of swaps. Or resort to bribes. In 2021 a court case revealed that a woman paid SKr2.4m, or $220,000, for a black-market contract for an apartment in Ostermalm, a posh part of Stockholm.

You can read more on the misallocation costs of rent control in Jeff Miron and Pedro Aldighieri’s chapter in The War on Prices.

California Fast Food Minimum Wage

The California Business and Industrial Alliance estimates that 10,000 jobs have been cut across fast food restaurants in California since a $20 per hour minimum wage for fast food workers (up from $16) was signed into law. According to The New York Post, numerous chains have shut down following the line.

Cato’s Michael Chapman summarized some of the adjustments firms were making in a blog this week:

California’s situation affirms some of these pernicious effects.

For instance, raising wage costs has reduced labor demand. The Wall Street Journal reported in March that some restaurants were “already laying off staff and reducing hours for workers as they try to cut costs.” Other businesses said they had “halted hiring” or were “scaling back workers’ hours.”

Round Table Pizza and Pizza Hut, for example, announced they were laying off about 1,280 delivery drivers. This eradicates entry‐​level positions that can give vital experience to young and lower‐​skilled workers and provide protection against poverty. Driver Michael Ojeda, 29 years old, said, “Pizza Hut was my career for nearly a decade and with little to no notice it was taken away.”

At the same time, the fact that the wage control applies to all fast‐​food outlets (with at least 60 locations nationwide) has meant firms have passed through a lot of the elevated costs into higher prices. Even before the wage floor was introduced at $20 per hour, up from $16 per hour, McDonald’s, Chipotle, and Jack in the Box “plan to raise menu prices to compensate for the required wage increase,” reported NBC 7 San Diego in March.

The War on Prices documents the many ways that firms can adjust to minimum wage hikes and why minimum wages increases are a poorly targeted means of reducing poverty.

Other Links

If you've read The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy please consider leaving a review on Amazon and/or Goodreads.

• Here are Ryan’s introductions to the book for City Journal, National Review, and AIER.

• Alex Salter explains why oil and gas price collusion can’t explain high prices.

• Canada’s federal New Democrats want grocery price caps.

• CFPB launches new “junk fees” enquiry.

• Vance Ginn reviews The War on Prices and Ryan appears on his podcast.