When a politician mentions price controls run for the hills.

It is important that the level of economic understanding in this country is sufficient to overcome the upcoming onslaught of wrongheaded ideas which are doubtlessly coming down the pipe. Recently a politician in South Carolina proposed capping the price at which gasoline could be sold. This was done under the guise of protecting the cash strapped consumer who simply couldn’t afford the higher prices.

That this politician reveals his economic ignorance in such a pronouncement is the understatement of the century. First off he does absolutely no questioning of the fundamental reasons why gasoline prices have risen. Perhaps it is implied to be the typical bogeymen, the greedy capitalist or maybe the always vilified speculator.

In actuality, the reason gasoline prices are higher is the same reason corn, wheat, soybeans, coffee, gold, silver and almost all commodities are making record highs. It is because of the actions taken by the Federal Reserve, the central bank of the United States. The Fed has created trillions of dollars out of thin air. This has diluted the purchasing power of all the existing dollars in circulation and caused all prices to be higher than they would be otherwise.

The U.S. government spends more money then it receives (steals) from taxation. The difference must be borrowed by issuing Treasury bonds. The Fed buys these bonds with money it creates with a bookkeeping entry on a computer. This is called monetization or quantitative easing. In actuality it is no different in its effects on prices than a counterfeiter running off bills in his basement. There are more dollars than before chasing around the same quantity of goods. Prices rise. This is not rocket science.

The politician who proposed capping the price of gasoline does not mention this obvious cause and effect on prices. Instead he wishes to address an effect of monetary policy and keep his head in the sand as to the cause.

Now let’s take a look at what the actual effect would be on his constituents if this clueless politician had his way. If an artificial price cap were placed on the price of gasoline below where it would sell on the free market, there would be widespread shortages of gas as the station owners shut off their pumps.

It is obvious to anyone with even a rudimentary understanding of business that there must be a positive spread between the buy and sell prices of the product of a business for there to be a profit incentive in selling the product. If input costs rise above the artificial price cap, the business owner will immediately stop selling the product so as not to incur a loss.

Under the price capping scenario, customers would be forced to either drive to a neighboring jurisdiction that still had a free market in gasoline. In addition to the inconvenience of perhaps having to drive 100 miles to stock up on gasoline, the selling price would be higher from the increased demand of all of the out of town customers. The alternative to driving out of the price caped territory would be to purchase from a vendor that ignored the law and sold gasoline at a price above the legally allowed price. The latter case of course would be referred to as a black market transaction. Both buyer and seller would be at risk of fine or arrest simply from making a mutually consented exchange.

Governments can only interfere with free markets. The Federal Reserve has a monopoly on issuing currency in the U.S. due to legal tender laws. It can debase the currency at will. This has an obvious effect of prices. We must hold politicians to task who do not understand this simple relationship. All a politician can do is make matters worse by adding insult to injury. It is bad enough we have to pay higher prices for goods, but under their interventionist proposals selected goods with price caps will not be available at any price. There is no room for such economic ignorance.

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