How To Fight Inflation

On today’s show we are taking a look at how to fight inflation and the various efforts underway in Washington and other capitals around the world.

Yesterday the national association of realtors published statistics for home sales in the month of April. Sales in April slid 2.4% from March to a seasonally adjusted annual rate of 5.61 million in April. It showed the third month of decline in a row for volume of home sales. Year-over-year, sales dropped 5.9% (5.96 million in April 2021).

Federal Reserve chairman Jerome Powell has said earlier this week at the Wall Street Journal Future of Everything conference that the Fed was committed to fighting inflation through monetary policy.

He pointed to the housing market as evidence that interest rate policy was starting to work by cooling off demand for housing and with the hope and expectation that this will eventually result in reducing price inflation in the housing market.

He is correct that the cost of housing is very sensitive to interest rates and that raising interest rates will exert downward pressure on the housing market.

But where else in the economy will interest rates cool off inflation?

Elizabeth Warren has put a proposal for price controls forward as a way to fight inflation.

This approach has failed every time it’s been attempted in history. Justin Trudeau’s father Pierre Trudeau attempted price controls when he was Prime Minister of Canada back in the 1970’s. They didn’t work. They didn't work in Argentina, or for Richard Nixon. 

But this time will be different. After all, we have the internet and electric cars and we are so much more sophisticated now so those lessons from history don’t apply to our modern way of life.

You see governments have control over very specific geographical areas. No single government has global control over markets. So if government attempts to control the market for wheat or oil or cars or housing, then business will adapt and shift supply to those locations where they can maximize their return on investment.

What happens in markets where governments introduce rent controls? Investors shift focus to areas where they can generate a profit. If government makes it unattractive to build or buy rental property in NY or California, then developers will shift their focus to Texas or Florida where they can be free from the chains of rent controls. In the short term, these controls seem like a good idea. But if you legislate businesses to lose money, then you pull supply of that product out of the market.

Eventually, an underground economy will form in response to the acute shortage of supply and push prices up anyway.

Some buildings that can’t make a profit will be converted to condo, which has the exact opposite effect. You see the government can regulate the price that a landlord can charge. They can’t regulate the supply of apartments. Therein lies the problem.

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Host: Victor Menasce

email: podcast@victorjm.com