Inflation is a disorder of the money supply. When the number of dollars in circulation increases but the amount of goods and services stays the same or increases more slowly, the ratio of dollars to goods and services increases. This increasing ratio shows up in cross-sector price hikes—it is just the laws of supply and demand applied to money itself.
Everyone knows this, at least in the back of their heads: If there are simply fewer dollars per good or service in circulation, prices will stabilize at that new ratio. Inflation can be licked only by bringing that ratio down. The state has a relatively small toolbox for accomplishing this—mainly raising taxes to pull dollars out of circulation, cutting spending to reduce the number of dollars being put into circulation, and raising interest rates.
These measures are unpalatable to politicians for three main reasons—raising taxes is unpopular, cutting social services is more unpopular still, and, under it all, anti-inflationary policies tend to reduce growth and to increase unemployment as a result. Yet the public dislikes inflation, and wishes to see something being done about it.
Because of their natural cowardice, politicians are always on the lookout for ways to be seen doing something without pursuing any of the unpopular policies that actually fix the problem. Turkey’s President Recep Erdogan has provided an invaluable service to economists by actually cutting central bank interest rates in the face of the lira’s spiral, in hopes that cuts would kick-start a period of productivity growth that could outrun the growth in the money supply. It turns out this doesn’t work very well; another doomed device for defying economic reality has joined the rubbish heap of history. Turkey’s worsening economic conditions this year brought Erdogan’s closest brush with electoral failure since he assumed leadership of the country. (Happily for Erdogan, the perennially sclerotic and bumbling Turkish opposition, the Republican Party, failed to capitalize on the moment.)
The cowardice doesn’t stop at the Dardanelles; it has overrun the European continent, boarded a ferry at Calais, and burst into the halls of the British Parliament at Westminster. Rishi Sunak, the diminutive Tory Prime Minister of the United Kingdom, whose main accomplishment to date (professionally or otherwise) has been marrying very well, is reportedly investigating a more than usually cretinous policy to combat rising prices—to wit, “voluntary” price controls on groceries.
Rising food prices in Britain remain a problem; the latest numbers show a 19.3 percent rate of increase for grocery prices in the context of about 10 percent economy-wide inflation, hardly a healthy state of affairs. Sunak’s “solution” brings at least two more, and maybe three, problems: first, price controls do not work; second, “voluntary” price controls are a confusing abuse of state power; third, and we grant this is mostly a personal problem for Sunak, price controls have been the kiss of death for Tory governments past.
As numerous commentators have pointed out, the U.K.’s post-war price controls failed to reduce prices across the economy and rather just produced widespread shortages. This is intuitive: If the problem is inflation, rather than a particular condition in a particular sector driving prices up, all the upstream costs for food producers are unaffected by price controls, and only those who can sell their products at lower prices and thinner margins—which will disproportionately be massive conglomerates, by the way—will remain in the market.
The dollars in circulation will continue to chase non-controlled goods; if shortages are grievous enough, the amount of overall products and services in the economy may decline and thereby aggravate the underlying problem of the increasing dollars-to-goods ratio. The only way out for the price-controller is to subject larger and larger sectors of the economy to price controls—not a very attractive solution to anyone with any sort of skepticism of the administrative state.
So be it. Sometimes policies fail, or sometimes different parties are at odds about doing what would be required for a policy to work; that’s the nature of politics in liberal democracies. What is corrosive is the use of state power to coerce without the creation of law. If the state makes a law setting bread prices, that is subject to the normal political processes; if I think it is a bad law, I can write my legislators and vote for the ones who will change it. If the state sends me a letter suggesting that I sell my bread at a certain price, but there is no legal obligation—I’m just encouraged—what am I to think? If I take it at face value, I’ll ignore the letter—but then why did the state send it? Do I need to worry about regulatory scrutiny? Will I be audited for failing to go along with Sunak’s exhortations? (It happened with similar “voluntary” price controls in the 1970s.) So I may follow the exhortation, but what has occurred isn’t liberal democracy. It’s thuggism. It’s the rule of men.
An unkind critic might suggest that the myth of “voluntary” price controls are the symptom of Britain’s profound psychological scarring from the Second World War—a collective masochism, a Western Stakhanovism, an addiction to emergency, a desire to surpass the law that undercuts the law—compounded by the relegation of post-war Britain to ignominious status as an American and sometimes European client state. I will limit myself to suggesting that it is an outgrowth or even a tumor protruding from Sunak’s yellow belly: He would like to reap the theoretical benefits of price controls, or to be seen pursuing those theoretical benefits, without committing himself to the policy in law. (The lukewarm will be vomited out, we note.)
The final problem, as we said, is mostly a personal one for Sunak. Prime Minister Edward Heath led the party down the road of price controls and ended a decade of Tory government. The Conservatives have been in power for a similar period, despite comic ineptitude and a revolving door of party leadership. Does Sunak really want to be remembered as the Hindu Ted Heath?
For their many flaws, Sunak’s predecessor, Elizabeth Truss, and her erstwhile finance minister, Kwasi Kwarteng, attacked the problem at the root and with zeal, presenting a “mini-budget” in September 2022. The revolt they faced—not just from their own party and from voters, who, right or wrong, are the political authority, but from the unelected mandarins of the Bank of England, who crashed the British economy in a temper tantrum upon the publication of the budget—ended Truss’s leadership. Truss is one of the least prepossessing persons in Anglophone politics; her face and manner are unpleasant, and one doubts that the erstwhile teenager who called for the abolition of the monarchy is entirely sincere in her Toryism. Yet she had the courage to propose a hard Powellite solution to the root of the problem, and to propose it in law.
Sunak is a small man, and he has come up with the small man’s solution to a problem: Avoid the bitter medicine, and offload the responsibility on entities that have neither the mandate nor the ability to take it in hand. Ordinarily The American Conservative disregards the internal politics of faraway countries, but as respect for the American political process deteriorates and American monetary policy shuffles shambolically through another debt ceiling crisis, it is worth holding up a bad example from abroad and saying, Shame.
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