When discussing opposition to rising prices, the conversation often drifts towards price controls. This isn’t entirely unfounded. In the wake of natural disasters, for instance, there are persistent calls for intervention to combat soaring prices or in response to long-term cost-of-living spikes, such as those seen in rent and food. However, it’s crucial to articulate the potential negative unintended consequences of such interventions.
Yet, those who caution against the pitfalls of price controls may not fully grasp the underlying reasons. Specifically, many who oppose price controls simultaneously endorse policies that indirectly manipulate price signals. Thus, an aversion to price controls doesn’t inherently equate to a belief in unregulated markets. What we need is a robust argument against meddling with the market signals that prices convey.
Take Canada’s housing crisis as a case in point. There exists a near-universal agreement among Canadian political parties regarding the need to limit immigration. Notably, neither the Liberal nor the Conservative Party campaigned on implementing price controls; instead, both pledged to manage demand.
The housing crisis is largely a byproduct of market distortions. A tangled web of laws and regulations stymies the construction of sufficient homes in desirable locations. While there’s a broad consensus that new housing is essential, we encounter the usual barriers: homeowners in high-demand areas typically resist changes that would lead to denser neighborhoods or shifts in local character.
In response to escalating housing prices, governments resort to further market distortions by both stimulating and constraining demand.[1]
Canadian governments have increased demand for new homes through a variety of policies, including incentives and tax credits that subsidize demand. Simultaneously, they are curbing demand with stricter immigration caps. One political party even floated the idea of linking immigration caps to housing and job growth, as well as healthcare accessibility. (Let’s bookmark that thought.)
The logic is somewhat sound: more homes tend to lower prices due to increased competition among sellers and landlords, while a growing population drives prices up through heightened competition among buyers and renters. If government actions are inflating prices, the intuition suggests that implementing policies to alleviate that inflation should help.
However, this rationale falters when we recognize that we operate in a multifaceted economy where individuals seeking homes are also entwined in various sectors, including home construction. This is precisely why we rely on prices: they are our sole mechanism for translating market knowledge into practical value.
Returning to the proposal of linking immigration to housing, job creation, and healthcare: all these elements also require immigrants. We need immigrants to construct homes, fill and generate new jobs, and address the nationwide shortage of medical professionals. Every worker and their resources have demands and offer contributions that no centralized authority can accurately gauge or manipulate without market prices.
It’s worth noting that there’s no intention to eliminate immigration altogether, which means the government may opt for further interventions to alleviate the issues stemming from immigration controls. They might prioritize immigrants with specific skills in trades. However, this approach would necessitate selecting one sector over another, potentially creating ripple effects throughout the economy. While restricting immigration might alleviate housing pressures, it could adversely impact the food supply. Layering intervention upon intervention across both housing and immigration gives the impression of a government engaged in a game of whack-a-mole.
This encapsulates the knowledge problem in action. Once the government creates a disturbance through market intervention, subsequent measures intended to rectify the initial issue often generate new complications in other economic sectors. With each new intervention, the efficiency of resource allocation diminishes, leading to a higher likelihood of increased prices or, in extreme cases, shortages.
A more nuanced understanding of prices is essential—recognizing how consumer demand reverberates through supply chains to assign value to raw materials and how prices harmonize competing consumer demands with resource availability, guiding service providers and producers to allocate resources where they are most valued. The war on prices is multifaceted. Merely convincing the public that price controls are detrimental will not suffice.
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[1] Cue the joke about the government intervening on both sides of an issue.
