A question worth asking, and answering

Carson asksWhat is the cause of Argentina’s problem with inflation?  Has the government done something to induce inflation, and is it now imposing price controls as the solution to the problem that it has itself created?  The news report linked above does not say anything about this question, but it is certainly one worth asking.”

I’ll give it a shot, based purely on available economic data and without any first-hand knowledge of Argentina per se. What follows is not colored by the fact that I was never a big fan of Maradona.

Before that, though, just to tweak Carson’s earlier point: “the predictable result of price controls is a shortage of the good whose price is controlled.” This is true only when the price control is what is called a price ceiling, a legally-mandated maximum price. In such cases, if the ceiling price is set below the market price then there will be excess demand for the product or a shortage. This is the type of control Argentina implemented, similar to price ceilings on gas in the 1970s. Another price control is a price floor, a legally-mandated minimum price. These often occur with agricultural products and the minimum wage, whereby the market price is deemed too low and the government imposes a higher price. The result here is the opposite: excess supply or a surplus. Ever wonder why American farms are “so productive” that we produce more food than we need? Why teenage unemployment rose during recent summers when the minimum wage increased?

What is the cause of Argentina’s problem with inflation?” A typical answer is that inflation is caused when too much money chases too few goods. If the supply of money is increased at a rate similar to the rate at which market production or exchanges are occurring, then there would not be any price increases. When the money supply increases faster than the production and exchange of goods and services, then inflation results.

So, the first thing to check is Argentina’s money supply growth. I’ll compare it to the U.S. as a benchmark. The U.S. inflation rate has stayed below 3.3% (based on the GDP deflator) since 2003; Argentina’s lowest rate since then was 8.8% in 2005 and averaged 13.1%. Looking at three measures of a country’s money supply (monetary base, M1, and M2), you can see below that Argentina’s money supply growth has been pretty dramatic:

Monetary base (US = blue, Argentina = red)

M1

M2

Has the government done something to induce inflation, and is it now imposing price controls as the solution to the problem that it has itself created?” To the first question, the graphs above certainly point toward a yes. Inflation can be caused by other factors, and money supply growth itself can be caused by increased lending by banks without much influence by a monetary authority.

The answer to the first question is not necessarily as relevant as the second, though, since imposing price controls is virtually guaranteed to lead to overall harm. Certainly some may benefit from price ceilings: those who are first in line or who are well-connected to producers will score big from artificially low prices, while the rest of the excess demanders will go home empty-handed. How are they helped by the law?

Why devote this much space to arcane economic issues? Because it gets to the point that I think far too many religiously-minded people believe that the effect of policy is directly tied to the intent of legislators or bureaucrats. Surely the Argentine leadership is not intending to create massive lines for basic staples, or to encourage black markets for these products; they simply want to make sure families are able to buy what they need at reasonable prices.

The Argentine experiment in price controls can be added to the myriad examples throughout world and American history that good intentions do not necessarily lead to good results. Hoping that good intentions will overturn economic realities is folly. Unfortunately, this blindness can even affect otherwise fantastic shepherds:

The cardinal [Dolan] congratulated [New York Governor] Cuomo on his third year as governor and praised some points of the address that he can stand with the governor on, such as reforming gun-ownership laws, raising the state’s minimum wage and improving local health care.

Argentine consumers will suffer under its price ceilings, and New Yorkers looking for work will suffer under its price floor. It does the Argentine leadership no good to ignore basic economics. The same is true of Catholics, bishops or otherwise.

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