Price Controls as A Tool to Fight Poverty

by Don Boudreaux on January 22, 2014

in Economics, Prices, Reality Is Not Optional, Seen and Unseen, Work

David Henderson grows even more pessimistic about the likelihood that higher minimum wages lead to lower rates of poverty.  I like David’s post a lot, so what I’m about to say is meant in no way as a criticism of it.

Having such a discussion about minimum wages and poverty reduction is, from the economic point of view, surreal.  And it’s surreal not only for the reasons that David explains.  This discussion is surreal at a deeper level – namely, very few economists would argue today that price controls generally are an effective means of improving the economic well-being of any broad group of people.  (Price controls can improve the economic well-being of some narrow groups.  An example that I use in class is that rent-control in New York City improves the economic well-being of landlords in those suburbs of New York with no, or less strict, rent control.  The reason is that, by making rental units more difficult to come by in New York City, rent control there causes the demand for – and, hence, the rental rates of – rental units in the suburbs of New York City to be higher than they would be otherwise.  [I understand, of course, that over the long run competition will eliminate even this benefit.])

As I wrote somewhere earlier (I cannot now find the link), most economists, I’m sure, would correctly regard a policy of government mandated price-ceilings on the goods and services bought disproportionately by the poor to be a disastrous means of raising the real incomes of the poor.  The economically untutored might conclude that mandated lower prices of goods and services means greater ability of poor people to consume goods and services.  Yet few economists would accept this conclusion.  And no ‘scientific’ discussions of monopolistically-competitive* power enjoyed by sellers facing downward-sloping demand curves would persuade most economists to take seriously the argument that a government policy of forcibly lowering the prices of all of the goods and services bought by the poor will raise many poor people out of poverty.  Economists understand that the unintended ill-consequences of such price controls are real and would fall heavily upon the intended beneficiaries of the controls.

Yet, for some strange reason, minimum-wage legislation is treated differently from other instances of price controls.  Many professional economists take seriously the notion that the welfare of the poor can be improved through such an intervention.  These economists, as I see matters, latch too readily on to factually implausible justifications for minimum-wage legislation – justifications that are no less available to, and no less plausible for, any economist who wished to argue in favor of general price-ceilings on goods and services bought by the poor.

….

* Note for non-economist readers: Yes, we economists do have the odd term “monopolistic competition.”  And, yes, the notion is as confused and as unhelpful as is the term itself.

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