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Fed Warns Biden Admin: Price Controls Should Stay In The History Books

Fed Warns Biden Admin: Price Controls Should Stay In The History Books

As inflation soars, a growing number of progressives are blaming ‘gouging’,…

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Fed Warns Biden Admin: Price Controls Should Stay In The History Books

As inflation soars, a growing number of progressives are blaming 'gouging', first by 'Big Oil' and now by 'Big Shippers', pressuring the Biden administration to impose price controls.

The problem is - they never work! And as Christopher Neely, the vice president of The St.Louis Fed, warns, price controls distort signals that are used to allocate scarce resources, leading to the inefficient allocation of goods and services, adding that such controls have significant costs that increase with their duration and breadth. Neely suggests appropriate fiscal and monetary policies can reduce inflation without the costs imposed by price controls.

Simply out, as Neely explains below, price controls have had a very long but not very successful history.

The burst of inflation that followed the COVID-19 crisis and the expansionary policy of international central banks, including the Federal Reserve, has returned the topic of price controls to the news. For example, recent articles have advocated forms of price controls to reduce U.S. inflation and achieve other goals.

This article reexamines price controls, discussing their history, operation and disadvantages, and economists’ views on the policy. It explains why most economists believe broad price controls to be costly and ineffective in most situations.

U.S. PCE Inflation Is at Its Highest since 1982

SOURCE: FRED (Federal Reserve Economic Data).

Price controls are government regulations on wages or prices or their rates of change. Governments can impose such regulations on a broad range of goods and services or, more commonly, on a market for a single good. Governments can either control the rise of prices with price ceilings, such as rent controls, or put a floor under prices with policies such as the minimum wage. The following table shows some examples of common price controls.

Types of Price Controls

 

The History of Price Controls

Price controls have a long history: The Code of Hammurabi prescribed prices for goods 4,000 years ago, and the Massachusetts and Virginia colonies did likewise 400 years ago.2 Governments have commonly restricted prices during wartime, with all major belligerents instituting broad limits on prices during World War II. Western countries commonly employed broad price controls into the 1970s. The U.S. government last used broad controls in a series of schemes from 1971-74 following the withdrawal of the dollar from the gold standard. Many developing countries control the prices of staples, sometimes combining price controls with subsidies.

The Impact of Price Controls

Let’s consider the impact of price ceilings. High prices have two economic functions:

  • They allocate scarce goods and services to buyers who are most willing and able to pay for them.

  • They signal that a good is valued and that producers can profit by increasing the quantity supplied.

That is, prices allocate scarce resources on both the consumption and production sides. Price controls distort those signals.

The next figure shows a stylized supply-demand graph for a competitive market in which the equilibrium price-quantity pair would be defined by the point at which the supply and demand curves cross, at {PE, QE}. In the presence of the price ceiling, however, consumers want QD units, while the suppliers are willing to offer only QS units. QD is much greater than QS and the difference is a shortage of the product (Q) at the price ceiling.

Supply and Demand with a Price Ceiling

SOURCE: The author.

The next figure similarly shows how a price floor, such as a minimum wage, changes the equilibrium {price, quantity} combination in a competitive market. In this figure, the price floor produces a glut of supply—for example, unemployment in the case of a minimum wage.

Supply and Demand with a Price Floor

SOURCE: The author.

Costs of Price Controls

Price controls have costs whose severity depends on the broadness of the control and the degree to which it changes the price from the free-market price. The costs include the following:

  • A government bureaucracy and law enforcement must be funded to enforce the controls.

  • Goods and services are allocated inefficiently, both in consumption and production.

  • Competition shifts from production to political markets as firms attempt to influence price-setting decisions.

  • Widespread evasion of price controls promotes disrespect for the law.

  • Suppressed inflation appears when temporary controls are relaxed.

Most of these costs are straightforward, but allocative inefficiency requires some explanation: Because QD is greater than QS in the second figure, there is a shortage of the product, and sellers must figure out how to allocate a limited supply. Perhaps they sell only to longtime customers or customers who also buy other products, or they just limit the quantity that each customer can buy.3 Rent control forces landlords to keep renting to existing tenants at artificially low prices. Such “non-price rationing” is inefficient because some buyers who don’t get the good would be willing to pay more for them. Producers would be willing to increase production and sell to consumers who want to buy at a higher price, but price controls make that illegal.

How Do People and Firms Evade Wage and Price Controls?

When a price ceiling prohibits a desired transaction, the buyer and seller will often evade the price ceiling by transacting in a closely related but unregulated product or by trading illegally in black markets. Similarly, sellers might change a good slightly to prevent it from being subject to the same price limit. The economist Hugh Rockoff notes that the price of clothing has been particularly difficult to control because an article of clothing can be upgraded easily to a higher-priced category by adding inexpensive decoration or reduced in quality by substituting cheaper materials.

The historian Jennifer Klein has documented that the current dependence of the U.S. health care system on employer-provided insurance is a relic of the evasion of wage controls during World War II. During that conflict, defense industries wanted to hire more workers but could not legally raise wages. To make their jobs more attractive, some employers began offering health insurance as a legal fringe benefit.

Price controls prompt greater behavioral changes in the long run. Consider how firms might respond to a higher minimum wage that increases the cost of entry-level labor. In the short run, employers might raise prices and economize on labor. Firms will tend to raise prices, even in a competitive market, because producers must pay higher wages to their employees. People will consume less of the higher-priced products that use entry-level labor intensively. In the longer run, employers will install more capable machines, such as dishwashers or automated cooking machines, to reduce the quantity of entry-level labor they use.

What Do Economists Think about Price Controls?

Economists generally oppose most price controls, believing that they produce costly shortages and gluts. The Chicago Booth School regularly surveys prominent economists on questions of interest, including price controls. Most economists do not believe that 1970s-style price controls could successfully limit U.S. inflation over a 12-month horizon, and many of those economists cite high costs of controls.

Economists do know, however, that price controls can be theoretically beneficial when imposed appropriately on a monopolist or monopsonist, and they do tend to work better in imperfectly competitive markets.4 The economist Hugh Rockoff cautiously suggests a limited role for price controls during some inflation episodes in his book Drastic Measures: A History of Wage and Price Controls in the United States. Rockhoff reported that even the late Milton Friedman, a noted free-market advocate, accepted a limited role for temporary price controls in breaking inflation expectations during a disinflation.

Conclusion

Price controls have had a very long but not very successful history. Although economists accept that there are certain limited circumstances in which price controls can improve outcomes, economic theory and analysis of history show that broad price controls would be costly and of limited effectiveness. Appropriate fiscal and monetary policies can reduce inflation without the costs imposed by price controls.

Tyler Durden Sat, 06/11/2022 - 16:30

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Government

Prevalence of gender-diverse youth in rural Appalachia exceeds previous estimates, WVU study shows

Gender-diverse youth are at an increased risk of suicide and depression, according to the Centers for Disease Control and Prevention. But the prevalence…

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Gender-diverse youth are at an increased risk of suicide and depression, according to the Centers for Disease Control and Prevention. But the prevalence of gender diversity is largely unknown—especially in rural areas, where studies of the topic are rare. 

Credit: WVU Photo/Sean Hines

Gender-diverse youth are at an increased risk of suicide and depression, according to the Centers for Disease Control and Prevention. But the prevalence of gender diversity is largely unknown—especially in rural areas, where studies of the topic are rare. 

To fill that knowledge gap, researchers at West Virginia University— along with their colleagues at the University of Washington and Boise State University — surveyed junior high and high school students in rural Appalachia about their gender identity. They asked about the students’ internal sense of being male, being female or having another identity, like nonbinary. They found that more than 7% of young people surveyed shared a gender identity that did not fully align with the sex they were assigned at birth.  

These findings were published in JAMA Pediatrics.

Being gender diverse, including being transgender, nonbinary or having another gender identity that doesn’t match the sex assigned at birth, is not a medical concern and is considered a normal part of human experience, according to the American Academy of Pediatrics. 

Even though gender diversity isn’t an illness, some young people who are gender diverse experience distress when their gender doesn’t align with their physical characteristics or treatment in society. This distress, called “gender dysphoria,” can be associated with higher rates of depression or even thoughts of self-harm, prior research suggests.

“We have a lot of studies that suggest gender-diverse youth are two to four times as likely to experience depression and thoughts of self-harm as their cisgender peers, or young people whose sex assigned at birth and gender identity fully align,” said WVU School of Medicine researcher Dr. Kacie Kidd, who co-authored the study. “This is an area where we need to do more research. We need to better understand how to support these young people, especially now that we are increasingly recognizing that they are here and would likely benefit from the support.”

Other study authors include Alfgeir Kristjansson, an associate professor with the WVU School of Public Health; Brandon Benton, a nurse with WVU Medicine; Gina Sequeira, of the University of Washington; and Michael Mann and Megan Smith, of Boise State University. 

Few studies have asked young people directly about their gender identity. 

A 2017 study suggested that West Virginia had the highest per capita rate of transgender youth in the country at just over 1%. 

“Prior studies have used less inclusive questions when asking young people about their identity,” said Kidd, an assistant professor of pediatrics and internal medicine. “We suspected that this underestimated the prevalence of gender-diverse youth.” 

She and her colleagues had previously asked these more inclusive questions to young people in Pittsburgh, a city in Appalachia. Nearly 10% of youth in that sample reported having a gender-diverse identity. 

“Despite the high prevalence of gender-diverse identities found in our Pittsburgh study, information about rural areas was still unknown,” Kidd said. “We suspect that many of the young people in rural Appalachia who shared their gender-diverse identities with us in this study may benefit from additional support, especially if they do not feel seen and supported at home and in their community.” 

This new study is one of many to recognize that researchers interested in gender diversity face a dearth of data when it comes to rural areas.  

It’s also one of many studies to recognize that gender-diverse individuals can face a scarcity of health care options, affirming social networks and other forms of support in those same rural areas.

For example, in a recent study led by Megan Gandy, BSW program director and assistant professor at the WVU School of Social Work, up to 61% of participants said they had to travel out of West Virginia to access gender-related care.

And another recent study conducted by Zachary Ramsey, a doctoral candidate in the WVU School of Public Health, found that rural areas could present unique barriers to sexual and gender minorities. 

Those barriers included discrimination and heteronormativity — or, the belief that a heterosexual and cisgender identity is the only “normal” one. They also included a lack of training for health care providers in handling LGBTQ concerns.

“Adolescent mental health is at a crisis point, according to the Centers for Disease Control,” Kidd said. “We have an access concern because so many young people need mental health services nationwide and we just don’t have enough mental health professionals to meet that need. It’s a growing problem and certainly gender-diverse youth are at an even greater risk.” 

In CDC data, the number of adolescents reporting poor mental health has increased, especially during the COVID-19 pandemic. Support from parents, schools, communities and health care providers has been associated with improved mental health outcomes, especially for gender-diverse youth.  

“Gender-diverse youth are incredible young people, and — as our study found — many of them live in rural areas,” Kidd said. “It is important that we ensure they have access to support so that they are able to thrive.”

Citation: The prevalence of gender-diverse youth in a rural Appalachian region”

Research reported in this publication was supported by the Centers for Disease Control and Prevention under Award Number U48DP006391 and the Agency for Healthcare Research and Quality under Award Number 5K12HS02693-03. The content is solely the responsibility of the authors and does not necessarily represent the official views of CDC or AHRQ.


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Economics

NY Fed Inflation Expectations Plunge Most On Record, But There Is A Catch…

NY Fed Inflation Expectations Plunge Most On Record, But There Is A Catch…

Readers will recall that according to Jerome Powell’s own presser,…

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NY Fed Inflation Expectations Plunge Most On Record, But There Is A Catch...

Readers will recall that according to Jerome Powell's own presser, the Fed's first 75bps rate hike in more than two decades was erroneously prompted by an abnormally higher preliminary UMich 5-10 year inflation print (which was subsequently revised lower in the final number). Well, if the Fed is so data-dependent that it now react to preliminary econ data prints, then the latest data out of the NY Fed's monthly Consumer Expectations survey would suggest a rate cut may be on deck.

Today at 11am ET, the NY Fed released its latest Consumer Expectations survey which showed a record drop in short-, medium- and longer-term inflation expectations: specifically, inflation expectations at the 1-year horizon decreased to 6.22% in July - the lowest since February - from the previous month’s 6.78%, the biggest monthly drop on record as expectations about year-ahead price increases for gas and food fell sharply. At the same time, median three-year-ahead inflation expectations also declined, from 3.62% to 3.18%, lowest since April 2021.

"Both decreases were broad based across income groups, but largest among respondents with annual household incomes under $50k and respondents with no more than a high school education," the report noted.

Finally, the median five-year ahead inflation expectations, surveyed intermittently since the beginning of this year, fell from 2.8% to 2.3%. After being stable at 3.0% during the first three months of the year, the series has been trending down since. Disagreement across respondents in their five-year ahead inflation expectations remained unchanged in July.

The Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined slightly at both the one- and three-year-ahead horizons. Uncertainty at the five-year-ahead horizon decreased more substantially.

Putting the move in context, while the NY Fed's 3 Year inflation expectations overshot most other forward inflation trackers, it also has tumbled the most in recent months.

 

Separately, home price growth expectations and year-ahead spending growth expectations continued to pull back from recent series highs. Households’ income growth expectations improved. Some more details:

  • Median expected change in home prices one year from now fell to 3.46% from 4.38%, its third consecutive decrease and its lowest reading of the series since November 2020. The decline was broad based across education and income groups and across census regions, but was largest in the Northeast census region.
  • Decrease in expected gas price growth second largest on record in available data going back to 2013; decline in food price growth expectations largest since series began; Over the next year consumers expect gasoline prices to rise 1.46%; food prices to rise 6.66%; medical costs to rise 9.2%; the price of a college education to rise 8.43%; rent prices to rise 9.91%
  • Expectations about year-ahead price changes decreased sharply by 4.2 percentage points for gas (to 1.5%) and by 2.5 percentage points for food (to 6.7%). The decrease in expected gas price growth was the second largest in the series, just below the 4.5 percentage point decline in April of this year. The decline in food price growth expectations was the largest observed since the beginning of the series in June 2013. There were smaller declines in expectations about year-ahead changes in rent (from 10.3% to 9.9%), medical care (from 9.5% to 9.2%), and college education (from 8.7% to 8.4%).

The red arrow on the chart below shows just how remarkable the collapse in gas price expectations is: while we are confident the survey organizers phrased this question on purpose in a way to make the Biden admin look good, we doubt they expected that the result would be respondents calling for a mid-2023 depression!

Aside from inflation, survey respondents had the following expectations about the...

Labor market:

  • Median one-year-ahead expected earnings growth remained unchanged at 3.0% in July for the seventh consecutive month.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased by 0.2 percentage point to 40.2%.
  • The mean perceived probability of losing one’s job in the next 12 months declined slightly to 11.8% from 11.9%, remaining well below its pre-pandemic reading of 13.8% in February 2020. The mean probability of leaving one’s job voluntarily in the next 12 months rose to 19.5% from 18.6% in June. The series has moved within a narrow 18.6% to 20.4% range over the past year.
  • The mean perceived probability of finding a job in the next three months (if one’s current job was lost) declined to 55.9% from 56.8%, moving slightly below its trailing 12-month average of 56.5%.

A quick aside here to point out just how ludicrous the survey now is thanks to today's responses which on one hand see a collapse in inflation expectations... and also at the same time the majority sees the unemployment rate dropping from here to new all time lows (as just 40% see higher unemployment).

Yes, we know that survey respondents don't really do Econ 101, but one would at least have hoped that the survey organizers would avoid a situation where they have two mutually impossible outcomes!

Household Finance

  • The median expected growth in household income increased by 0.2 percentage point in July to 3.4%, a new series high. The increase was most pronounced for respondents without a college education and with lower (below $50k) annual household incomes.
  • Median year-ahead nominal household spending growth expectations fell by 1.5 percentage points to 6.9% in July, well below its series high of 9.0% in May, but remains above its trailing 12-month average of 6.4%. The decline, the largest in this series, was broad-based across age, education, and income groups.
  • Perceptions of credit access compared to a year ago continued to deteriorate in July, with the share of respondents finding it harder to obtain credit now than a year ago reaching a series high. Expectations about future credit availability improved slightly.
  • The average perceived probability of missing a minimum debt payment over the next three months decreased by 0.5 percentage point to 10.8%, remaining below its pre-pandemic level of 11.4% in February 2020.
  • The median expectation regarding a year-ahead change in taxes (at current income level) increased by 0.4 percentage point to 4.9%.
  • Median year-ahead expected growth in government debt decreased by 0.4 percentage point to 10.7%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now decreased to 34.1% from 35.7%.
  • Perceptions about households’ current financial situations compared to a year ago improved slightly in July, with slightly fewer respondents reporting being financially worse off than they were a year ago. Respondents were also more optimistic about their household’s financial situation in the year ahead, with fewer respondents expecting their financial situation to deteriorate a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased to 34.3% from 33.8%.

In summary, while this survey clearly is meant to serve political means (i.e., collapsing gas price expectations), it fails to be even remotely coherent, with most respondents expecting unemployment to fall further. Newsflash: that means no recession, it also means gas prices soar from here.

But since we doubt anyone except us will have read the fine print of the survey, the media will be happy to pump the headline that "inflation expectations" are collapsing for one simple reason: it makes both Biden and the Fed look good. As for the final outcome of current fiscal and monetary policies, let's just check back in one year and see where inflation truly is in the summer of 2023.

More in the full NY Fed report here.

Tyler Durden Mon, 08/08/2022 - 12:40

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Economics

US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders

US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders

US shale is still acting with restraint in terms of production…

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US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders

US shale is still acting with restraint in terms of production growth despite President Biden's calls to increase supplies to squash energy prices that were driven up due to soaring demand, decarbonization efforts, lack of refinery capacity, limited spare capacity, and, of course, geopolitical uncertainty surrounding Russia's invasion of Ukraine. 

ConocoPhillips, Pioneer Natural Resources, and Devon Energy recorded soaring profits in the second quarter, though many of these top shale oil and gas producers were reluctant to boost capital spending to increase output despite elevated prices for crude, according to Financial Times

Executives of these companies are under pressure from Wall Street to return record profits in the form of dividends and share buybacks to investors rather than increasing capital expenditures to boost production. It comes after years of burning cash and issuing equity to survive the multiple boom-bust cycles that paralyzed the shale industry. 

Then there was the chaos of slumping crude oil demand in the virus pandemic lockdowns, and WTI plunged below $0 per barrel for the first time. US shale drillers have rearranged their priorities from exceptional growth rates to stable rates that attempt to prevent another dark winter. The capital that would typically be deployed for drilling is being rerouted to shareholders:

"Unless we have shareholders that come in and say, look, we absolutely — we do not like these big dividends. We do not like your share repurchase program. We want you to go back to a growth model," Rick Muncrief, chief executive of Devon Energy, a top shale producer, told investors. "Until we see that, I see no reason to change our strategy." 

Other shale executives reiterated Muncrief's message as they all remain defiant to the Biden administration's request to increase production. In response, Biden and other western politicians have slammed shale companies' decision not to increase output. 

According to the Energy Information Administration, US crude production is around 12.1 million barrels a day. Production levels remain 800,000b/d from the pre-coronavirus pandemic highs. 

Occidental Petroleum is another shale company concentrating on debt repayments and cleaning up its balance sheet than expanding production. 

"We don't feel the need to grow production," said the company's chief executive Vicki Hollub. "We feel like one of the best values right now is an investment in our own stock." Warren Buffett's Berkshire Hathaway has bought a 20% stake in the company, helping equity value to double over the past year. 

"This year has marked a reversal in the shale industry's fortunes after hefty losses during the pandemic, although fears of a recession have once again cast a cloud over its prospects," FT said. 

Shale also has another problem: its inability to raise production due to bottlenecks in the industry. 

Last month, Halliburton Co.'s CEO Jeff Miller warned oilfield equipment market is so tight that oil explorers are limited to the amount of production they can bring online. 

Miller said oil companies don't have enough fracking equipment for newly leased wells this year. He said diesel-powered and electric equipment are in short supply, "making it almost impossible to add incremental capacity this year." 

similar message was conveyed by Exxon Mobil, whose CEO said that global oil markets might remain tight for another three to five years primarily because of a lack of investment since the pandemic began.

"Availability of frac fleets is one of main bottlenecks impeding oil and natural as production growth for the next 18 months," Robert Drummond, chief executive officer of fracking firm NexTier Oilfield Solutions, recently told Reuters

... this bottleneck is due to several years of divestment and decarbonization -- making the days of shale roaring back to life over for now.   

So shale execs funnel profits back to shareholders instead of boosting production -- and even if they were to increase output, there are severe bottlenecks in the equipment space that inhibits bringing on new rigs. 

Making matters worse for the Biden administration, OPEC+ only increased production last week by a measly 100k barrel per day in output for September - considerably less than the 300-400k increase expected by many. This means OPEC+ has limited spare capacity, so crude prices should stay elevated overall. 

Tyler Durden Mon, 08/08/2022 - 12:15

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