China freezes prices, inventing inflation that it can’t measure

In today’s International Herald Tribune I see China is moving to control inflation in a manner I never considered – because it’s kind of dumb:

The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing’s mounting concern over inflation.

“All current rules on goods and service prices controlled by the government should be strictly implemented. Any unauthorized price rise is strictly forbidden,” the statement said.

The ministries ordered local governments not to raise prices without the approval of the National Development and Reform Commission, the main planning agency.

The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August.

There was also this one, which blew my mind:

To keep a lid on pork prices over the holidays, the government would draw if necessary on the country’s pork reserves, the ministries said.

Pork reserves? Awesome.

So. Two gripes:

1. Imposing price ceilings creates unofficial markets

Price ceiling generate black markets. Rationing generates black markets. People’s willingness-to-pay cannot be mandated. If people out there are willing to pay $10 for an egg, and the government sets the price at $2, and you have an egg, what will you do? You’ll find that guy with the $10.

We maximise surplus, and in a world of shortages, that means producers extracting rent from consumers.

Economic implication: China’s inflation will not be halted, and it will not go away. What it will do is fall below the radar of official markets, and will become a black market problem, rather than an inflation problem. Will it help Chinese households buy stuff? No. It will be harder to get, now, because transactions will also be illegal, meaning bribes – in fact driving the price even higher still. It also means that the poor (a) have less access to goods and services, because they aren’t networked, and (b) when they do, they’ll pay higher bribes, because they aren’t ‘connected’.

2. Forcing a minimum wage increase generates cost-push inflation

Whether I like the idea or not, it is true that increasing a minimum wage increases the cost of production, when enough of the workforce receive only the minimum wage (I’ll assume many millions of the Chinese workforce do). Cost-push inflation occurs when prices are being raised in response to increasing wage pressures – but those cost-pushed price increases put us back where we were, just with higher wages and prices (i.e. higher inflation).

Economic implication: inflation will/may/should/might be made even worse.

I really need an inflation Tag.


2 comments so far

  1. Alan Freeman on

    If what you say in number 1 happens and a large black market for these products is created, does the government officially (or even unofficially) recognize this? Will they consider their move a success because the inflation of the black market is not measured? I’m one of your students so I’m just getting into this field but do governments factor the black markets into their calculations?
    In my confusion I googled the pork reserve idea, which apparently is a “smelly strategic reserve of hundreds of thousands of live pigs kept at special subsidized farms for precisely the shortage the country is now facing.” As you said, awesome!

  2. zooeygoethe on

    Honestly, I don’t know. It falls to the government to measure such things, so if they don’t, then. I would reckon that they’d consider the move a success, if the problem goes away according to the statistic.

    Disclaimer: this is not to single out the Chinese government. We’re doing it right now in Iraq (a bullet in the back of the head is a ‘bad’ death, but a bullet in the front is just a ‘normal’ death). We do it with employment data all the time. The UK Department of Heatlh has to deal with it, vis. the NHS.

    Anytime you say a statistic is bad at a certain level, all one has to do is get it beneath that level: it is among the most simple of incentives within government. There’s every chance the risks are greater in China, where the reach of the party centre just does not extend to the party ruling the edges (meaing ruling party officials are the bosses of unofficial markets – as per (applied) Communism, generally).

    If, as you say, my point 1. happens (and happens significantly, but it may also not happen at all – being wrong never deters an economist) then no, I don’t expect inflation that gets pushed under the statistic to be measured. I think the government will consider it a success because they can cheerfully report the problem ‘fixed’ (editors from the old Pravda, perhaps, can contribute?).

    I’m not even sure what prices the government controls. Oil, I know, is one. They can control food, indirectly at least, via subsidies (or dictat – it’s still China, after all). These have, historically, bloomed into black markets with magnificent ease, so I see no reason why China would manage to avoid it.

    In terms of foreign trade, we may see export quotas or other controls taken of production (not something one sees often, but the likes of SinoPec and PetroChina may well be concerned).

    I think (personally, but as an economist) they’d do better to look into importing – Pork, etc., from the US, should be feasible. Markets have a way of trying to be markets, even after a government tries to take control. Unless the government pushes very hard, in which case all it generates is suffering.

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