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.