One lesson socialists forgot: Price controls never work

Socialists in both parties may feel they are offering fresh solutions to today’s problems, whether it is government-run grocery stores from Democrats or government-run gas stations from Republicans. These ideas are neither fresh nor solutions. In fact, Henry Hazlitt explained why government intervention generally backfires 80 years ago, in his 1946 classic Economics in One Lesson.

America’s 1937 experiment with a minimum price for coal as well as the Silver Purchase Act of 1934 (which will be examined at a later date) reveal recurring problems with government intervention. Like CEI Senior Economist Ryan Young’s analysis of tariffs, these examples illustrate how knowledge problems, incentive problems, and an impossibility theorem preclude effective central planning.

Knowledge problems

During the Great Depression, price deflation bankrupted coal producers that overinvested during good times. Layoffs increased, wages fell, and mines sat inactive. Hazlitt writes that Congress sought to fix this by compelling coal mine owners “not to sell below certain minimum prices fixed by the government.”

But determining fair nationwide prices proved impossible. No central office possessed enough knowledge about local conditions.

The 1937 Guffey-Vinson Coal Act kicked off a colossal fact-finding mission. Economic planners had to evaluate and reconcile pricing schedules produced by 23 producers’ boards in 10 zones and weigh them against average production costs they were responsible for calculating themselves. They also had to consider consumer complaints, fight litigation, and address widespread noncompliance, which were rampant after two earlier schemes to fix coal were ruled unconstitutional.

The result was slow, expensive, “unrelieved confusion.” By 1940, the Bituminous Coal Division employed over 1,000 staff who monitored 350,000 prices. Procedural expenses cost taxpayers at least $20 million. This was seven times the whole industry’s deficit in 1936. Yale Law Professor Eugene V. Rostow observed in 1941, “It takes so long to establish prices, under the best possible circumstances, that a cost determination reached at the beginning of the proceeding is out of date at its conclusion.” Between 1937 and 1943, when Congress allowed the Act to expire, only one price schedule was ever completed.

Incentive problems

Even if bureaucrats could have approximated free-market price signals, they had no interest in reproducing them. Before Guffey-Vinson, industries and individuals naturally reacted to falling coal prices spurred on by deflationary monetary policy. Mines laid off surplus workers while coal users explored alternatives like diesel trains and natural-gas cookers.

A market response to price changes takes time and leads to winners and losers. But interventionists wanted to ensure that coal won: one senator, James J. Davis (R-PA), asserted “the stabilization of coal means the end of poverty.” Rostow quipped that the “Coal Division wants to keep competitive opportunities open as of the year 1937.”

The Guffey-Vinson Act set a price floor that discouraged operators from cutting fat and innovating, with a punitive 19.5 percent sales tax for undersellers. The Act also favored coal over cleaner, more efficient fuels by tasking already overburdened bureaucrats with researching new uses, marketing tactics, and export opportunities for coal.

Guffey-Vinson, which one representative, J. Buell Snyder (D-PA), called a “great national and humanitarian measure,” was really a wealth transfer to underperforming coal producers from everyone else. Over $20 million was taken from tax funds and sprinkled among unproductive mine owners, mainly in Appalachia. Little wonder that in the two decades after World War II (1949-1969), with free-moving energy prices, Appalachian coal experienced mechanization, layoffs, and competition with substitute fuels, even as total US energy production doubled.

The impossibility theorem

The final question Young posed in his tariff paper was: “Optimizing what?” If Congress wanted to reward laggard coal-mine owners, it could have said so plainly. Instead, politicians and union leaders blamed “unrestrained competition” for “excessive waste,” “sweated labor,” and removing “the [coal] industry as a source of tax revenue.”

Therefore, the Act had unrealistic expectations. One goal was to reduce competitive pressure. But another was making mines raise wages, cut waste, and generate higher taxable revenues. Because these outcomes run counter to a firm’s natural market incentives, the policy created an impossible tradeoff where optimizing for one goal inevitably undermined the others.

In practice, the government just created another subsidy. And due to the knowledge problem, it was an expensive, poorly administered one.

The Guffey-Vinson Coal Act is largely forgotten today because the laws of economics ultimately overrode the laws of Congress. Modern policymakers, with their short memories, are repeating the same mistakes. They assume a knowledge base that does not exist, impose wrong incentives that undermine economic growth, and demand optimized outcomes that cannot coexist.