The high cost of humbug

In his 1935 satire, "It Can't Happen Here," Minnesota's Nobel laureate novelist Sinclair Lewis conjured a memorable political charlatan, U.S. Sen. Berzelius "Buzz" Windrip — "an inspired guesser at what political doctrines the people would like."

Windrip finagles his way to the tyrannical top in America with such shameless bunk as his "thoroughly tested (but unspecified) plans to make all wages very high and the prices of everything … very low ..."

That particular guess as to what kind of political moonshine might best intoxicate the masses remains a favorite to this day. Everywhere they look, today's potion peddlers see wages they think should be higher and prices they think should be lower.

Trouble is, prices and wages are the nervous system of an economy, indicating where it hurts and what feels especially good. High prices and wages tell firms and workers which products and skills society wants more of (while advising consumers what they might want to use less of). Low wages and prices recommend one's taking up another line of work, or producing something that's less plentiful.

Interfering with such useful messages seldom turns out as well as planned.

For example, inspired guessers in Minneapolis and St. Paul have been hard at work deciding what wages and rents ought to be. It hasn't taken long for their constituents to pay a price, as it were.

Both cities have commanded increases in their minimum wages in recent years. In November, researchers at the Minneapolis Federal Reserve Bank issued an initial report on the effects — which included a pre-pandemic loss of employment in city restaurants. Minimum wage advocates were quick to find fault with the study, and the researchers themselves noted that this is only the first look in what will be a multiyear study.

Meanwhile, readers of this column know that something of a new consensus has lately evolved among economists, finding job losses less clear than once expected in the wake of minimum wage hikes.

Still, the issues are complex, and evidence that large-scale local meddling in labor markets might not be beneficial for all wage earners should not be shrugged off.

The real world evidence on rent control seems even clearer — but apparently not to everybody.

In November, voters in St. Paul enacted what may be the strictest rent control regime in the world, among other things making no allowance for newly constructed rental housing. Within days, developers and investors made it clear that as a result there may be precious little new rental construction in St. Paul.

Faced with more flexibility and predictability for their investments essentially anywhere else, developers put numerous projects on hold and "St. Paul will be lucky to see a trickle" of funding for rental construction this year, according to Star Tribune business columnist Lee Schafer.

It's been enough for a majority of the newly elected City Council in Minneapolis to call for restraint in acting on rent control. Minneapolis voters last fall gave the city authority to impose rent regulation, but did not specify how tightly rents should be limited or when properties should be exempted.

Meanwhile, though, five members of the council signed a commentary on these pages just last week calling for Minneapolis to embrace the full-strength St. Paul rent control formula, along with other policies not exactly designed to make landlords and developers feel appreciated.

In the long run only an increasing supply of housing can make more "affordable housing" possible. And it's hard to see how these chilly political winds in the Twin Cities can do anything but increase the apparent risks of investing in rental construction in these parts, at least in the core cities.

Meanwhile, Windripian wonders are being promised on the national scene, too, in many economic sectors. President Joe Biden, increasingly anxious to shirk blame for worrisome inflation, recently announced a plan to cut rising meat costs down to size.

"While [meatpackers'] profits go up," the president complained during a virtual White House presentation, "the prices you see at the grocery stores go up, [but] the prices farmers receive ... go down ... .

"So, I'm here ... to talk about how we can create fairer markets ... for family farmers and ranchers and bring down the price at grocery stores ... ."

Higher prices for sellers on the farm, lower prices for buyers at the meat counter. What could be simpler?

The farmers' beef, of course, is with a handful of giant meatpackers who dominate the industry. They really do have marketplace power to drive hard bargains, both with livestock producers and with grocers and consumers on the retail end of things. It may be an actual competitive problem that justifies government intervention. Factory livestock production also presents genuine moral and environmental concerns.

But none of this is particularly new, and that makes it implausible as an explanation of the recent price surge. The White House paper on the issue makes it clear that the meat industry has been consolidating for many decades, while wholesale prices were subdued as late as 2019, despite rising per capita meat consumption.

What's apparently happened is that pandemic-related supply chain snarls and worker shortages have driven up processing and distribution costs while huge government stimulus programs have kept consumer demand high.

In such an inflationary situation, well-entrenched enterprises that can readily pass along their costs often enjoy windfalls.

Another interesting current example may be Minnesota state government, which recently touted a nearly $8 billion projected budget surplus thanks to rising tax revenue on incomes and business profits.

This points to the problem with all of the attempts by Biden and others to blame today's inflation on "corporate greed." Self-interest is a constant in human affairs; it doesn't surge and recede like COVID but is as perennial as, say, political opportunism. If "greed" is causing today's inflation, where has it been for the past several decades when inflation has been all but forgotten?

To the extent their position in the marketplace allows, businesses always seek a "profit-maximizing" price — the price level at which the combination of sales volume and price per unit produces the best achievable return on invested capital. This is not necessarily the highest possible price or the highest possible level of production.

And that is why subsidies, price controls and other manipulations of prices so often risk producing unwanted shortages and gluts (shortages of affordable apartments, say, or gluts of lower-skill workers) as investors, firms, consumers and workers all adjust their behaviors.

All this is worth keeping in mind as Washington's latter-day Windrips continue to pursue long-sought high-wage, low-price goals such as a coast-to-coast $15 minimum wage and price controls on prescription drugs.

A much higher nationwide minimum wage — ignoring labor market differences between, say, rural Mississippi and lower Manhattan — hardly seems a surefire strategy for fighting inflation. Yet a $15 minimum for all new federal contractors takes effect this month.

And while nothing is surefire in the complex world of prescription drug pricing, the respected Congressional Budget Office cautioned again last year that "If expected profitability of new drugs declined — because of a change in federal policy, a shift in demand or supply ... or for any other reason — [it] would probably mean fewer new drugs."

Unlike drug companies, politicians are not required to disclose such possible side effects.

D.J. Tice is at doug.tice@startribune.com.