Biden claims his spending bills will “reduce inflation.”

“Biden’s wrong,” Henderson responds. “There’s no economic theory that says when the government spends a huge amount more money, prices fall.”

Some people want government to stop inflation by imposing price controls.

That would be “horrible,” says Henderson.

Price controls were tried before. In 1971, President Richard Nixon ordered a freeze on all prices.

It sounded reasonable. Too much inflation? Our intuition tells us that government can fix that with a price freeze. But “that’s where people’s intuition goes wrong,” says Henderson.

Wrong because prices are not just money; they are also information.

“Prices are signals … that guide people,” explains Henderson. “Mess that up, you’ve really messed up the economy.”

Price changes tell buyers what to avoid and sellers what to produce. When COVID-19 hit, the price of face masks rose sharply. Immediately, producers made more. New Balance switched from making footwear to making masks.

Flexible pricing gets suppliers to produce what people really need. //

“Price controls are like saying it’s really cold and I’m going to solve that by breaking the thermometer,” says Henderson. “It’s actually worse than that because breaking the thermometer doesn’t reduce the temperature, whereas price controls cause actual shortages!”