In a recent survey of 41 academic economists conducted by the University of Chicago’s Booth School of Business, 61 percent said that price controls similar to those imposed in the 1970s would fail to “successfully reduce U.S. inflation over the next 12 months.” Others said the policy might bring down inflation in the short-term but would lead to shortages or other problems.
“Price controls can of course control prices — but they’re a terrible idea!” David Autor, an economist at the Massachusetts Institute of Technology, wrote in response to the survey.
Are price controls effective in the past?
In August 1971, consumer prices were rising at an alarming rate. Nixon announced that he would impose a 90-day freeze of wages, rents, and prices. Companies were allowed to increase prices after the freeze expired, but they were restricted by a council headed Donald H. Rumsfeld who was later to serve as defense secretary under Presidents Gerald R. Ford, George W. Bush.
Initial results of the controls looked promising. Inflation dropped from a peak of over 6 percent in 1970 to below 3 percentage in 1972. However, prices rose again almost immediately after the government relaxed restrictions. This led Nixon to impose a second price freeze followed by a new round of stricter controls. In part due to the first Arab oil embargo, the controls did not manage to reduce inflation. The price controls were removed in 1974, just before Nixon resigned.
However, not all attempts to rein in prices have been so successful. To prevent wartime shortages from making food or other basic supplies unaffordable, the Roosevelt administration instituted price controls during World War II. They were generally regarded as necessary at the moment, and economists tend not to favor them. In fact, there have been numerous instances of wartime price control throughout history, often coupled with rationing, wage growth limits, and other restrictions.
Why would economists want to reopen this debate?
Today, few economists defend the Nixon price controls. Some argue that it is unfair for them to be considered a definitive rebuttal to all price caps. The 1970s were a period of significant economic turmoil, including the Arab oil embargo and the end of the gold standard — hardly the setting for a controlled experiment. The Nixon-era price caps were too broad. Modern proponents advocate a more targeted approach.
Many progressive economists in recent years have reconsidered once-scorned ideas like the minimum wage in response to evidence suggesting that real-world markets often don’t behave the way simple economic models would predict. Some economists argue that price controls need a similar reappraisal.
Source: NY Times