America’s recent inflation spike has prompted renewed interest in an idea that many economists and policy experts thought they had long ago left behind for good: price controls.
The federal government last imposed broad-based limits on how much private companies could charge for their goods and services in the 1970s, when President Richard M. Nixon ushered in wage and price freezes over the course of a few years. That experiment was widely regarded as a failure, and ever since, the phrase “price controls” has, at least for many people, called to mind images of product shortages and bureaucratic overreach. In recent decades, few economists have bothered to study the idea at all.
As consumer prices soared this fall, however, a handful of mostly left-leaning economists reignited the long-dormant debate, arguing in opinion columns, policy briefs and social-media posts that the idea deserves a second look. Few if any are arguing for a return to the Nixon-era policies. Many say they aren’t yet ready to endorse price controls, and just want the idea to be taken seriously.
Even so, the renewed discussion brought a swift reaction from many mainstream economists on both the right and left, some of whom suggested it would be a mistake to even open the door to the idea. So far, decision makers in Washington haven’t embraced price caps, even in a more modest form.
Here’s what to know about the push for price controls, the history of the idea and the possible outcomes if they were to be tried in 2022.
Why do (most) economists dislike price controls?
In the most basic economic models, prices are a function of supply and demand. If prices for a product are too high, people won’t buy as much of it. If prices are too low, companies won’t make as much money, and will make less of the product. In a free market, prices naturally settle at the point that balances out those two forces.
In that model, when the government imposes an artificial cap on prices, supply falls (since companies won’t make as much money) and demand rises (since more people will want to buy at the government-imposed lower price). As a result, supply can’t meet demand, resulting in shortages.
That’s the theory. In the real world, a variety of factors — imperfect competition between producers, unpredictable behavior by consumers, practical limits on how quickly operations can ramp up and down — mean that prices don’t always behave the way simple models predict.
Still, most economists argue that the basic logic of that theory still holds: Artificially holding down prices leads to shortages, inefficiencies or other unintended consequences, like an increase in black-market activity. And while some economists say price controls on specific products can make sense in specific situations — to prevent price-gouging after a natural disaster, for example — most argue that they are a poor tool for fighting inflation, which is a broad increase in prices.
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.
Have price controls worked in the past?
In August 1971, with consumer prices rising at their fastest pace since the Korean War, Mr. Nixon announced that he was imposing a 90-day freeze on most wages, prices and rents. Once the freeze ended, companies were allowed to raise prices, but subject to limits set by a council headed by Donald H. Rumsfeld, who later served as defense secretary for Presidents Gerald R. Ford and George W. Bush.
The controls initially looked like a success. Inflation fell from a peak of more than 6 percent in 1970 to below 3 percent in the middle of 1972. But almost as soon as the government began to ease the restrictions, prices shot back up, leading Mr. Nixon to impose another price freeze, followed by another round of even more stringent controls. This time, the controls failed to tame inflation, in part because of the first Arab oil embargo. The price controls expired in 1974, shortly before Mr. Nixon resigned from office.
Not all attempts at reining in prices have been such clear failures. During World War II, the Roosevelt administration imposed strict price controls to prevent wartime shortages from making food and other basic supplies unaffordable. Those rules were generally viewed as necessary at the time, and economists have tended to view them more favorably. In fact, there have been plenty of instances of wartime price controls throughout history, often paired with rationing and wage growth limits.
Why do some economists want to reopen the debate?
Few economists today defend the Nixon price controls. But some argue that it is unfair to consider their failure a definitive rebuttal of 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. And the Nixon-era price caps were broad, whereas modern proponents suggest a more tailored approached.
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. Price controls, some economists argue, are due for a similar reappraisal.
“This is a great suppressed topic,” said James K. Galbraith, an economist at the University of Texas. “It was absolutely mainstream from the start of World War II until the Reagan administration.”
Isabella Weber, an economist at the University of Massachusetts Amherst, has pointed to the period after World War II, when the government quickly lifted wartime price controls and inflation spiked. In a recent opinion column in the Guardian newspaper, Dr. Weber argued that had the controls been removed more slowly, as many prominent economists suggested at the time, inflation might have been lower. The huge, unexpected wartime disruption, she said, might offer parallels for today.
But other experts said there were key differences between the two periods. Wartime price caps typically came alongside rationing, in which the quantity of goods people were allowed to buy was limited, said Rebecca L. Spang, a money historian at Indiana University.
“If you try to have price controls without rationing, you end up with shortages, you end up with purveyors pulling their goods from the market,” she said.
Enforcing price controls is also difficult: It requires popular acceptance, agency personnel and wide governmental support. Broad buy-in of shared ideas is not a feature of the modern political landscape.
“The cultural context has changed so much,” she said, noting that the world since World War II has begun to treat economics as an individual pursuit, emphasizing freedom and low regulation.
What would price controls look like in 2022?
So far, few people have offered specific proposals for price controls in response to the recent jump in inflation. But economists who are exploring the idea are focused on areas where the pandemic has disrupted supply chains.
Those disruptions, this argument goes, may take time to resolve. In the meantime, if needed products — meat, computer chips, gas — come up short, it is not clear that market forces will be able to rapidly expand production to meet demand. That could lead to a situation where companies can make big profits by charging more for goods in short supply, and in which only the rich can afford some products.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe the price burst will fade, but some concerning signs suggest it could last.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities — food, housing and especially gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
By instituting temporary and product-specific price caps, the logic goes, the government could ensure that the poor don’t end up getting gouged. Fans say lower prices would give an incentive to companies to sell as much as they can possibly produce at the permitted price.
“You don’t want to go back to the Nixon model — you can be more targeted,” said J.W. Mason, an economist who co-wrote a recent Roosevelt Institute brief arguing for some limited price controls. “We want to protect people from the possibility that temporary shortages are going to lead to spiking prices.”
Notably, hardly anyone today is calling for a cap on how much wages can rise to go alongside limits on price increases. To critics of price controls, that is a problem: Without constraints on wage gains, companies could face rising labor costs at a time when they can’t charge more, putting them out of business or discouraging them from ramping up production.
“It sounds good: Your wages are going to be higher, and your prices are going to be the same,” said Lawrence H. Summers, a Harvard University economist. “Unless there is a mechanism for producing more stuff, it’s just going to result in longer queues.”
Are powerful politicians calling for price controls?
To date, nobody with major political sway has embraced the price control idea. Price controls are not something under consideration by the administration, a White House official said.
But there have been some sector-specific controls — the cost of coronavirus tests was temporarily held down as part of a deal between big companies and the administration, for instance — and Democrats are increasingly talking about corporate profits as a sign that business behavior is partly responsible for the recent run-up in prices.
“Profits at the biggest U.S. companies shot above $3 trillion this year, and the margins keep growing,” Sherrod Brown, chairman of the Senate Banking Committee, said at a recent hearing. “Mega corporations would rather pass higher costs on to consumers than cut into their profits.”
Democrats and the administration have stopped short of suggesting actual price limits, instead focusing on how to encourage competition and trying to strike deals and take actions — like releasing strategic oil reserves — that could help lower prices around the edges.
But that kind of behavior is what many in favor of modern price controls say they are suggesting: Precise, surgical moves to control inflation rather than blunt policies, like the interest rates increases the Federal Reserve is poised to make this year in a bid to weaken demand and cool the economy.
Fed moves could come at a cost, they argue, slowing the labor market, weakening business investment at a time when it is needed and playing out too slowly to prevent painful price adjustments that may squeeze the poor, in particular.
