There are some notions so thunderously discredited by experience that they may never be revived. No serious person still believes that lead can be turned into gold, that astrologers can predict the future or that fans will turn out to watch baseball in Miami. But some people suffer from the delusion that when inflation emerges, price controls can snuff it out.
Inflation has emerged with beastly vigor. In December, the consumer price index was up by 7% over the past 12 months, the biggest jump since 1982. Federal Reserve Chairman Jerome Powell said recently that inflation represents a “severe threat” that the Fed is prepared to combat by raising interest rates, which it has long avoided.
The reasons for the surge are varied. The pandemic has throttled production of goods and services. Child care woes and fear of COVID-19 have pushed some workers out of the labor force.
Fiscal stimulus in 2020 and 2021, aimed at preventing a recession, left many Americans with money in the bank, and the deprivations of life under COVID-19 have unleashed pent-up demand. For years, the Fed has maintained an “easy money” policy while striving to coax inflation up to its preferred 2% level.
We have too much money chasing too few goods, which is bound to push up prices. Price controls sound like a marvelously simple solution. If the government makes it illegal to raise prices, then prices can’t go up, right?
A few economists, reports The New York Times, are championing the idea. Sen. Elizabeth Warren, D-Mass., encouraged this sort of thinking when she accused grocery chains of gouging consumers to fatten profits — though their stores consistently make only about two cents on each dollar of sales. Joe Biden has threatened antitrust action against companies that are allegedly overcharging.
In time, Democrats may grow frustrated with slow remedies for high prices and decide quicker ones are in order. But history indicates that controls either fail to hold prices down, making them useless, or succeed while generating awful side effects, making them destructive.
We need only revisit the maddening experience of the 1970s, when the federal government tried dictating what sellers could charge. Richard Nixon instituted a broad wage-price freeze in 1971. The result, wrote Daniel Yergin and Joseph Stanislaw in their book “The Commanding Heights,” was that “ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.”
Worst yet were the shortages of oil and gasoline. Price controls led to hourslong lines at pumps, prompted some states and cities to ration supplies, and forced some service stations to close for hours or even days because they had no fuel to sell.
These consequences were not unforeseeable. Putting a lid on prices deters production and encourages consumption, creating a gap between what consumers want to buy and what companies want to sell. Shortages ensue. Allowing prices to rise with demand has the opposite effect, spurring output while dampening demand, bringing the two into balance.
When Ronald Reagan lifted limits on oil and gasoline prices in 1981, critics feared costs would soar. In fact, they rose modestly before going into a long decline. When Reagan took office, crude oil cost nearly $29 a barrel. When he left, it fetched less than $14 — despite years of strong economic growth.
The problem is that controls don’t remove the underlying cause of inflation. As economist Milton Friedman said, trying to cure inflation by imposing price controls is like trying to cool a hot room by breaking the thermometer.
If there is too much money sloshing around as a result of federal relief spending and Fed policy, controls won’t drain it away. If there are too few goods, because of pandemic-related troubles, controls won’t boost it.
Other options hold more promise. With the feds no longer sending out stimulus checks, consumer spending should abate. As the current omicron spike passes, suppliers will be able to ramp up production. Fed tightening is also likely.
Only those who didn’t live through the economic turmoil of the 1970s or have forgotten it could perceive new price controls as a sound idea. Mark Twain supposedly said, “There is nothing to be learned from the second kick of a mule.” But not everyone learns from the first kick.