With Inflation High, People Are Talking About Price Controls. Is That a Terrible Idea?

On April 9, 1946, The New York Times published a letter to the editor that would strike most people today as strange.

Signed by 11 former presidents of the American Economic Association, including the luminaries Irving Fisher and Wesley Mitchell, and by the eventual Nobel laureates Simon Kuznets and Paul Samuelson, the letter asked Congress to extend wartime price controls on a wide array of goods and services. The signatories’ aim was to hold down the inflation that had begun to surge.

Such an endorsement of price controls, an unapologetic interference in the workings of the free market, is scarcely imaginable today from a group of mainstream economists.

The Office of Price Administration was set up in 1941, before the U.S. entry into World War II, to prevent the already huge increase in military spending from causing prices to soar. The office was abolished in 1947. In between, it grew from a staff of seven to a bureaucracy of 15,000. It kept a lid on prices during the war, but inflation began to surge afterward as pent-up demand was released.

That’s what the economists who sent the letter to The Times were worried about. “For the next six months numerous bottlenecks in raw materials, components and labor will have to be broken,” they wrote, urging Congress to extend price controls for another year. “And it will be a year before the flow of consumer goods in many markets reaches a peak.”

Today, with inflation at a 40-year high — a 7.5 percent price rise in January over the past year — there’s been a revival of interest in price controls among some left-leaning economists and policymakers. They see price controls as a kinder and gentler way to bring down inflation than raising interest rates, which reduces demand by cooling off economic growth. The controls that they’re contemplating might be limited to products and services that are produced by monopolists or are “essential to human flourishing,” such as food.

Is this a good idea, or one that should be stuffed back in the cabinet of failed economic policies?

Before trying to answer that question, it’s worth noting that World War II was hardly the only time price controls were used in U.S. history. They were used during World War I and the Korean War, as well as during the 1970s under President Richard Nixon. The long absence of price controls since Nixon’s presidency “has been the exception in the nation’s inflation experience, not the rule,” Stephen Reed, an economist at the Bureau of Labor Statistics, wrote in 2014.

James Galbraith, a liberal economist at the University of Texas, Austin, argued in a column last month that federal price policies “were highly effective, which is why mainstream economists considered them indispensable.” He wrote that price controls had been unfairly stigmatized by conservative economists such as Milton Friedman and Friedrich von Hayek, who falsely promised that free markets could achieve full employment through smoothly adjusting prices.

(Galbraith didn’t mention in the column that his father, the famous economist John Kenneth Galbraith, was an administrator at the Office of Price Administration from 1941 to 1943, before he was forced out by conservatives and manufacturers, and that the elder Galbraith regarded price-control enforcement as a highlight of his career.)

Price controls are popular with skeptics of free markets. The economist Isabella M. Weber, of the University of Massachusetts, Amherst, wrote in December that companies were earning record profits by raising prices. She called for “tailored controls on carefully selected prices” to buy time to deal with pandemic bottlenecks.

There are big problems with price controls, though. They do nothing about the root causes of inflation, which are some combination of too much demand and too little supply. They can even worsen the problem by dampening the price signals that tell producers to produce more and consumers to consume less. Rent controls, for example, suppress the incentive to build more housing, which can be counterproductive when more housing is needed.

Price controls can sometimes be effective in preventing acute episodes of price gouging, such as those that can occur in the wake of a natural disaster, but the longer they remain in place, the worse their effects on incentives become. Price controls also cause shortages and generate wasteful activity as people wait in lines, pay bribes and so on to obtain scarce goods.

World War II price controls, which were mostly removed by 1946, suppressed the average price level by at least 30 percent below what it would have been, but at the cost of reducing employment at least 12 percent and output at least 7 percent, according to a 1982 study in the Journal of Political Economy by the economist Paul Evans. (Price controls during the Korean War were less extensive; Nixon’s price controls did curb inflation temporarily but also produced shortages, particularly of meat and gasoline.)

The free market is far from perfect — or even free. I can see an argument for the temporary, surgical application of price controls as part of a broader effort to tackle inflation that includes opening production bottlenecks and preventing anti-competitive behaviors such as price fixing by producers. But returning to their broad use seems misguided.

When I was looking up that 1946 letter to the editor in The Times’ digital archive, I stumbled upon a full-page ad just a few pages away that was placed by the National Association of House Dress Manufacturers. It was seeking relief from Maximum Average Price Regulation, a price control imposed by the Office of Price Administration. “This advertisement is not a plea for the abandonment of price control,” the ad said. “We are for price control as a dyke against inflation.” But, it added, “we believe the O.P.A. should be amended to increase production, not to stifle it.” It said the Office of Price Administration was responsible “for the distasteful compromises you now are making in your choice of essential fashion.”

Yes, inflation needs to be brought down. No, blanket price controls are not the way to do it.

Elsewhere

The Great Resignation, it’s called: The share of Americans who are either working or looking for work — that is, the labor force participation rate — plummeted in the pandemic recession of 2020 and has since retraced only two-thirds of its decline.

How many of the people who are still missing from the labor force would prefer to work? Very few, according to a working paper by the economists Jason Faberman of the Federal Reserve Bank of Chicago and Andreas Mueller and Aysegul Sahin of the University of Texas, Austin. Drawing from a survey of their own design that’s administered by the Federal Reserve Bank of New York, they find that the pandemic-related increase in the gap between the number of hours people worked and the number of hours they desired to work “essentially disappeared by the end of 2021.” That suggests that “the labor market is tighter than suggested by the unemployment rate,” they write.

Quote of the day

“Economic recovery has been strong. In 2021, G.D.P. grew faster than it has in almost 40 years.”

— Cecilia Rouse, chair of President Biden’s Council of Economic Advisers, in Senate testimony on Feb. 17

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