Price controls: Should the government control the cost of food and gasoline?

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It’s been done before, usually in times of crisis, but for most mainstream economists the answer to that question is a resounding “no.” Limiting how much companies can charge will distort markets, they say, causing shortages and exacerbating supply chain problems while only temporarily reducing inflation.

“Price controls can of course control prices – but that’s a very bad idea,” noted David Autor, a professor of economics at the Massachusetts Institute of Technology, in a survey published earlier this month by the ‘University of Chicago.

When asked if price controls similar to those used in the United States in the 1970s could reduce inflation in the coming year, less than a quarter of economists surveyed said they agree, while nearly 60% disagreed or strongly disagreed.

“Stop it. Seriously,” University of Chicago professor Austan Goolsbee said in response to the question. Goolsbee previously served as chairman of the Council of Economics Advisers under former President Barack Obama.

The attitude toward price controls appears to be similar in Washington, where policymakers have shown little enthusiasm for even targeted or temporary measures despite growing pressure on middle-class families feeling the pain of price increases. more than the rich.

Still, with annual inflation hitting a four-decade high of 7% and midterm elections approaching, price controls could feature in future debates about how to bring prices down, especially if the measures taken this year by the Federal Reserve fail to control inflation.

The problem of price control

Price controls can be targeted or imposed on a wide range of products, setting either a floor or a ceiling. The German capital of Berlin, for example, has sought to limit the amount of rent landlords can charge tenants. In the UK, regulators limit how much consumers can be charged for energy and certain types of rail fares.

Economists who are skeptical of price controls often talk about basic economic concepts.

They argue that price caps encourage companies to produce less of a product, while making it more attractive to consumers. Supply decreases and demand increases, with shortages the inevitable result.

But that doesn’t stop governments around the world from resorting to price controls when inflation spirals out of control. As elections approached late last year in Argentina and annual inflation exceeded 50%, the government froze the price of more than 1,000 household items.

Last week Hungarian Prime Minister Viktor Orban said he would reduce the price of flour, sugar, sunflower oil, milk, pork leg and chicken breast ahead of national elections of April, according to Reuters. It also extended caps on energy, fuel and mortgages.

Isabella Weber, an assistant professor of economics at the University of Massachusetts Amherst, argues that price controls also have a role to play in the United States, as policymakers try to tackle inflation caused by the extraordinary circumstances. of the pandemic.

“Price control would buy time to deal with the bottlenecks that will persist as long as the pandemic prevails,” Weber recently wrote in The Guardian, adding that “the cost of waiting for inflation to die down is high”. One of the keys to the policy’s success, she wrote, is to phase out price caps to avoid a rapid price spike.

Free market or price control?

There are many precedents for price controls in the United States, but you have to go back a few decades.

They were last deployed federally during the 1970s, when former President Richard Nixon created a Cost of Living Board in the summer of 1971 and blocked most wage and price increases for 90 days. The policy was popular with the American public, and inflation slowed temporarily after hitting 5.8% in 1970.

But Nixon’s later efforts to cap prices were far less successful. The Republican has repeatedly tried to freeze prices over the next few years, but inflation climbed to 11% in 1974 — exacerbated by the previous year’s declaration by the Organization of the Petroleum Exporting Countries (OPEC) of an embargo on oil shipments to the United States.

Prices are skyrocketing.  How high can they go?

Nixon had worked early in his career as a lawyer for the Office of Price Administration, which was created during World War II to impose price caps on rents and a wide range of products. Price controls were largely effective, but resulted in a thriving black market. The agency was disbanded in 1947.

Limited price controls are also present in the US economy today. Some cities cap rents or the amount landlords can raise each year, while government agencies cap the price some monopoly utilities charge.

Modern politicians tend to trust the Federal Reserve’s ability to control inflation, but the central bank may struggle to cope with price hikes caused by supply chain issues resulting from the pandemic.

President Joe Biden has also taken steps to fight rising prices by targeting businesses and using the power of his office. He pledged to enforce antitrust laws and crack down on price-fixing by meat processors, an industry controlled by a handful of big corporations. Biden has also released oil from the country’s strategic oil reserves in an effort to lower energy prices. Both meat and energy are major contributors to inflation.

Price controls, it seems, are still a bridge too far.

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