The Danger with Price Controls

The Danger with Price Controls

According to the Consumer Price Index, an inflation gauge that measures costs across dozens of items, inflation rose a staggering 7 percent in December 2021 over last year. This increase in inflation represents the fastest pace since June 1982 and has been felt by Americans nationwide.

Making matters worse, this strain comes amid a shortage of goods and workers and is in large part due to pandemic-specific issues. In response, some elected officials have pointed to price controls as a short-term solution to address inflation and lower the cost of goods and stabilize the marketplace. But economists and other policy experts have been quick to chime in, reminding them of the damage and distortions caused by price controls across all sectors.

It is difficult to find any issue where economists on both sides of the political spectrum agree so fervently. In a survey of 41 academic economists published this year by the University of Chicago Booth School of Business, when asked whether price controls could reduce inflation, less than a quarter of respondents said they agree. “Just stop. Seriously,” said Austan Goolsbee, a professor at the University of Chicago, in response to a question about the efficacy of price control measures.

Economists argue that capping prices encourages companies to produce less of a product. What follows is easy to predict: supply goes down and demand goes up, resulting in even more shortages. And we know that the same can be said for housing, rather than improving the availability of affordable housing, measures like these only serve to exacerbate shortages, cause existing buildings to deteriorate and disproportionately benefit higher-income households. “Price controls can of course control prices — but they’re a terrible idea!” said David Autor, an economist at the Massachusetts Institute of Technology.

And we don’t have to look far to learn just what a terrible idea price controls are for the United States. In 1971, President Richard Nixon froze wages and prices to combat inflation. The results of Nixon’s “New Economic Policy” were ultimately disastrous – inflation picked up further to 11 percent as the dollar weakened, ranchers stopped selling cattle, farmers drowned their chickens and supermarket shelves emptied.

The system also gave rise to a thriving black market and was finally abolished in April 1974. George Shultz, the head of the Office of Management and Budget at the time said of the experiment, “At least, we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer.”

Price controls are no remedy for inflation. Let’s not run this experiment again.


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