In an opinion piece for British news outlet The Guardian, University of Massachusetts economics professor Isabella Weber said that policymakers should consider implementing price controls to combat inflation.
Noting the fact that inflation is near a four-decade high, Weber argued that an “explosion in profits” is at least partially responsible. She drew an analogy to the aftermath of World War II and economists’ calls for price controls:
Some of the most distinguished American economists of the 20th century called for a continuation of price controls in the New York Times. This included the likes of Paul Samuelson, Irving Fisher, Frank Knight, Simon Kuznets, Paul Sweezy and Wesley Mitchell, as well as 11 former presidents of the American Economic Association. The reasons they presented for price controls also apply to our present situation.
They argued that as long as bottlenecks made it impossible for supply to meet demand, price controls for important goods should be continued to prevent prices from shooting up. The tsar of wartime price controls, John Kenneth Galbraith, joined these calls. He explained “the role of price controls” would be “strategic”. “No more than the economist ever supposed will it stop inflation,” he added. “But it both establishes the base and gains the time for the measures that do.”
To support her reasoning, Weber invoked the need to fight climate change and the decision of Sen. Joe Manchin (D-WV) to pull support from President Joe Biden’s domestic agenda:
Price controls would buy time to deal with bottlenecks that will continue as long as the pandemic prevails. Strategic price controls could also contribute to the monetary stability needed to mobilize public investments towards economic resilience, climate change mitigation and carbon-neutrality. The cost of waiting for inflation to go away is high. Senator Manchin’s withdrawal from the Build Back Better Act demonstrates the threat of a shrinking policy space at a time when large scale government action is in order. Austerity would be even worse: it risks manufacturing stagflation.
In an article published earlier this year, James Dorn — the vice president for monetary studies at the Cato Institute — rightly predicted that progressives would begin calling for price controls as inflation continued to accelerate.
“If inflation persists, and the Fed caters to political pressure to keep rates near zero to finance the growing federal debt and prop up asset prices, it would be tempting for progressives to call for price controls,” Dorn argued. “Those controls would be dressed up as a temporary measure to stabilize prices and win votes, but they would not address the underlying inflationary pressures stemming from excessive money growth and fiscal dominance.”
Dorn referred to the loss of economic freedom witnessed amid the price control regime of the 1970s — during which President Richard Nixon was granted the authority to “initiate overall restraints on wages, prices, and rents in the face of an exceptionally stubborn inflation.”
“The risk is that fiscal dominance will prevail and executive privilege will once again be used to impose price controls that will temporarily suppress inflation and create shortages, just as in 1971,” Dorn continued. “A short period of price controls like in 1971 is especially attractive as it would be used to smooth over the volatility as the economy returns to pre‐pandemic norms.”
“The challenge for the Fed is to avoid being captured by fiscal doves and those who see the Fed as a vehicle for satisfying special interests,” he added. “Although we are far from the double‐digit inflation of the 1970s, an acceleration of inflation from its current levels could make the idea of price controls attractive. The Fed is on a tightrope: it has to avoid excessive money growth but not move prematurely.”