It’s no longer a relic of the 1970s, price control is back

The inflation, energy and security shocks hitting the global economy are driving a kind of government intervention in the markets, last seen in the 1970s.

Why is this important: Price controls were largely abandoned after the 1970s as US and world politics moved towards less government involvement in the economy.

  • This marked the beginning of the end of the Keynesian bipartisan consensus, which emphasized the role of government in managing the economy. In its place, a greater reliance on markets emerged under the Reagan administration – and dominated the post-Cold War era.

State of play: On Friday, finance ministers from the G-7 group of major economies pledged to put in place a plan to limit Russia’s revenue from oil sales, forming a cartel of buyers to try to cap Russian crude price.

  • Separately, European Commission officials last week announced plans for “emergency intervention and structural reform of the electricity market”, amid soaring electricity prices and the decision of Russia to cut gas flows to the west.

The big picture: For decades, governments have relied on largely apolitical market mechanisms to allocate goods from sellers to buyers based on the fundamental logic of economic efficiency.

  • But today, energy markets have become the scene of economic warfare and governments are being forced to play a bigger role.

What they say : When Russia stops exporting gas, or when Western countries decide to put in place sanctions, the markets that are affected are not governed by the laws of supply and demand. They are governed by political intervention,” says Isabella Weber, a professor of economics at the University of Massachusetts, Amherst, and one of the first amid the current crises to argue that governments should take steps to stabilize some price.

Yes, but: So far, much of the major Western countries’ efforts to manage prices have been limited to the energy sector.

  • We don’t see governments adopting the kind of blanket policies that were periodically used from World War II through the 1970s.

The other side: Orthodox economics has long argued that virtually all price controls are counterproductive and almost inevitably lead to shortages.

  • This is because the demand for goods is artificially raised by below-market prices, and with prices locked in, producers see no reason to increase production.

Rollback: In 1971, President Nixon took the remarkable step of imposing price and wage controls, in an attempt to try to contain the inflation that threatened his re-election campaign the following year.

  • The controls remained in place until 1974, although they were widely considered ineffective in countering price increases.
  • Their mixed record in the 1970s masked the fact that during emergencies such as World War I and World War II they were important economic tools.
  • President Reagan abolished the White House Council on Wage and Price Stability in one of his first acts as president in 1981 – an early part of a policy shift away from government management of the economy and towards a more laissez-faire approach.

The bottom line: “The pendulum is swinging the other way,” Daniel Yergin, energy expert and co-author of “The Commanding Heights,” a story of the shift from state economic control to a market-based system, told Axios.

James V. Hayes