Soaring inflation revives the debate on price control

In a recent survey of 41 academic economists conducted by the University of Chicago Booth School of Business, 61% said that price controls similar to those imposed in the 1970s would fail to “successfully reduce the US inflation over the next 12 months. Others said the policy could lower inflation in the short term, but would lead to shortages or other problems.

“Price controls can of course control prices – but that’s a very bad idea!” David Autor, an economist at the Massachusetts Institute of Technology, wrote in response to the survey.

In August 1971, as consumer prices rose at their fastest rate since the Korean War, Mr. Nixon announced that he was imposing a 90-day freeze on most wages, prices and rents. After the freeze ended, companies were allowed to raise prices, but subject to limits set by a board headed by Donald H. Rumsfeld, who later served as Secretary of Defense to Presidents Gerald R. Ford and George W. Bush.

The checks initially looked like a success. Inflation fell from a peak of over 6% in 1970 to less than 3% in mid-1972. But almost as soon as the government began to ease restrictions, prices rebounded, leading Mr. Nixon to impose another price freeze, followed by another round of even tighter controls. This time, controls failed to bring inflation under control, partly because of the first Arab oil embargo. Price controls expired in 1974, shortly before Mr. Nixon resigned from office.

Not all attempts to control prices have been such egregious failures. During World War II, the Roosevelt administration imposed strict price controls to prevent wartime shortages from making food and other basic supplies unaffordable. These rules were generally considered necessary at the time, and economists tended to view them more favorably. In fact, there have been many instances of wartime price controls throughout history, often associated with limits on rationing and wage growth.

Few economists today defend Nixon price controls. But some argue that it’s unfair to view their failure as a definitive rebuttal of all price caps. The 1970s were a time of significant economic turmoil, including the Arab oil embargo and the end of the gold standard – hardly the setting for a controlled experiment. And Nixon-era price caps were wide, while modern proponents suggest a more personalized approach.

In recent years, many progressive economists have reconsidered once despised ideas like the minimum wage in response to evidence suggesting that real-world markets often don’t behave as simple economic models predict. According to some economists, price controls should be subject to a similar reassessment.

James V. Hayes