The price control consensus

On the Chicago Booth Global Markets Initiative last month is the following statement:

The price controls deployed in the 1970s could successfully reduce inflation in the United States over the next 12 months.

The 43 economists interviewed, all from prestigious colleges, are asked to say they disagree, strongly disagree, are unsure, agree or strongly agree. They also have the option to have no reviews or no response.

0 people strongly agree, 10 agree, 5 were unsure, 21 disagree, 4 strongly disagree, 1 had no opinion and 2 did not answer. So 25 out of 43 disagreed or strongly disagreed.

Why wasn’t it 43 out of 43, which I expected given both basic economic reasoning about price controls and our bad experience in the 1970s?

One reason is that some of the economists interviewed read the question more carefully than I did. I took the statement to mean the actual cost of obtaining goods of a given quality. We know that price controls reduce quality and also increase the time it takes to get goods.

But the statement did not clearly state that these things should be included.

I guess those who disagreed had something like what I had in mind. Some of them, like Robert Shimer of the University of Chicago, have expressed it. And many who said they agreed pointed out that the reported inflation figure could fall but there would be huge problems.

Here are the comments of the 9 of the 10 acceptors who took the trouble to give their reasons:

Daron Acemoglu, MIT. Effective price controls, by definition, would reduce price increases, but they would most likely create other huge distortions.

David Auto, MIT. Price controls can of course control prices, but that is a very bad idea!

Darrell Duffie, Stanford. Barring illegal price fixing, this seems mechanically true. A more interesting question is whether price controls are a good idea.

Aaron Edlin, Berkeley. Price controls could temporarily reduce inflation at the cost of shortages and possibly subsequent inflation.

Oliver Hart, Harvard. They could reduce inflation, but the consequence would be shortages and rationing.

Kenneth Judd, Stanford. Yes, it could reduce inflation in the short term, but only temporarily, just like the 1971 controls did. Too much money creation.

Eric Maskin, Harvard. I imagine that price controls could curb inflation, but that does not mean that such controls are a good idea.

Jose Scheinkman, Columbia University. Could reduce measured inflation but would generate inefficiencies and cause even higher inflation when controls are lifted (see US 1974)

Richard Schmalensee, MIT. Over 12 months, probably, but with significant costs.

Note that all 9’s are basically saying price controls are a bad idea. The only deal that didn’t give her reasons was Amy Finkelstein of MIT.

4 of the 5 who answered “not sure” pointed to issues that critics of price controls typically point out:

Robert Hall, Stanford. Some observers believe that the high inflation in 1974 was the result of earlier controls, which would suggest control effects.

William Nordhaus, Yale. Maybe it could reduce inflation in the short term like in the 1970s. Would only cause more shortages and a terrible idea.

Carl Shapiro, Berkeley. What does “successfully” mean? Price increases could be contained to some extent, but underlying supply issues would be compounded.

James Stock, Harvard. There might be some short-lived success because of the way inflation is measured, but in the longer term price controls would be ineffective.

Thus, 9 out of 10 who accepted think it’s a bad idea and 4 out of 5 who expressed uncertainty think it’s a bad idea. Add those 9s and 4s to the 21 and 5s that disagree or strongly disagree, and you get 39 out of 43 that are explicitly critical of price controls.

Not one said price controls were a good idea.

By the way, while I don’t often say positive things about Austan, I loved Austan Goolsbee of the University of Chicago’s rationale for his Strongly Disagree answer:

Stopped. Seriously.

James V. Hayes