No longer a relic of the 1970s, price control is back
The inflation, energy, and security shocks plaguing the global economy are prompting a type of government intervention in markets last seen in the 1970s.
why does it matter: Price controls were largely abandoned after the 1970s, as American and world politics shifted toward less government involvement in the economy.
- It was the beginning of the end for the bipartisan Keynesian consensus, which emphasized the role of government in managing the economy. In its place, a greater reliance on markets emerged during the Reagan administration—and dominated the post-Cold War era.
playing condition: The finance ministers of the Group of Seven major industrialized nations pledged on Friday to draw up a plan aimed at limiting the amount of money Russia makes from oil sales, and to form a cartel of buyers in a bid to curb Russian crude prices.
- Separately, European Commission officials last week signaled plans for an “emergency intervention and structural reform of the electricity market” amid soaring electricity prices and Russia’s decision to cut off gas flows westward.
The Big Picture: For decades, governments have relied on largely apolitical market mechanisms to allocate goods from sellers to buyers based on the basic logic of economic efficiency.
- But energy markets are now economic battlegrounds, and governments are forced to play a larger role.
what are they saying: “When Russia stops exporting gas, or when Western countries decide to impose sanctions, the markets affected are not subject to the laws of supply and demand. “They are doomed to political interference,” says Isabella Weber, professor of economics at the University of Massachusetts Amherst, one of the first current crises to argue that governments should take action to stabilize certain prices.
Yes, but: So far, much of the efforts of major Western countries to manage prices have been confined to the energy sector.
- We don’t see governments adopting the kind of broad brush policies that were used periodically from World War II until the 1970s.
the other side: Orthodox economics has long argued that almost all price controls are counterproductive, and almost inevitably lead to shortages.
- That is because the demand for goods is artificially raised by below market prices, and with prices fixed, producers do not see a strong reason to increase production.
recovery: In 1971, President Nixon took the remarkable step of imposing price and wage controls, in an effort to try to control the inflation that threatened his election campaign the following year.
- The controls remained in place until 1974, although they were largely seen as ineffective in the face of rising prices.
- Their mixed record in the 1970s obscured the fact that they were important economic tools during emergencies such as World War I and World War II.
- President Reagan canceled 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 large government management of the economy, and toward a laissez-faire approach.
Bottom line: “The pendulum is swinging the other way,” Daniel Yergin, an energy expert and co-author of Leadership Heights, a history of the shift from economic state control to a market-based system, tells Axios.