In the war against inflation, an old weapon is getting new consideration.
The cost of living has surged more than 8% over the past year in the U.S. and is jumping world-wide.
Governments have three main ways to fight inflation: monetary policy, fiscal policy and price controls. Tightening the money supply, primarily by raising interest rates,...
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In the war against inflation, an old weapon is getting new consideration.
The cost of living has surged more than 8% over the past year in the U.S. and is jumping world-wide.
Governments have three main ways to fight inflation: monetary policy, fiscal policy and price controls. Tightening the money supply, primarily by raising interest rates, often works frustratingly slowly. Fiscal discipline requires a far-fetched scenario of politicians suddenly agreeing to tighten their own belts. So perhaps it’s no surprise that price controls—government-imposed limits on how much producers and suppliers can charge for goods and services—are back in vogue.
The conventional wisdom that price controls have always failed is a myth. History shows that they have often been surprisingly effective as temporary measures in urgent crises—such as World War I and World War II.
But controls have seldom worked during peacetime—probably because it takes a national emergency like war to summon enough public support, political resolve and administrative savvy to make price ceilings stick.
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And jawboning almost always fails to stifle inflation. Even during wartime, when appeals to patriotism carry maximum power, demands or threats from politicians rarely deter businesses from raising prices.
In an op-ed in The Wall Street Journal on May 30, President Joe Biden wrote: “I have made tackling inflation my top economic priority.”
So far at least, the administration seems to be ruling out a formal program of price controls. But Democrats in both houses of Congress, led by Sen. Elizabeth Warren (Mass.), Sen. Tammy Baldwin (Wis.) and Rep. Jan Schakowsky (Ill.), introduced a bill last month to prevent what the sponsors call “price gouging.”
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The bill would make it illegal to sell goods or services “at an unconscionably excessive price during an exceptional market shock.”
That language is an uncanny echo of one of the earliest known attempts to control prices in what is now the U.S. In 1623, with the settlers’ war against American Indians sending prices to “a most excessive and unconscionable height,” the governor of Virginia, Francis Wyatt, imposed price controls on more than a dozen essential goods, including “Beere” and “Sider.”
Although there’s scant evidence on whether they worked, those controls were later abandoned.
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It isn’t hard to find examples that failed.
In 301 AD, after the Roman Empire had spent decades diluting its coinage and bloating its bureaucracy, inflation was running at an estimated 35% or more annually.
That year, Emperor Diocletian issued an edict imposing ceilings on the prices of more than 1,200 goods and services—everything from timber and textiles to lions, wine and “liver of swine, fed on figs.” Violators who engaged in “shameless pricing” would be put to death.
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Historians believe the emperor set the ceilings below recent retail prices, so sellers must have simply withdrawn their goods from the market. The edict fizzled; inflation continued to rage.
Controls imposed by President Richard Nixon in 1971 also failed to snuff out inflation, mainly because the Federal Reserve didn’t constrain the money supply.
Such examples show that controls tend to flop when governments lack the will or resources to enforce the rules, when not enough goods are covered, or when monetary and fiscal policy remain loose.
Under such conditions, consumers awash in cash buy whichever products aren’t controlled, and black markets will spring up to create more supply for those products that are controlled but hard to get.
Controls have worked best “when they were used to calm a ‘price panic,’” says Hugh Rockoff, an economic historian at Rutgers University and author of “Drastic Measures: A History of Wage and Price Controls in the United States.”
Such panics occur when people expect inflation to keep heating up. That can become a self-fulfilling prophecy as consumers rush to buy as much as they can as soon as possible and suppliers crank up prices to meet the surge in demand and cover their own rising costs.
In World War I, controls helped cut wholesale-price inflation to 7.1% annually from 32.4%, estimates Prof. Rockoff; in World War II, they helped get inflation down to 1.6% annually from 11.9%.
Price controls, especially on essentials like fuel and food, can be a way to break the public’s expectation—and fear—that the cost of living has to keep climbing.
That’s one reason economists are increasingly calling for selective controls. “As rising costs of essentials like fuel and food start becoming an issue not only for consumers but also for some corporations, interests might be temporarily aligned in stabilizing these prices,” says Isabella Weber, an economist at the University of Massachusetts Amherst and author of “How China Escaped Shock Therapy: The Market Reform Debate.”
That would require cooperation between the U.S. and European governments, she says.
Inflation has also skyrocketed because the price of oil has nearly doubled since last summer; the Russian invasion of Ukraine and the resurgence of Covid-19 in China have disrupted shipments of materials and goods world-wide.
But, at least so far, inflation expectations aren’t climbing steeply; rightly or wrongly, consumers are expecting the cost of living to rise about 5% or 6% in the next year.
Another hitch: The comprehensive rules that successful price controls require can feel like straitjackets.
During World War I and World War II, government agencies engaged thousands of local volunteers to roam through communities investigating prices and behavior.
In 1943, “pleasure driving” was banned, and police pulled thousands of people over; drivers had to explain to the federal Office of Price Administration why their trips were necessary.
No wonder the brilliant and charismatic head of the Office of Price Administration, Leon Henderson, ended up deeply unpopular.
In June 1941, the Journal’s editorial page warned that Henderson was veering toward “industrial dictatorship,” and the comic poet Ogden Nash wrote in 1942:
“There goes Leon
Glowing like neon.
He’s got an appointment
In somebody’s ointment.”
These examples suggest why price controls have nearly always failed during peacetime. During national emergencies, people will put up with not being able to haggle, waiting in line to get a fraction of what they want and even being hauled in front of a review board of nosy bureaucrats.
Then, those impositions feel like patriotic duty. In peacetime, they feel like a burden.
Write to Jason Zweig at intelligentinvestor@wsj.com