Saying No (Again) to Wage and Price Controls

The vast majority of economists understand that economy-wide price controls are a bad idea. The reason is that they prevent prices from adjusting in individual markets. Supplies and demands for various goods change a lot, and avoiding price controls allows prices to adjust to those changes in supplies and demands. We saw a huge problem with President Nixon’s price controls in 1973, when the prices his controllers had set for oil and gasoline were based on a world price of oil of about $3 per barrel. In the fall of 1973, when a suddenly powerful OPEC raised the world price of oil to about $11 dollars per barrel, there was a shortage of oil and gasoline. People who drove vehicles during that time probably remember their frustrating time in line, sometimes to buy less than a full tank of gasoline.

Price controls don’t work, period. You might think that’s the end of the story. Unfortunately, it’s not. Economists occasionally give sophisticated justifications for policies that are bound to fail. Because price controls are so destructive, it’s important to say what’s wrong with economic thinking that lays the groundwork for such controls. It’s also important to say, yet again and if only briefly, what’s wrong with wage and price controls.

This is from David R. Henderson, “Saying No (Again) to Wage and Price Controls,” Defining Ideas, February 2, 2023.

In it I criticize Paul Krugman for coming very close to advocating them and Olivier Blanchard for laying some of the groundwork. I also criticize Blanchard for getting causation on lower inflation and slower growth wrong.

I write:

If you get the causation wrong, you can be led to some bad policies. If you think, for example, that slowing growth will reduce inflation, you might be tempted to advocate higher tax rates or more regulation, both of which would slow growth but would do nothing to reduce inflation.

To drive the point home, I used a joke, but my editor said that it didn’t clearly apply. So he deleted it. If it didn’t work for him, it didn’t work. But see what you think. Here’s the joke:

I’m reminded of the old joke about the guy who calls 911 because he discovers his wife on the floor, having bled from a bullet wound. The 911 operator asks if she’s dead. He answers, “I think so.” “Well, make sure,” says the operator. “Ok,” says the husband. A few seconds later, the operator hears a gun fire twice. “Ok,” says the husband, “she’s dead.”