With the global economy in the dark and financial transactions more restricted than ever before in history, government mandated prices appear to be making a comeback. Europe is suffering from major financial difficulties stemming from the war between Ukraine and Russia, and just recently the Kremlin shut down the EU’s main gas supply. Now the European Commission and G7 finance ministers are trying to implement price caps on oil and electricity.
An editorial in Axios claims that the idea of price controls has been taken up by “influential economic thinkers”
The Ukrainian-Russian war following the Covid-19 pandemic and the massive amount of stimulus produced around the world has sent the world economy into a tailspin. This past weekend, global economists discussed Russia’s desire for the “collective West” to lift financial sanctions against the country.
Vladimir Putin’s spokesman, Dmitry Peskov, claimed that Nord Stream 1’s pumping problems were due to financial sanctions imposed against the country. Reuters reportedthat “European gas prices have jumped 30% higher,” in response to Peskov’s remarks.
Nearly dailyandreportsin recent months have noted that “Europe is bracing itself for a brutally cold winter” this year as the price of gas used to generate electricity and heat homes has soared ridiculously high. Rising gas prices across Europe have pushed politicians toward reinstating price control regulations that have not been utilized since the 1970s.
The debate over reinstating price controls began to resurface late last year, sparking manyconversationson the subject throughout 2022. But with the Ukraine-Russia war, that debate has
intensified as it has become a reality.
On September 6, 2022, Axios Markets author Matt Phillips wrote aeditorialexplaining that price mandates are “no longer a relic of the 1970s,” with the reporter adding that “price controls are back.” Phillips’ editorial discusses last Friday’s meeting of G7 finance ministers and the members’ “commitment to implement a plan aimed at limiting the amount of money Russia makes from oil sales.”
The reporter adds that the European Commission last week revealed plans to launch “emergency intervention and structural reform of the electricity market.” Price controls are on the minds of politicians around the world, and the trend is happening in the United States as well.
Just recently, price caps were placed on certain drugs sold in the United Statesand drug companies had to pay a penalty if the price of certain drugs, such as insulin, became too high. The St. Louis branch of the Federal Reserve also wrote about price controls, offering a paradoxical perspective compared to many of the bureaucrats who support this idea today.
“When inflation rises,” the St. Louis Fed reportsays, “some people want the government to control prices.” But such controls have significant costs that increase with their duration and breadth.”
There are many arguments against price controls from the level of basic economics, stressing that these laws can distort natural markets.
Countless economists believe that price controls suppress and disrupt supply and demand
Price caps can be an additional headache for bureaucrats because price control policies can introduce black markets, hoarding, rationing, and queuing, which can actually increase the price of consumer goods over time.
“When prices are kept below natural levels, resources such as human resources and investor capital leave the industry to seek better returns elsewhere,” said Fiona M. Scott Morton,an American economist and Theodore Nehrenberg Professor at the Yale School of Management. explained in a 2001 blog post
Despite criticism from economists around the world, the author of Axios Markets states that “price controls, once ridiculed, are (increasingly) being taken up by influential economic thinkers.” Phillips also highlights aopinion piecewritten by Financial Times (FT) author Martin Wolf, who writes, “Price controls, even rationing, must be on the table.” Wolf claims that “the U.K. energy crisis is a burden of war.”
The author acknowledges that “the majority view” was that Nixon’s “astonishing measure” of instituting a fixed price system “was ineffective in combating rising prices,” and that price controls during World War II were a complete failure
In addition, the editorial noted that in 1971 former President Nixon “took the astonishing step of instituting price and wage controls.” However, economists have been pointing out for years, and the website wtfhappenedin1971.com clearly shows that Nixon’s economic moves were far from “remarkable.” Phillips also notes that Nixon’s price control policies were withdrawn in 1974. He further states that economic moves by the 37th President “were largely regarded as ineffective in combating rising prices.”
Despite the history of past price controls and the economic arguments against this policy, János Allenbach-Ammann and Vlad Makszimov of euractiv.comclaiming that price controls “participated in the European inflation debate”
. Price controls were also in place during World War II because of the establishment of the U.S. Office of Emergency Management in 1941. The Office of Price Administration (OPA) was created to initiate price controls on certain commodities and to control the incidence of rental spikes.
Between 1943 and 1945, the U.S. Consumer Price Index (CPI) rose 4%, and between 1939 and 1943, the CPI soared 24%. According to the CPI at the time and research studies today, price controls did not work, but price manipulationreinforced the black market and skimflation. Moreover, the U.S. deficit jumped from 3% of gross domestic product (GDP) to nearly 27% in 1943.
Image Credits: Shutterstock, Pixabay, Wiki Commons, Editorial photo credit: Spencer Platt/Getty Images(Credits.)
