Why Price Controls Don’t Work

Inflation is soaring throughout the world. Here in the United States, it’s rising at an official rate of 9.1% annually. And without the various adjustments Uncle Sam makes to suppress the official rate, it would be increasing at around 18% per year.

One of the most effective ways to fight inflation is to increase interest rates. So far in 2022, the Federal Reserve has raised interest rates three times. It promises more rate hikes in the months ahead if inflation doesn’t moderate.

But higher interest rates mean that businesses and consumers who borrow money face higher payments on their debts. That makes this policy tool politically unpopular.

Yet there’s another policy tool that politicians are considering to fight inflation: price controls. Last week, New York Congressman Jamaal Bowman introduced the “Emergency Price Stabilization Act.” While it wouldn’t directly impose price controls on food, gasoline, or other everyday items whose prices are soaring, it would expand the president’s authority to do so.

There’s also a limited form of price controls in the slimmed-down version of President Biden’s “Build Back Better” Plan (BBBP) we recently wrote about. The plan would allow Medicare to negotiate prices it pays on prescription drugs. Proponents of this measure claim it will result in dramatic price reductions on many drugs, given the huge buying power of the government.

Those of us with long memories know the consequences of such actions. That’s because on August 15, 1971, President Richard Nixon announced:

I am today ordering a freeze on all prices and wages throughout the United States.

When Nixon stated this declaration, I was a teenager. While my mother initially thought price controls were a wonderful idea, she quickly changed her mind. Within a few weeks of Nixon’s announcement, she discovered that she could no longer buy her favorite brands in stores. Manufacturers couldn’t make a profit by delivering them at a government-controlled price. So, they stopped making them.

Two years later, the Organization of Arab Petroleum Exporting Countries imposed an oil embargo against the United States over its support of Israel. Over the next few months, imports fell sharply, and the price of oil quadrupled.

Congress responded by extending price controls on oil. The controls succeeded in keeping the price of gasoline from rising as quickly as it would have without them. But shortages – and long lines at the gas pump – quickly followed.

In 1979, there was another oil price spike, thanks to a revolution in Iran, a major oil producer. Oil prices doubled again in just a few months. With price controls still in effect, long lines at gas stations started again.

This pattern continues to the present day. For instance, Venezuela has had stringent price controls in effect for nearly two decades. And shortages of food, medicine, and other necessities emerged almost as soon as they were imposed. Producers stopped producing because they couldn’t make a profit at the controlled price. The only way for people to buy the goods and services they need is on the black market at a steep premium.

Most of us almost instinctively recognize the folly of wage and price controls. Yet, some economists and think tanks believe they’re justified. For instance, last November, the Roosevelt Institute published a policy brief calling for a vast expansion in government-owned housing and “rent stabilization policies”; i.e., price controls on rent.

The report from the Roosevelt Institute triggered a memory dating from the time I lived in Vienna, Austria. It turns out that about 60% of Vienna’s residents live in homes that are either owned by the city government or by state-subsidized non-profit cooperatives. And many private housing units are subject to rent controls.

The media portrays Vienna as a “renter’s utopia.” Yet as someone who lived there for more than two years, I can assure you that it’s not. It’s true that rentals are affordable in Vienna, but only if you can find a price-controlled unit. I couldn’t find a suitable unit, and it turns out that I’m far from alone.

The reason that I couldn’t find a suitable unit is that in Vienna, when you rent an “unfurnished” apartment, it often means you’re renting an “unfinished” one. For instance, under the city’s rent control regime, tenants are often responsible for paying for new appliances. So when they leave the apartment, they routinely take the appliances – and anything else that’s not nailed down – with them.

I remember looking at one unit in which the previous tenants had removed all plumbing fixtures and kitchen appliances. To make the apartment livable, I would have needed to buy and install a toilet, a stove, a refrigerator, and two sinks, along with closets, a bed and furniture.

Leases in Vienna’s rent-controlled apartments have also led to a great deal of chicanery. It’s routine for the primary leaseholder to sublease their apartment on the black market at rates far higher than the rent-controlled amount. Conversely, in buildings where rents can be raised after a tenant leaves, apartment owners offer renters huge bonuses to move out. Once they do so, they can raise rents to the market rate.

Whether it’s food, fuel, or housing, there’s only one way to ensure that price controls won’t lead to shortages. And that’s with rationing; allowing people to purchase only limited quantities of price-controlled goods which would otherwise be in short supply. Anyone who was alive during World War 2 will recognize this image of a mileage ration card for gasoline:

We hope shortages and rationing aren’t in the version of the future that President Biden and Congressman Jamaal Bowman have in mind for us. They and other advocates of price controls would do well to reflect on a statement reportedly made by Nobel Prize winner Albert Einstein. “Insanity,” Einstein is reported to have said, is “doing the same thing over and over again and expecting different results.”

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