I came of age as an economist during the Great Moderation, which lasted from the mid-1980s up to the financial crisis. It was a time of low, stable inflation and relatively mild recessions. I was taught in graduate school that this success had come because, after many stumbles and policy errors, economists finally knew what worked. We learned to respect the laws of supply and demand, to recognize that market failures generally came down to problems with information, and to see inflation as a monetary phenomenon.
Now it looks like the Great Moderation was largely due to luck, and, when faced with any economic challenge, we will not draw on our wisdom but will instead repeat our worst mistakes. To combat the 2007–2009 recession, the first big one in decades, central banks attempted to lower long-term interest rates by buying long-term bonds, a policy once considered an abject failure. It’s still not clear that it works, but central banks continue to rely on it. Capital controls, tariffs, and subsidies are also back in fashion.
Even worse, some economists are now considering price controls to combat inflation. There was a time, as recently as last week, when nearly all economists agreed that price controls don’t work and rank among the greatest policy failures of the twentieth century. That’s because prices often rise when demand increases faster than supply. Price controls do nothing to temper demand; all they bring are more shortages and reduced incentives for suppliers to find ways to produce more goods and substitutes, prolonging the cause of inflation and shortages. All this is common sense now, but a generation ago it was a hard lesson to learn. Even some of the best economists of the twentieth century, including Paul Samuelson and Irving Fisher, argued for price controls—a low point in their careers.
We seem doomed to forget this lesson. Last week, the Guardian published an op-ed from an economist arguing for price controls. New York followed up this week by arguing that price controls are superior to monetary policy because they are a more precise way to deal with rising prices. Economist James Galbraith (via Modern Monetary Theory advocate Stephanie Kelton on Twitter) also argued that price controls are not so bad. We might be tempted to dismiss them as just a few heterodox thinkers, but the idea appears to be gaining traction—as terrible ideas do in challenging times.
Some prominent Democrats and members of the Biden administration blame rising prices on the greed of large corporations. They point to rising profits as evidence that a sudden increase in greed, not changing economic conditions, is driving inflation. This line of argument creates an economic case for price controls and breaking up big firms to tackle inflation. They may not be arguing explicitly for price controls now, but threats of antitrust and other sources of pressure on large firms from the White House appear to be intended to keep firms from raising prices with inflation.
Many blamed greed for rising prices in the twentieth century, too. But price controls didn’t work then, and they won’t work now, even if the economy has changed. Yes, big firms dominate the economy more today, and many are quite profitable, but this was true long before inflation took off. And this reality is no argument for price controls; if anything, the changing market structure makes price controls an even worse idea now than they were 50 years ago.
Bigness can bring greater efficiency, and efficiency is critical to surviving in a technology-driven global economy. Globalization and technology also make greed-driven gouging harder than ever because consumers can search the Internet for lower prices. Even with fewer providers in the marketplace, consumers still have more power. More than ever, prices reflect clear signals about market supply and demand, not greed—which means that prices controls, if imposed, could prove even more harmful than before.
A big, profitable firm won’t go out of business when faced with price controls, even if its motive to supply more products is undermined. But price controls would land yet another fatal blow to small businesses, which already face small margins and are struggling with higher labor costs. Price controls were a bad idea in the last century; they are an even worse one now. Serious consideration of repeating such a mistake is a distressing sign.
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