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Wednesday, January 26, 2022

Price controls spark heated debate as history gets a second look

In a recent poll of 41 academic economists by the University of Chicago’s Booth School of Business, 61 percent said that price controls such as those introduced in the 1970s would not “successfully reduce US inflation over the next 12 months.” Others said the policy could bring down inflation in the short term, but lead to deficits or other problems.

“Price control can certainly control prices, but that’s a terrible idea!” David Autor, an economist at the Massachusetts Institute of Technology, wrote in response to the poll.

In August 1971, with consumer prices rising at the fastest rate since the Korean War, Mr. Nixon announced that he was imposing a 90-day freeze on most wages, prices, and rents. After the freeze ended, companies were allowed to raise prices, but with limits set by a board led by Donald H. Rumsfeld, who later served as Secretary of Defense under Presidents Gerald R. Ford and George W. Bush.

The controls initially looked like a success. Inflation fell from a peak of over 6 percent in 1970 to less than 3 percent in mid-1972. But almost as soon as the government began easing restrictions, prices shot up again, forcing Nixon to freeze prices again. then another round of even tighter controls followed. This time, control failed to curb inflation, in part because of the first Arab oil embargo. Price controls expired in 1974, shortly before Mr. Nixon stepped down.

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Not all attempts to rein in prices have been such clear-cut failures. During World War II, the Roosevelt administration instituted strict price controls to prevent shortages of food and other necessities during wartime. At the time, these rules were generally considered necessary, and economists tended to view them more favorably. In fact, there have been many instances of wartime price controls throughout history, often combined with rationing and wage caps.

Few economists today defend Nixon’s price controls. But some argue that it is unfair to consider their failure as the final refutation of all price restrictions. The 1970s were a period of major economic upheaval, including the Arab oil embargo and the lifting of the gold standard—hardly the place for a controlled experiment. And the price limits of the Nixon era were wide, while modern proponents offer a more personalized approach.

Many progressive economists in recent years have revisited once despised ideas like the minimum wage in response to evidence that real-world markets often don’t behave the way simple economic models predict. Some economists argue that price controls require a similar reassessment.

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