As the global economy darkens and financial trade is tighter than ever, government-mandated prices seem to be making a comeback. Europe is suffering significant financial hardship due to the war between Ukraine and Russia, and most recently the Kremlin has cut off major gas supplies to the European Union. Now, members of the European Commission and G7 finance ministers are trying to cap crude oil and electricity prices.
The Axios editorial states that price control ideas are being taken up by “influential economic thinkers“.
The war between Ukraine and Russia, after the Covid-19 pandemic and the massive amounts of stimulus produced around the world, has plunged the global economy into crisis. Last weekend, world economists discussed how Russia wants “the collective West” lifts the financial sanctions against the country.
A spokesman for Vladimir Putin, Dmitry Peskov, says the Nord Stream 1 pumping problems are due to financial sanctions imposed on the country. Reuters reported that “gas prices in Europe have risen by 30 percent“, following the statements of Mr. Peskov.
The reports note that “Europe is preparing for a brutal and cold winter” this year, as the price of gas – used to generate electricity and for home heating – has reached colossal heights. Rising gas prices in Europe have prompted politicians to reinstate price control regulations that have not been enforced since the 1970s.
The debate over reinstating price controls began to resurface late last year and has sparked much conversation on the topic throughout 2022. However, with the war between Ukraine and Russia, the discussions have intensified.
On September 6, 2022, Axios Markets author Matt Phillips explains in an editorial that the. price controls are only “no longer a relic of the 1970s“, and the journalist adds that “price controls are back“. Phillips’ editorial talks about the G7 finance ministers’ meeting last Friday and how members “committed to a plan to limit the amount Russia gets from oil sales“.
In addition, the journalist adds that the European Commission revealed last week its intention to launch a “emergency intervention and structural reform of the electricity market“. Price controls are on the minds of politicians around the world, and the trend is also emerging in America.
“When the government adopts price controls, it defines the market price of a product and forces all, or a large percentage, of transactions to occur at that price instead of the equilibrium price set by the interaction between supply and demand“In 2001, the American economist Fiona M. Scott Morton detailed the problem.
Most recently, price caps have been imposed on certain pharmaceuticals sold in the U.S., and pharmaceutical companies are required to pay a penalty if the price of certain drugs, such as insulin, goes up too much. The St. Louis branch of the Federal Reserve has also written about price controls and offers a different perspective than many economists who support the idea today.
“As inflation rises, some have called on the government to impose price controls“, the St. Louis Fed said in an internal report. “But these controls have significant costs that increase with their duration and scope.“
There are many arguments against price controls from a basic economic perspective that point out that these laws can distort the natural market. A myriad of economists believe that price controls also suppress and distort supply and demand.
Price caps can cause even more headaches for bureaucratsbecause price control policy can introduce black markets, hoarding and rationing, queuing, and actually increase the price of consumer goods over time.
“When prices are kept below natural levels, resources such as investor talent and capital leave an industry to seek better returns elsewhere“, American economist and Theodore Nierenberg Professor at the Yale School of Management, Fiona M. Scott Morton, explained in a 2001 article.
Despite criticism from economists around the world, the author of Axios Markets says that “price controls, once derided, are being taken up by influential economic thinkers“. Phillips also highlights an opinion piece written by Financial Times (FT) writer Martin Wolf, who wrote that “price controls, even rationing, must be on the table“. Wolf asserts that the “UK energy crisis is a wartime burden“.
The author admits that the “remarkable measureNixon’s “remarkable measure” of imposing fixed prices was “widely perceived as ineffective in countering rising prices“, and that the price controls of World War II were a complete failure.
In addition, the editorial mentions that former U.S. President Richard Nixon “took the remarkable step of imposing price and wage controls” in 1971. However, economists have noted for years, and wtfhappenedin1971.com makes clear that Nixon’s economic measures were far from “outstanding“. Phillips also mentions that Nixon’s price control policy was reversed in 1974. He also notes that the economic measures taken by the 37th president of the United States were “widely regarded as ineffective in countering rising prices.“
Despite the history of price controls in the past and the economic arguments against this policy, János Allenbach-Ammann and Vlad Makszimov of euractiv.com insist that price controls “[sont rentrés dans] the european debate on inflation “. Price controls were also imposed during World War II, as the Office for Emergency Management of the United States was created in 1941. The Office of Price Administration (OPA) was created to initiate price fixing for certain commodities and to curb surges in rental costs.
Between 1943 and 1945, the U.S. Consumer Price Index (CPI) rose by 4 percent, and from 1939 to 1943, the CPI soared by 24 percent. While the CPI then and now research studies show that price controls did not work, price fixing did. In addition, the U.S. deficit rose from 3 percent to nearly 27 percent of the nation’s gross domestic product (GDP) in 1943.