As inflation in the United States has spiked to levels not seen in forty years, some progressive voices have become increasingly bold in their calls reform. Reasoning that inflation is, after all, due to firms raising their prices, these commentators have directly attacked businesses: complaining about price gouging and what they call corporate greed, threatening antirust legislation, and even calling for price controls. While limiting price increases seems like a straightforward remedy for inflation, a look at how price controls have worked in South America shows why such measures bring more problems than solutions.
“We consulted with the president in view that the shelves were empty and people were demanding food,” Francisco Arias Cárdenas, a Venezuelan provincial governor told a reporter in the fall of 2016 amid unrest in the country. In response, President Nicolás Maduro allowed some provinces to relax the price controls that were driving chronic food shortages. While the easing of price controls led to a jump in prices, the shortages were alleviated. “At least I can come in and buy, even if at high cost,” Ana Atencio, a nurse, told the Wall Street Journal. “Before, I wouldn’t even dream of it because of the line and people fighting.” Unfortunately, Maduro did not learn the lesson from this local experiment, as price controls remained in place nationwide in Venezuela for years afterward. When the price controls were finally relaxed, Venezuela’s economy was hit with hyperinflation and mass hunger, and endured possibly the worst peacetime economic collapse in history.
The Venezuelan experience with price controls was not unique. The failure of price controls to achieve their aims of stopping inflation and allowing for broad access to goods has been documented time after time. Many of these episodes were described back in 1979 in a book whose title, Forty Centuries of Wage and Price Controls: How Not to Fight Inflation, summarizes the history. And yet, it seems, all bad ideas come back around.
It is rare to have a policy with such a long history of failure be proposed as “new” idea. But over the past few months, that’s exactly what we’ve seen. The new progressive commentators argue that price controls are a popular means of arresting corporate power, that “strategic” price controls can arrest inflation by cutting into profit margins, and that “democratic control over price levels” can limit the impact of supply shocks. This last referenced piece was commended by a member of President Biden’s Council of Economic Advisers, which suggests these ideas are being seriously considered by policymakers in the United States.