On the Chicago Booth Initiative on Global Markets last month is the following statement:
Price controls as deployed in the 1970s could successfully reduce US inflation over the next 12 months.
The 43 economists polled, all of them at prestigious colleges, are asked to disagree, strongly disagree, state that they are uncertain, agree, or agree strongly. They also have the option of having no opinion or not answering.
0 people strongly agreed, 10 agreed, 5 were uncertain, 21 disagreed, 4 strongly disagreed, 1 had no opinion, and 2 did not answer. So 25 out of 43 disagreed or disagreed strongly.
Why wasn’t it 43 out of 43, which I would have expected given both basic economic reasoning about price controls and our bad experience in the 1970s?
One reason is that some of the economists polled read the question more carefully than I did. I took the statement to mean the actual cost of getting goods of a given quality. We know that price controls reduce quality and also raise the time cost of getting goods.
But the statement didn’t make clear that those things ought to be included.
My guess is that the ones who expressed disagreement had in mind something like what I had in mind. Some of them, such as Robert Shimer of the University of Chicago, expressed that. And many of those who stated agreement pointed out that the reported inflation number could fall but that there would be huge problems.
Here are the comments from the 9 of the 10 agreers who bothered to give their reasons:
Daron Acemoglu, MIT. Effective price controls, by definition, would reduce price increases, but they would most probably create other huge distortions.
David Autor, MIT. Price controls can of course control prices–but they’re a terrible idea!
Darrell Duffie, Stanford. Barring illegal price setting, this seems to be mechanically true. A more interesting question is whether price controls are a good idea.
Aaron Edlin, Berkeley. Price controls could temporarily reduce inflation at a cost of shortages and possibly later inflation.
Oliver Hart, Harvard. They could reduce inflation but the consequence would be shortages and rationing.
Kenneth Judd, Stanford. Yes, it could reduce inflation over the short run–but only temporally–just as the 1971 controls did. Too much money creation.
Eric Maskin, Harvard. I imagine that price controls could restrain inflation–but that doesn’t mean such controls are a good idea.
Jose Scheinkman, Columbia University. Could lower measured inflation but would generate inefficiencies and cause even higher inflation when controls are lifted (see US 1974)
Richard Schmalensee, MIT. Over 12 months, probably, but with significant costs.
Notice that all 9 are essentially saying that price controls are a bad idea. The only agreer who didn’t give her reasons was Amy Finkelstein of MIT.
4 of the 5 who answered “uncertain” pointed to the problems that those who critique price controls typically point to:
Robert Hall, Stanford. Some observers think that high inflation in 1974 was the result of earlier controls, which would suggest some control effects.
William Nordhaus, Yale. Perhaps could reduce inflation in the short run as 1970s. Would only cause more shortages and a terrible idea.
Carl Shapiro, Berkeley. What does “successfully” mean? Price increases could be controlled to some degree but the underlying supply problems would be made worse.
James Stock, Harvard. There might be some ephemeral success because of the way inflation is measured, but longer-run, price controls would be ineffective.
So 9 of the 10 who agreed think they’re a bad idea and 4 of the 5 who expressed uncertainty think they’re a bad idea. Add those 9 and 4 to the 21 and 5 who disagreed or strongly disagreed, and you get 39 out of 43 who are explicitly critical of price controls.
Not a single one said that price controls are a good idea.
By the way, although I don’t often say positive things about Austan, I loved the University of Chicago’s Austan Goolsbee’s justification for his Strongly Disagree answer:
Just stop. Seriously.
READER COMMENTS
Mark Z
Feb 11 2022 at 5:35pm
I suppose the ‘disagree’ economists may have been thinking that price controls don’t hold down *equilibrium* prices, they actually drive them up by reducing supply, even if holding down prices of recorded transactions. Maybe some took ‘successfully’ to imply ‘without causing even worse side effects.’ I think Darren Duffle is right that whether price controls are a good idea is a more interesting question. I hope this survey isn’t brought up by someone as proof that ‘almost 1/3 of economist (who expressed an opinion) support price controls.’
David Henderson
Feb 11 2022 at 6:11pm
You wrote:
I’m pretty sure you’re right.
You wrote:
Indeed, it’s to head off such incorrect thinking that I posted on this. I’ve learned with surveys, whether as an analyst or as a person surveyed, always to look at the question and context carefully.
Pierre Lemieux
Feb 11 2022 at 6:42pm
Very interesting analysis! But is it possible that the ones who did not answer with a plain Disagree were (unconscientiously) trying to read the necessarily ambiguous question (it’s only 17 words) in the right way in order to give an answer acceptable to their academic and political tribe? If the glass is half-full and half-empty and a member of your FULL tribe asks you, you will say it’s half-full. The economists could have disagreed and expressed qualifications, instead of agreeing with some caveats. But at least, as you point out, the non-plain-disagree did express caveats. In economics, you can’t say just about anything.
raja_r
Feb 11 2022 at 9:41pm
Pierre,
That was my interpretation as well. I call it the Tyler Cowen tactic.
john hare
Feb 11 2022 at 7:11pm
A radio show aired a clip of Biden wanting to control medical pricing. Including any cancer cures becoming a public utility. If I was a CEO in that field, I might consider zeroing the R&D budget.
Andrew_FL
Feb 11 2022 at 7:40pm
Actually since the question was “Price controls as deployed in the 1970s” I’m not sure I can agree with the economists who said that price controls could in theory reduce measured inflation-although they still wouldn’t be a good idea. That does not seem to have happened in the 70s. It happened in the 40s, but 70s controls were not as extensive or enforced as the 40s.
Fred
Feb 11 2022 at 7:58pm
I know almost nothing about economics. I did live through the 1970s when our government took some ludicrous steps like the Whip Inflation Now buttons and finally did apparently end inflation with the appointment of Paul Volcker to the Fed. Is there a consensus among economists about the cause of the 1970s inflation, and what are some responsible contrary views to the consensus?
Zachary Bartsch
Feb 11 2022 at 11:25pm
This elaboration comes as a relief.
The way many economics textbooks present it, price ceilings are great for consumers. You might be interested in this:
https://economistwritingeveryday.com/2022/02/04/teaching-price-controls-poorly/
Matthias
Feb 12 2022 at 7:15am
Thanks for the link! It’s an excellent write-up.
David Henderson
Feb 13 2022 at 11:26am
Well done.
Knut P. Heen
Feb 14 2022 at 6:07am
The reason we have people with a PhD teach courses is to provide a deeper understanding than that given by the textbooks. If textbooks were perfect, there would be no need for lectures.
Last time I taught micro, I covered all the points you mention. I even gave a mathematical example in which the consumer surplus fell after the introduction of the maximum price (because the goods were allocated to the “wrong” consumers). I assumed random allocation between the consumers willing to buy at the new maximum price rather than optimal allocation. I also explained how a black market may improve on this allocation.
Philo
Feb 12 2022 at 12:19am
It would take some time to get the bureaucratic machinery for imposing price controls in place. I suppose 12 months is plenty of time, but if the specified time period was, say, 2 weeks, I would answer ‘no’, on grounds of inadequate “state capacity.”
Matthias
Feb 12 2022 at 7:16am
How long did the pandemic price controls (via anti gouging laws) take to implement?
Jon Murphy
Feb 12 2022 at 8:24am
Price controls are frequently imposed pretty much instantly.
Philo
Feb 12 2022 at 1:57pm
Doesn’t the government have to determine and announce maximum prices for all goods and services (that are going to be price-controlled)?
Jon Murphy
Feb 13 2022 at 9:58am
Much of that is already done. Price gouging legislation typically states prices cannot rise X% (usually about 10%) above pre-emergency levels. And likely there’s already a list being populated/already existing before the legislation is even discussed.
David Henderson
Feb 13 2022 at 11:27am
Nixon did it one day, a day that should live in infamy: August 15, 1971.
He announced that for the next 90 days all prices and wages would be frozen at their current level.
Davis
Feb 13 2022 at 12:34pm
I learned this lesson studying minimum wage. Labor economists (who overwhelmingly lean left) generally support minimum wage policy. This gives the average person the idea that economists disagree over whether minimum wage reduces employment or increases prices.
The problem is, every single meta analysis has found that employment does on average decrease and prices do on average increase. Many economists will acknowledge this and still support minimum wage anyways because they believe it’s necessary to this abstract idea of “income equity.”
It’s funny, economists will disagree on policy and obfuscate their reasons giving the layman the impression that basic economic principles are in question. But in reality, economists agree on the tenants and disagree out of principle.
Adam Wildavsky
Feb 13 2022 at 5:11pm
The question equivocates on which meaning of inflation it’s using, price inflation or monetary inflation. “Inflation” literally means “inflating” the money supply, that is, creating more money without anything to back it. Thus, per Milton Friedman, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
I’d expect this in a popular poll but not one aimed at economists.
David Henderson
Feb 13 2022 at 7:53pm
You wrote:
Actually, it doesn’t. It’s clear from context that it means “price inflation,” which is the standard usage and has been for about 70 or more years.
Don Geddis
Feb 14 2022 at 2:55pm
Nobody (except “Austrians”) is confused about this. “Inflation” (in mainstream economics) always means price increases. More importantly, that’s what Milton Friedman meant too. You apparently didn’t understand Friedman at all.
David Seltzer
Feb 13 2022 at 6:11pm
Price controls create shortages and increase ones cost of search for goods. Rent controls in NYC brought about other destructive results to both property owners and tenants. Maintenance was deferred till buildings became unlivable and tenants suffered. As for new construction, there was little incentive to take the risks associated with new building. This was sadly depicted in the 1981 movie, Fort Apache, The Bronx. The decaying, impoverished, high-crime South Bronx region of New York City.
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