Economics Professor Proposes Price Controls as a Powerful Weapon to Contain Inflation – Mish Talk

Isabella Weber, an assistant professor of economics at the University of Massachusetts Amherst, trots out proven economic nonsense in a Guardian article.     

Please consider her economically illiterate proposal: We Have a Powerful Weapon to Fight Inflation: Price Controls. It’s Time We Use It. 

Inflation is near a 40-year high. Central banks around the world just promised to intervene. However, a critical factor that is driving up prices remains largely overlooked: an explosion in profits. In 2021, US non-financial profit margins have reached levels not seen since the aftermath of the second world war. This is no coincidence. The end of the war required a sudden restructuring of production which created bottlenecks similar to those caused by the pandemic. Then and now large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits. 

The White House Council of Economic Advisers suggests that the best historical analogy for today’s inflation is the aftermath of the second world war. Then and now there was pent up demand thanks to high household savings.

President Truman was aware of the risks of ending price controls. On 30 October 1945, he warned that after the first world war, the US had “simply pulled off the few controls that had been established, and let nature take its course”. And he urged, “The result should stand as a lesson to all of us. A dizzy upward spiral of wages and the cost of living ended in the crash of 1920 – a crash that spread bankruptcy and foreclosure and unemployment throughout the Nation.” Nevertheless, price controls were pulled in 1946, again triggering inflation and a boom-bust cycle.

Today, there is once more a choice between tolerating the ongoing explosion of profits that drives up prices or tailored controls on carefully selected prices. Price controls would buy time to deal with bottlenecks that will continue as long as the pandemic prevails. Strategic price controls could also contribute to the monetary stability needed to mobilize public investments towards economic resilience, climate change mitigation and carbon-neutrality. The cost of waiting for inflation to go away is high. Senator Manchin’s withdrawal from the Build Back Better Act demonstrates the threat of a shrinking policy space at a time when large scale government action is in order. Austerity would be even worse: it risks manufacturing stagflation. We need a systematic consideration of strategic price controls as a tool in the broader policy response to the enormous macroeconomic challenges instead of pretending there is no alternative beyond wait-and-see or austerity.