What Nixon’s Ghost Can Teach Americans about Using Price Controls to Curb Inflation
For the last 2 1/2 years, price inflation has been eating away the paychecks and savings of the public.
Consumer prices are up roughly 20% since 2020, according to consumer price index data, and recent polls show the public believes inflation is the single biggest problem facing the country.
Unfortunately, many are so concerned about inflation that they are advocating “solutions” that would do tremendous damage to the economy and families.
Buried in a CBS poll released this week, which showed 59% of respondents disapprove of President Joe Biden’s handling of the economy, was this question: “To try and control inflation, would you approve or disapprove of government price controls?”
An alarming 66% of respondents answered that they would approve of government-imposed price controls to rein in inflation, including 80% of self-identified Democrats. (Fifty-six percent of Republicans also said they’d approve of price controls.)
Using government price controls to curb inflation might sound like a good idea, but basic economics and recent history make it abundantly clear that such a policy would be disastrous.
The last U.S. president to pursue aggressive price controls as a remedy to rising consumer prices was Richard Nixon, who, in August 1971, interrupted a Bonanza episode to announce in a national address that he was “ordering a freeze on all prices and wages throughout the United States” for 90 days. Following this three-month freeze, increases in prices and wages would have to be approved by the federal government’s “Pay Board” or “Price Commission.” (Nixon also called on corporations to pause increases in dividends.)
Many economists warned the price controls would be disastrous, including Nobel Prize-recipient Milton Friedman, who famously confronted the president on the topic at the White House.
Friedman and his fellow economists were proven right. The price controls were a disaster. Not only did they fail to curb rising consumer prices; they also resulted in huge shortages of certain goods and services (evidenced infamously by the massive lines at gasoline stations due to fuel shortages that persisted throughout the decade).
None of this should have come as a surprise.
History is replete with examples showing that price controls are much better at creating shortages, causing famines, and producing black markets than they are at taming prices, which can never be fully constrained in a remotely free society. Famous price control failures stretch back to (and beyond) the Athenian Empire, Rome’s Edict on Maximum Prices, and the Bengal Famine of 1770, which Adam Smith detailed in The Wealth of Nations.
A Nixon apologist might argue the president’s heart was in the right place. He was only trying to “break the back of inflation,” as he said in his address.
Nixon was many things, but he was not a fool; the Nixon tapes show the president fully understood the ramifications of his policy.
“The difficulty with wage-price controls and a wage board, as you well know, is that the Goddamned things will not work,” Nixon privately told an aide six months before he announced his policy. “They didn’t work even at the end of World War II. They will never work in peacetime.”
Nixon didn’t just oppose price controls because of their lack of economic utility. He also opposed them on principle, describing them as “a scheme to socialize America.” Yet he couldn’t resist embracing them because of their political utility.
“To the average person in this country, this wage and price freeze — to him, [it] means you mean business,” Treasury Secretary John Connally told Nixon in August 1971.
In other words, Nixon imposed price controls to show he “meant business” on the economy, hoping the approach would help him win reelection the following year. And it worked. Nixon won in a landslide.
Sadly, it appears the public’s understanding of basic economics has improved little since 1971.
CBS’s recent poll shows price controls remain quite popular, even though economists such as Paul Krugman have described the idea of fighting inflation with price controls as “truly stupid.”
What these economists understand is that price controls cannot solve a fundamental economic reality: scarcity.
Scarcity, which Thomas Sowell has dubbed “the first lesson of economics,” is the simple idea that in a world of limited resources and unlimited human desires, there is never enough stuff to satisfy all our wants, which is why humans adopted property rights and prices — the essence of capitalism — to help them allocate resources.
It’s remarkable how well this formula has served humanity, which is why it’s so alarming to see the public support a policy as intellectually bankrupt and economically destructive as price controls.
Editor’s note: This article by the Foundation for Economic Education was originally published by The Washington Examiner.