The Problem With Wage and Price Controls: Lessons from the 1970s
Published: April 27, 2021
During an economic decline, the first response from many politicians is to manipulate market-based prices or wages. However, history has repeatedly shown that artificially manipulating prices to in order to solve political problems only leads to detrimental shortages, job losses, and other economic hardships. True market-based prices and wages are vital, as they provide insight into consumer preferences, job skills, and available resources.
- What are the objectives of wage and price controls?
- Are there any benefits to wage and price controls?
- Read Choose Economic Freedom: Enduring Policy Lessons from the 1970s and 1980s, by George P. Shultz and John B. Taylor. Available here: https://hvr.co/3v4EAos.
- Listen to the Hoover Virtual Policy Briefings episode “John Taylor: COVID-19 and the Economy.” Available here: https://hvr.co/3dwAr6H.
When bad things happen with our economy, we look to our elected leaders for solutions. And the natural response from our politicians is to do something - anything - to
ease the pain.
Their solution is often to artificially change how much things cost.
Typically, this means mandating lower prices, or higher wages.
But true market-based prices and wages give us vital information - like what consumer preferences are, or how valuable a certain professional skill might be, or the
availability of a particular resource.
And when the government artificially manipulates these conditions, even with the best intentions, it often makes things worse, not better.
In the early 1970s, the U.S. economy faced severe inflation. People demanded action, so in August 1971, Congress gave President Nixon the power
to freeze wages and prices to try to halt inflation.
Initially, these controls semed to work, but before long inflation came roaring back.
Because prices were frozen, consumers could buy more for less. But businesses didn't have enough financial upside to produce enough to
meet the demand.
This led to widespread shortages, including the infamous gas crisis that plagued the decade, from Nixon to Ford to Carter.
Thankfully, we eventually escaped the runaway inflation of the 1970's. But that hasn't stopped policy makers from looking to wage and price controls in other forms to try to alleviate economic pain.
Consider the 2020 Covid Pandemic - demand quickly skyrocketed for masks and other items. But anti-price gouging laws prevented prices from rising with the demand.
So consumers bought more than they needed, and the people who needed them most couldn't get them.
Substantially increasing the federal minimum wage is another example of well-meaning but precarious intervention.
Increasing the federal minimim wage is often positioned as a way to help the poor. But in reality, the natural results of an increased minimum wage are greater competition for lower-skilled jobs, and
greater incentives for businesses to innovate and automate themselves into less reliance on higher labor costs.
The lessons learned from wage and price controls are every bit as relevant today as they were in the 1970's. Policy interventions that artificially change wages and prices consistently lead to detrimental shortages, job loss, and other economic hardships.