Op-Ed: A case for strategic price policies in a time of inflation

Isabella Weber, an economist at the University of Massachusetts, recently jump-started a debate that had been suppressed for 40 years among economists. Specifically, she advanced the idea that rising prices call for a price policy. Imagine that.

The last vestige of a systematic price policy in America, the White House Council on Wage and Price Stability, was abolished in January 1981, a week after Ronald Reagan took office. That put an end to a run of policies that had begun in April 1941 with the creation of Franklin D. Roosevelt’s Office of Price Administration and Civilian Supply — seven months ahead of the Japanese attack on Pearl Harbor.

U.S. price policies took various forms over the next four decades. During World War II, selective price controls quickly gave way to a “general maximum price regulation” (with exceptions), followed by a full freeze with the “hold the line order” of April 1943.

In 1946, price controls were repealed (over objections from Paul Samuelson and other leading economists), only to be reinstated in 1950 for the Korean War and repealed again in 1953. In the 1960s, the Kennedy and Johnson administrations instituted pricing “guideposts,” which were breached by U.S. Steel, provoking an epic confrontation. In the following decade, Richard Nixon imposed price freezes in 1971 and 1973, with more flexible policies, called “stages,” thereafter.

Federal price policies during this period had a twofold purpose: to handle emergencies such as war and to coordinate key price and wage expectations in peacetime, so that the economy would reach full employment with real (inflation-adjusted) wages matching productivity gains. As the postwar record of growth, job creation and productivity shows, these policies were highly effective, which is why mainstream economists considered them indispensable.

The case for eliminating price policies was advanced largely by business lobbies who opposed controls because they interfered with profits and the exercise of market power. Right-wing economists — chiefly Milton Friedman and Friedrich von Hayek — gave the lobbyists an academic imprimatur, conjuring visions of “perfectly competitive” firms whose prices adjusted freely to keep the economy in perpetual equilibrium at full employment.

But even as late as 1980, Jimmy Carter imposed credit controls — a move that won public acclaim but also arguably cost him his reelection, because the economy slipped into a brief recession.

Reagan and Paul Volcker, whom Carter appointed to run the Federal Reserve, succeeded against inflation where Carter had failed, because they were willing to pay an enormous price: unemployment above 10% in 1982, a global debt crisis that nearly brought down the largest U.S. banks and widespread deindustrialization, particularly in the Midwest. A new economic mainstream defended all this by falsely proclaiming that price policies had always failed.

The Reagan-era policies also paved the way for China’s rise. China’s economic strategy in the 1980s relied on price controls with slow adjustments, similar to the U.S. policies of the 1940s. In the 1990s, China continued on its gradual path, allowing its industry to mature as America’s declined.

We now inhabit the world that Reagan, Volcker and China made. For many years, inflation remained low because wages were stagnant and goods imported from China were cheap (as were energy and commodities, owing to a strong dollar and the shale-energy boom much later). But the COVID-19 pandemic disrupted this world, giving us an oil-price shock and shortages in autos and some other goods. That is where current U.S. inflation comes from.

Today’s strategic prices include oil. While oil prices are already being knocked back by sales from the Strategic Petroleum Reserve, this measure is temporary. Energy policy and pricing will be a huge challenge in the future, because the entire system must be transformed to mitigate climate change.

Then there is healthcare, and high drug prices specifically. A public purchasing agency would help here; but “Medicare for all,” with explicit price controls, would be even better. A public agency with discretionary authority could rein in rising supply-chain prices, as well, by stopping opportunistic price gouging, which can make a bad situation worse.

Finally, there is the services sector. Wages here must rise as a matter of justice, and though such increases may show up in the inflation measures, the effect will be modest.

If supply-chain issues can be sorted out, the current inflation tizzy will probably subside early this summer, when last year’s oil and used-car price spikes finally drop out of the 12-month numbers. But if inflation persists, the government should step in to manage strategic prices. Failing that, the next best option is to do nothing, declaring firmly that policy levers will be used to defend full employment over price stability.

The worst option is to punt the issue over to the Fed, which will raise interest rates and fight inflation by letting Americans be kicked out of work. That is what today’s mainstream economists are advocating, stuck, as they are, in the reactionary mind-set that has prevailed for 40 years.

James K. Galbraith holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the LBJ School of Public Affairs at the University of Texas at Austin.