With the global economy looking gloomy and financial markets tighter than ever in history, government-mandated prices seem to be back with a vengeance. Europe is suffering from a severe financial crisis caused by the Ukraine-Russia war, and just recently the Kremlin cut off the EU’s main gas supplies. Now the EU Commission and G7 finance ministers are trying to implement price reforms on crude oil and electricity.
An Axios editorial claims price control proposals are being picked up by ‘influential economic thinkers’.
The Ukraine-Russia war has left the global economy reeling in the wake of the Covid-19 pandemic and massive global stimulus. Last weekend, world economists discussed how Russia wants the “Common West” to lift financial sanctions against the country.
Vladimir Putin’s spokesman, Dmitry Peskov, said the Nord Stream 1 pumping issues were due to financial sanctions imposed on the country. According to Reuters, following Peskov’s announcement, “European gas prices rose by 30%.”
Almost every day over the past few months, reports have suggested that “Europe is in for a brutal, icy winter” this year as fuel prices – electricity and home heating – soar to record highs. Rising gas prices across Europe have prompted politicians to reinstate price controls that have not been used since the seventies.
The debate over reinstating price controls began to grow late last year, sparking much discussion on the issue in 2022. But with the Ukraine-Russia war, the talks have turned into reality.
On September 6, 2022, Axios Markets author Matt Phillips said that price controls are “no longer a relic of the 1970s,” adding that “price controls are back.” A Phillips editorial notes that the G7 finance ministers met last Friday and its members “committed to a plan to limit Russia’s revenue from oil sales.”
In addition, the European Commission plans to launch “emergency intervention and structural reform of the electricity market” last week, the reporter added. Price controls have been on the minds of politicians around the world and the trend is taking hold in America as well.
A price cap has recently been imposed on specialty drugs sold in the US, and drug companies will be forced to pay fines if the price of specialty drugs such as insulin is too high. The St. Louis branch of the Federal Reserve has also written about price controls and offers the opposite view compared to many bureaucrats who support the idea today.
“As inflation continues to rise, some have called for government price controls,” the St. Louis Fed reported on the subject. “However, such controls have significant costs that increase in duration and scope.”
Many arguments against price controls from a basic economics level argue that these laws can distort the natural market. Most economists believe that price controls restrict and distort supply and demand.
Inflation can create more headaches for bureaucrats because price control policies promote black markets, hoarding and rationing, rallying, and causing prices of consumer goods to rise over time.
“When prices are below natural levels, resources such as talent and investor capital leave an industry to seek better returns elsewhere,” says American economist and Theodore Nirenberg Professor at Yale School of Management, Fiona M. Scott Morton explained in 2001. Blog post.
Despite being criticized by economists around the world, the author of Axios Markets said, “Price controls, once ridiculed; [increasingly] They are being taken over by influential economic thinkers. Phillips highlights an opinion piece by Financial Times (FT) author Martin Wolff, who wrote that “price controls, even regulation, should be on the table.” “The UK’s energy crisis is the burden of war,” Wolff said.
Nixon’s ‘dramatic move’ to impose fixed prices, the author admits, ‘proved largely ineffective at preventing inflation, WWII price controls were a total failure.
The editorial also mentions how in 1971, former US President Richard Nixon “took a dramatic step toward price and wage control.” However, as economists have argued for years, the website wtfhappenedin1971.com clearly shows that Nixon’s economic activism was far-fetched. From “Amazing,” Phillips also noted that Nixon’s price control policy was reversed in 1974. He also noted that the economic activities of the 37th president of the United States were “regarded as largely ineffective in preventing inflation.”
Although there have been economic debates on the history and policy of price controls in the past, Janos Allenbach-Amann and Vlad Maksimov from euractiv.com insist that price controls do exist.[entered] The European Inflation Debate” In 1941, when the United States Office of Emergency Management was established, price controls were imposed during World War II.
In the year Between 1943 and 1945, the Consumer Price Index (CPI) in the United States rose by 4%, and from 1939 to 1943, the CPI rose by 24%. While the CPI of the time and research studies of today show that price controls did not work, price fixing encouraged black markets and inflation. Moreover, by 1943 the US deficit had risen from 3% to 27% of the nation’s gross domestic product (GDP).
What do you think about government leaders’ promises to implement price controls in a struggling economy? Let us know what you think about this in the comments section below.
Image credits: Shutterstock, Pixabay, Wiki Commons, Editorial Photo Credit: Spencer Platt/Getty Images
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