Inflation and the looming danger of a recession are the most urgent economic and political issues of our day, driven by price explosions in essential goods like energy and food. But the Federal Reserve, despite its responsibility for price stability, has no tools to contain these skyrocketing prices. Instead the Fed has already repeatedly hiked interest rates. Yet even as inflation appears like it might be starting to ebb, the future trajectory remains highly uncertain in the context of war abroad and a global pandemic.
Renewed rate hikes, however, risk spurring a recession and present a serious political danger in our sharply polarized society. A recession would further hurt those who have suffered most from both the covid-19 pandemic and inflation.
But there is an alternative to causing them more misery and pushing down wages. Instead Congress can stabilize prices and reduce inflationary pressures through selective price caps combined with investments to increase the resilience of our economy. The Inflation Reduction Act is a momentous step in the right direction. Carefully selected caps could buy time for the important supply-side measures in the legislation to come into effect, while also tackling short-term price spurts driven by today’s emergency conditions. Doing so would preserve purchasing power instead of erasing it and can create an economic environment that encourages urgently needed investments — public and private alike — in workers, care, education, infrastructure, climate mitigation and more.
Many economists warn that price controls never work. But history says that’s not true. Targeted controls combined with large-scale investments present a real alternative to the potent sort of stagflation — high inflation and a stagnant economy — that wreaked havoc in the 1970s and threatens us now.
While price controls have a bad reputation politically and a record of mixed success, they worked in one of the most important cases in American history — World War II. And the differences between that case and later failures reveal how policymakers can wield this tool effectively.
As the world descended into global conflict, President Franklin D. Roosevelt made the case that the United States had to serve as “the arsenal of democracy.” To keep American factories operating at capacity, and American workers productive, the government needed to keep a lid on inflation. If the cost of living rose too high, it might trigger strikes that would cripple output.
Roosevelt’s administration responded by imposing price ceilings across-the-board, with particular attention focused on sectors that contributed most to inflation and were vital to the global crusade for freedom. For meat and fuel, for example, consumers received ration coupons that ensured a fair supply at controlled prices.
This special focus on the most critical sectors for the war effort was one of the four ingredients of Roosevelt’s successful use of price limitations.