Case Studies
Nixon’s Price Controls
 Inflation became the basic national concern during the administration of Richard Nixon. He ordered a freeze on all prices and wages throughout the United States for a period of 90 days and ordered the Cost of Living Council to impose a ceiling on prices of beef, pork and lamb. The price control gamble was based on the idea that all of the underlying price factors would hold still. But, in fact, experience shows the odds almost always favor change. Huge wheat shipments were going overseas because of the surpluses until a drought in the southwest destroyed much of the winter wheat crop.
Cattlemen soon saw their feed prices, which were not controlled, push higher, while their beef prices remained locked in a vice.
Because farmers are an independent group of businessmen one of the first things that they tried to do was to withhold their animals from markets.That had the effect of tightening up on supplies and actually putting real pressure on the whole system. By the middle of the summer, beef was scarce in many areas of the country…and now it was consumers who were trapped. The price controls they had demanded had led not only to lower prices…but to lower levels of meat production and prices for beef shot up.
Once the controls were relaxed, however, the animals came to market the price fell down driving many producers out of the business.
Consumers felt the shortages for several years.
| Comment & Analysis by Richard Gill People will generally tend to act in their own best self interest. They try to maximize their satisfactions or welfare. Consumers might like to have all the goods they possibly could, but are limited in their budgets and must choose. In making a choice, they try to maximize their own welfare. The same is true of producers. In their case they try to maximize their firm’s profits. And they can maximize their profits…if they use more efficient productive methods and produce those goods that consumers will, in fact buy. |
WWII Price Controls
 The attack on Pearl Harbor was a surprise, but planning for World War II had been underway for some time. As German armies swept across Europe, America began to build up its military and to prepare its economy for the shock of war. Many adult Americans still held vivid memories of the hardships caused by inflation during the unregulated economy of World War I. The cost of living then spiraled up more than 100%. Every worker and every resource was suddenly in precious demand. Military and civilian needs competed with no referee but the price system…and so prices naturally shot higher. As another and potentially greater war approached American shores, President Roosevelt prepared to initiate price controls. But the job of planning and controlling the economy was anything but easy.
Scarce resources were rationed…silk, for example, was no longer available for stockings…So resourceful women found substitutes. President Roosevelt’s advisors assured him that business had to make money out of the process of aiding the war effor…or business wouldn’t produce…So the government ultimately determined the prices paid for war materials, with an emphasis on attractive profit incentives for producers.
The Office of Price Administration not only had to set prices…it had to see that the men and women on the home front would go along with the regulated market. OPA wasted few opportunities to publicize the value of price controls… and for the duration of the war, it continued to provide patriotic guidance for the American public.
Most Americans agreed that these shortages and inconveniences were trivial compared with the national crusade to win the war. And so they cooperated with the emergency programs. They invested in war bonds and saved their money for the goods that would be available when the fighting was over. For the duration, the controlled market carried out its necessary functions…and defense goals were met.
| Comment & Analysis by Richard Gill Most economists agree that price controls in World War II were quite successful because of the special circumstances involved. The war involved a huge transfer of resources from the civilian to the military sector of the economy. The government made tremendous demands on the economy, which, without some sort of controls, might easily have led to a rapid spiral of wages and prices, itself damaging the war effort. Also, the controls were instituted for a specific purpose…for a short period of time, and under conditions of patriotic fervor. |
New York Housing Crisis
 The end of World War II brought a major question: Where were all these returning vets going to live? New York had a housing crisis…The returning veterans and their families badly needed an additional 200,000 housing units. Because of the shortage, big price hikes were expected. So, when the federal government removed wartime rent controls…the State of New York continued them on all existing rental housing. The goal was patriotic and understandable…to give the vets a helping hand, and it seemed to be working, after a fashion.
There was a need for rent control because of the unusual shortage of housing. And, of course it also was true that there was a great deal of pressure from renters, from tenants, and obviously there are an overwhelming majority of tenants in the city as contrasted to landlords.
The fabric of neighborhoods and housing seemed
unaffected by rent control at first. Brick and mortar do not immediately waste away and maintenance costs were stable throughout the 1950s. But the cost could not hold still forever…inevitably the system began to crack under the stress. First, landlords skimped on some repairs. Before too long, they were locked into making ends meet with deteriorating buildings. Then, balance sheets showed that costs were so high and returns so low they could no longer afford to keep their buildings. In the 1960s, first a few, then hundreds of landlords began to abandon their buildings. At the same time, private housing construction in the city came to a standstill. Rent ceilings cut into profit margins…Profits or people?...The issue was an emotional one with no neutral bystanders. But while the debate raged, investors took their money elsewhere.
| Comment & Analysis by Richard Gill Rent control can be summarized by the curves of supply and demand. Rent controls bring into being lower prices. The quantity demanded now exceeds the quantity supplied and there’s a housing shortage. Apartments are sought and not to be found. This is an economically inefficient situation, but it may not be the only economic objective. The objective may be to improve income distribution. Also the market place itself is not always perfectly efficient so no conclusion can be reached that any and all interferences with the price system are necessarily harmful. But almost always, such interferences do have some costs in terms of economic efficiency. |
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