'If policymakers reflexively presume the wisdom of conventional tools and dismiss the potential of unorthodox ones, we will all pay the price.,' warns EricLevitz
The price is wrong. Photo: Wang Ying/Xinhua News Agency via Getty Images America is suffering from the fastest rise in consumer prices in nearly four decades. For months, inflation has been outpacing workers’ nominal wage gains, thereby depressing living standards, sowing financial anxiety, and raising the poll numbers of America’s increasingly anti-democratic opposition party.
Yet this instrument is imprecise, and it is of limited efficacy when deployed in moderation. Marginal increases in interest rates are unlikely to significantly reduce demand. Large increases, meanwhile, come with nasty side effects. In the early 1980s, Federal Reserve chair Paul Volcker succeeded in breaking the back of inflation by raising prime interest rates to more than 20 percent. But the “Volcker Shock” came at the cost of two recessions, the second lasting 16 months.
All of which is to say: The government’s broadly accepted, normal tools for managing inflation aren’t so great. To be fair to Weber’s critics, her case for price controls is fatally undermined by its brevity and dearth of detail. The economist does not acknowledge the potential pitfalls of price controls or anticipate skeptics’ arguments. More critically, she never specifies precisely which prices the government should set.
Similar principles apply to the less-hypothetical scenario of an American housing shortage. Thanks to restrictive land-use regulations and underinvestment in social housing, demand for residences in the U.S. far outstrips their supply. This is a large part of why rental rates in America are high and rising. And there’s a strong case that price controls have a role to play in mitigating the adverse effects of housing inflation.
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