Could price controls be the answer to inflation that Biden is seeking?

Analysis of the Russian attack on Ukraine has rightly focused on the strategic, military and humanitarian considerations of the conflict itself. Soon, however, domestic implications will begin to impinge on the geo-political. Maintaining public support will be critical as President Biden and other democratic leaders around the world ask their citizens to sacrifice for the cause of countering Russia’s war. 

The pressing nature of this challenge is made obvious by the ban on Russian energy imports that Biden announced on March 8. Cutting off the revenue that Russian oil and gas sales generate for the Kremlin is of clear strategic importance, but most analysts agree that it will raise gasoline and other energy prices for American consumers. Such hikes will come on top of the existing inflation problem with which the Biden administration has struggled for months.

To date, public enthusiasm for aiding the Ukrainian cause has run high. If the conflict drags out through the spring and summer months, however, a real risk exists that high prices for gas and other commodities could undermine public support, weakening the Western position against Russia. Although blaming the president for high gas prices is not actually a rational position given the global nature of energy markets, the reality is that many Americans remain dependent on gasoline to do their jobs and meet their own families’ needs. Many have little economic cushion against such a rise in gas prices. 

The connection between strategic imperatives and domestic economic factors is not new. Even before Pearl Harbor, the Roosevelt administration worried that war mobilization would lead to runaway inflation as the supply of labor, raw materials and basic consumer goods was outstripped by booming demand. FDR responded with price controls, a tool that for now is beyond the reach of the Biden White House.

Implemented through the Office of Price Administration and Consumer Supply, the wartime price controls effectively constrained inflation. Although the controls may have somewhat reduced output, and rationing was required for some goods, production remained high enough to support the war effort and meet basic consumer needs. The price control regime ensured that high inflation never undermined public support for the war.

Price controls were used again during the Korean War, and then in varying ways and with varying degree of success by the Truman, Kennedy, Johnson and Nixon administrations. By the late 1970s, the shortfalls of some of these efforts, as well as the rise of a market-oriented consensus that opposed such interventions, removed price controls from the menu of policy options available to presidents. 

Most mainstream economists today oppose price controls, although in recent months a sometimes-intense debate has emerged over the issue. Critics point to the pitfalls of the policy, such as the way that they can exacerbate shortages by preventing price signals (i.e., price increases) from inducing producers to increase supply. There is also the problem that controls cannot by themselves fix underlying structural causes of inflation.

Defenders of the approach note that a nuanced regime of “administered prices” has worked in the European Union, and that China relied on a system of price management during the early stages of its rapid economic development in the 1980s and 1990s. They also argue that controls can prevent corporate profiteering. 

Whatever the drawbacks of price controls, however, the issue is no longer one of economic policy alone. It is now a strategic problem too, as the Biden administration’s other options for cushioning the impact of the Russian energy ban have their own downsides. In recent days, for example, the administration has undertaken talks with the regime of Venezuelan dictator Nicolás Maduro to ease oil sanctions on that country. Similarly, it has sped up negotiations with Iran on a revised nuclear arms control agreement that would unlock Iranian oil exports. 

More generally still, the preferred inflation control policy of the past four decades — interest rate hikes by the Federal Reserve — runs the risk of setting off a recession. After two years of pandemic upheavals, a rise in unemployment, and resulting anger, will do little to strengthen the hand of the United States and its allies against Russian President Vladimir Putin.

Unpleasant choices, alas, abound.

Even before the Ukrainian invasion, economists such as James K. Galbraith and Isabella Weber called for the use of strategic price controls to mitigate the inflation problem in the United States. That term now takes on a deeper meaning when applied to energy prices in the context of war in Ukraine.

Price controls are not ideal. But neither is negotiating with Iran or Maduro from a position of need, or trying to counter Putin amid a domestic political context of raging energy inflation. In this crisis, the tools that Franklin D. Roosevelt used successfully should at least be on the table for Joe Biden to consider.

Guian McKee is an associate professor at the University of Virginia’s Miller Center for Public Affairs specializing in how federal policy, especially in the executive branch, plays out at the local level in American communities. Follow him on Twitter @guian_mckee.