David R. Henderson  

A Day That Should Live in Infamy

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Today is the 40th anniversary of President Nixon's announcement of price controls on the American economy. He imposed an immediate freeze on all wages and prices that lasted for 90 days. Then he went through the various phases of control, leading to decontrol by 1974. With one main exception: oil and gasoline. Controls remained on oil and gasoline and these controls led to a lot of damage. Let me count the ways:
1. Because OPEC raised the price of oil in the fall of 1973, but the price controls did not allow all of the price increase to be passed on, there were shortages, line-ups, and violence.
2. Because some refiners had access to "old oil," whose price was controlled at $4.25 per barrel, whereas other refiners had to buy oil on the world market for the world price, which was about $11 per barrel, these latter refiners thought this was unfair. President Ford (I think) responded in 1974 by initiating the "entitlement" program. If you imported a barrel of oil, you became entitled to a fraction of a barrel of old oil at $4.25. As Joe Kalt and other economists pointed out at the time, a refiner who paid $11 for an imported barrel did not bear the whole $11 cost because he got a subsidy from crude producers for every barrel. This increased the amount of imported oil demanded, further strengthening OPEC. Moreover, the price controls discouraged exploration and production of oil, also strengthening OPEC. From wells that produced old oil, the producers received $4.25. "New oil" was decontrolled but, as I pointed out at the time, when something gets discovered, it becomes "old." Assuming that oil producers were not Charlie Brown being fooled by Lucy's football trick, the amount of new oil was lower than otherwise.
3. The shortage caused by the price controls led Nixon to impose the 55-mph speed limit nationally, a limit that the truckers called "the double nickel."
4. Because people were acting as if the price of gasoline was low, the government got upset about that and, under Ford, started CAFE, short for Corporate Average Fuel Economy. We're still suffering the consequences.
5. When President Carter came into office, he started an aggressive program of energy conservation standards, many of which are still with us today and many of which have been made more extreme.
6. Most people blamed OPEC, and particularly Arabs, for the gasoline shortage: they didn't blame Nixon. That led to calls to invade Saudi Arabia. Fortunately that never happened. Unfortunately, Carter started the Rapid Deployment Force so that he could have a force ready to invade the Middle East. That morphed into U.S. Central Command (CENTCOM) under Reagan and, of course, it later did invade the Middle East--twice.

Talking about blame, that reminds me of one of my favorite passages from Milton and Rose Friedman's Two Lucky People. Here's my telling:

In September 1971 Friedman and his former University of Chicago colleague George Shultz, then the administrator of President Nixon's price controls, had a discussion with Nixon in the Oval Office. As Friedman was about to leave, Nixon said the price controls would be ended soon, adding, "Don't blame George for this monstrosity." Friedman answered, "I don't blame George. I blame you, Mr. President."


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COMMENTS (5 to date)
Gary Rogers writes:

The way this administration is going, I would almost bet on more price controls before we are done. That is where history has almost always taken previous governments who found that loose monetary policy failed to solve their problems.

David R. Henderson writes:

@Gary Rogers,
"before we are done" is too vague. But if you're willing to be more specific, we might have a bet. Certainly monetary policy has not been loose and the inflation rate is low.

marcus nunes writes:

David
Tellingly you donĀ“t mention that the price controls came on the same day as the "closing of the gold window". But that "side of the day" is what the "Mises Institute guys" are mourning today!
http://thefaintofheart.wordpress.com/2011/08/15/%E2%80%9Caugust-15-1971%E2%80%9D/

Charles R. Williams writes:

The instant that Reagan deregulated the price of oil, the price started to fall.

Gary Rogers writes:

David:

You are correct that "before we are done" is inadequate and I am considering what time frame I would put on my prediction. I always hate it when people make me do that. However, I still argue that a zero discount rate for the next two years, a falling dollar index and a rapidly climbing m2 constitute a loose monetary policy in spite of the absense of measurable CPI inflation. The problem is velocity, not money supply and if the Fed is using the wrong tool, the current policy will lead to trouble.

By the way, we already have price fixing in Medicare and Medicaid and look at the problems that created. Is it a stretch to predict imagine that the same legislators that want to expanded theses programs would try something similar in other areas?

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