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."