THEY EVER LEARN:We have a powerful weapon to fight inflation: price controls. It’s time we consider it.

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Inflation is near a 40-year high. Central banks around the world just promised to intervene. However, a critical factor that is driving up prices remains largely overlooked: an explosion in profits. In 2021, US non-financial profit margins have reached levels not seen since the aftermath of the second world war. This is no coincidence. The end of the war required a sudden restructuring of production which created bottlenecks similar to those caused by the pandemic. Then and now large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits. The Federal Reserve has taken a hawkish turn this month. But cutting monetary stimulus will not fix supply chains. What we need instead is a serious conversation about strategic price controls – just like after the war.

Today economists are divided into two camps on the inflation question: team Transitory argues we ought not to worry about inflation since it will soon go away. Team Stagflation urges for fiscal restraint and a raise in interest rates. But there is a third option: the government could target the specific prices that drive inflation instead of moving to austerity which risks a recession.

To use a metaphor: if your house is on fire, you would not want to wait until the fire eventually dies out. Neither do you wish to destroy the house by flooding it. A skillful firefighter extinguishes the fire where it is burning to prevent contagion and save the house. History teaches us that such a targeted approach is also possible for price increases.

The White House Council of Economic Advisers suggests that the best historical analogy for today’s inflation is the aftermath of the second world war. Then and now there was pent up demand thanks to high household savings. During the war this was a result of rising incomes and rationing; during Covid-19 that of stimulus checks and shutdowns. At both times supply chains were disrupted. This is as far as the White House advisers’ interpretation of the parallel between the two episodes goes. What they do not tell us is that the inflation after the war was not without an alternative.

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h/t SG


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