Help me out and press the heart button, I would greatly appreciate it!
Last week in Under Control Pt. 1, I discussed the long history of wage and price controls throughout history as a method to get inflation under control. They may alleviate price pressure in the short run but always fail in the end as they don’t target the root cause of inflation. Many deleterious consequences arise such as supply shortages, inferior products, black markets, replacement goods, barter systems, and more. This doesn’t stop some economists and journalists from supporting a price control regime today. While inflation rates are coming down currently, I think we are bound to see more periods this decade where inflation rates are above the Federal Reserve’s 2% target. Where are we seeing price controls now? Even if inflation as a political priority is low now, where might we see these policies in the future?
Let’s be clear, the government wants inflation and doesn’t at the same time. Not clear? I’ll explain. Inflation under control reduces the chance of panic or resistance in the population which is not desirable. Countries with hyperinflation often see looting, riots, and civil unrest. Further, things like social security payments are tied to the consumer price index (CPI) so expenditures go up if inflation does. The central planners want some inflation for financial repression, which is where bonds yield less than the inflation rate which is one way to alleviate large federal debts. Structural inflation is caused by the increase in money supply and tinkering with its interest rate and flows, but this is now acknowledged by the smart economists at the Federal Reserve or those in Congress looking to pass more legislation. For this reason and because many times citizens are uninformed, price controls reoccur.
A quick Google search will show several mainstream articles showing why price controls are not optimal economic strategies. With your tin-foil hat on, you can bet governments won’t use this language explicitly to implement new price control policies. As the US is still a mostly functioning democracy, price controls cannot be automatically instituted. It is more likely we return to a version of Carter’s voluntary price controls with incentives or backdoor coercion to comply. Just like the targeted policy seen with the Inflation Reduction Act (IRA), controls could target certain industries as they see fit. Be on the lookout for this voluntary strategy in the future, and pay attention to what voluntary really means.
Price Controls Today
Here’s one example happening right now. I am a fan of all energy technologies, but critical of the excessive deficit spending required to fund the IRA [1,2]. The IRA is mostly focused on the energy transition but has some other random things mixed in, one being healthcare. Like those “voluntary” controls in the 70s, the same things are being pushed for drug companies in the IRA. The drug transparency rule requires companies to undergo annual audits and hand over proprietary information to the government OR charge fixed costs to Medicaid recipients. While some drug prices are ridiculous and I definitely have some criticisms of the industry, this policy is voluntary price control through coercion and another step towards a public or cartel healthcare system.
Another form of price control that has had deleterious consequences is the control of water. Living in the northeast it is easy to take for granted cheap and abundant water. Those in the southwest know desert living is dependent on the Colorado River which I’ve written about in the past. The government has a program of quotas for each state available to use, causing a slow draining of the reserves in Lake Mead and Lake Powell to dangerously low levels. With the free market pricing system, water would be prohibitively expensive for certain uses that are exploited today, and perhaps so many people wouldn’t have chosen to live in the literal desert. While it is a remarkable human accomplishment to be able to live in some of the most inhabitable places, serious water changes are coming for the Southwest whether they like it or not.
Another current price control in place is of course money. The cost of money is defined by the interest rate attached to a loan because just like the total money supply, time is an important factor in the value of money. Loans come in the form of peer-to-peer loans, bank lending, corporate and municipal bonds, all the way to government-issued bonds. The Federal Reserve has been manipulating the price of money with open market operations and/or interest rate manipulation since World War I. Now, the central bank dictates the federal funds rate which influences all other interest rates. Instead of a bank deciding on its own what value to attach to a loan based on creditworthiness, its financial standing, and other economic factors, they are beholden to rates set by a group of 12 FOMC members in Virginia.

Wages
Finally, another vital price is that of labor. Wage controls have similar effects as those for goods and services. Unions hate wage controls in their constant battle for higher wages. That is unless it is raising the minimum wage, which is a price control in itself. Minimum wage laws distort the labor market to outsource labor, develop automation, and contribute to unemployment. Wage maximums make labor less productive in areas and businesses find it harder to attract and retain highly skilled labor who can charge top dollar for their services. The labor market may stall due to relative abundance or shortage of labor in certain sectors. Just like price controls, wage controls misallocate where labor is best suited to be.
While not a commonly discussed policy today outright, it often comes in the form of wage freezes, corporate income policies, and progressive tax policies. There is an economic theory that high wages give the consumer excess disposable income which increases aggregate demand and thus prices. This theory, known as the wage-price spiral, is the basis for wage controls. The anti-wealthy “tax the rich” sentiment is rising with things like wealth taxes in current political discussions. Beloved president FDR implemented a maximum wage of $25,000 ($478,000 today) in 1942 to discourage profiteering in WWII. The current administration is very supportive of labor unions, but the US is not shy to wage freezes in recent history, as seen with Nixon in 1971. At the end of the day, these policies arise when politicians run out of levers to pull instead of addressing the root causes of inflation, and doing nothing is a threat to their credibility.
Indeed in these days, when every available dollar should go to the war effort, I do not think that any American citizen should have a net income in excess of $25,000 per year after payment of taxes. - FDR
Taxes
There is a lot of talk today about companies taking advantage of the consumer and the excess wealth accumulating at the top. One such method is the best of both worlds. To reign in inflation and stick it to those greedy capitalists is a corporate tax policy that targets companies that are too profitable.
This idea brought to you by members of the Federal Reserve itself in the 70s was to use a “tax-based incomes policy” to reduce inflation. This involves applying higher corporate tax rates to profitable companies to bring down wage growth. Companies with a wage budget that increases too much based on arbitrary economic growth metrics would see tax increases greater than others. This is an attempt to control the wage-price spiral by keeping down wage increases at top companies. This of course makes it harder for these companies to retain good employees and likely stunts innovation at successful companies. Do you think Nvidia would continue to be the dominant semiconductor/AI innovator if the government limited what they could pay top employees and how much profit they could reinvest into further innovations?
Tax increases are likely politically unpalatable to either party today. This supports my view that a return to easy monetary and fiscal policy will continue to dominate. As the government runs extraordinary deficits and cannot raise more taxes, new money will be created to foot the bill instead of direct taxes. It’s complicated, but easy money policies are generally equivalent to increasing the money supply and debasing the currency. This is a stealth tax that most do not recognize, which is why easy money, price controls, and other strategies will be the form most new policies will be funded through instead of tax increases. Polls suggest that people are not privy to the long arc of unsuccessful price controls and still prefer the government to try to regulate energy prices for example.
Commodities
I could see price controls for key commodities like lithium, semiconductors, oil, or uranium. Cartels like OPEC could arrange and set prices and production quotas as they do for oil. The Chinese government could step in and set price/export controls on key rare earth metals or other commodities. South American lithium miners in Chile nationalized by the government may set prices for exports, determine through taxation the optimal profit for companies, and also control new mining efforts. If supply issues or prices explode, the US may look to intervene in agreements for key commodities for specific prices and urge compliance of smaller countries with its dominant influence on the global stage.
Other than inflation, we saw price caps used as a sanctioning tool in 2022. Some thought Russia may use oil and gas prices and/or supply as a weapon against Europe to escalate the war, but the job was done for them with the destruction of the Nord Stream Pipeline. At the same time, many Western countries agreed to a price cap on Russian oil. While some success and other factors like draining the strategic petroleum reserve and slowing economies around the world helped to lower oil prices naturally, ultimately the market found a way. It is now documented that much of the Russian oil was sold to India who then sold the oil to Europe. Both exchanges took place at prices well above the price cap that was outlined.
All of these policies of course disrupt the free market. By doing so, second and third-order consequences arise like reducing the incentive to produce new materials under a price cap leading to future supply issues, and local supply issues where certain players buy up cheap products at the expense of others.
Energy and Food
With the intervention and subsidization of certain energy technologies, by extension, there could be price controls on what energy sources to use. Making renewables artificially cheaper may put distress and price pressure on the grid by allocating too many resources in that direction. Taking another step, there could come a time when utilities are charging too much to consumers based on the actions I just outlined, and the government steps in to limit what energy utilities can charge. This of course could lead to even more energy shortage due to there not being incentive to add more infrastructure to the grid.
Back in 2022, there was considerable public commentary in mainstream publications about the idea of using price controls on necessities like food and gas. While this never came to fruition, if inflation rears its head again and the Federal Reserve is shown to not have truly slain the inflation beast, other policies may be tried. Ministers in the UK just last year were discussing voluntary limits on basic foods, taking it a step further than the US while still not implementing them.
Housing
The last form of price controls I could see happening today is housing or rent controls. These could take form in many ways including mortgage rate buydowns for certain buyers, tax incentives, and most importantly rent controls. Rent controls are proposed in certain US cities like Boston today, an area with a long history of rent control policy. Maybe rents are so high in the area because developers spent so long disincentivized from building new units where they wouldn’t make money on depressed rental income.
While all price control measures are immoral in my opinion, rent controls are a specific attack on property rights and the foundation of a free society. By controlling rent you are by extension imposing morality onto how much profit a landlord should be making. If the state is determining the profit, what is the motivation to enter that line of work, whatever it is? If the landlord, why not the restaurant down the street, the company you work for, your own small business, the teacher, the preacher, or the doctors and nurses? Where does it end?
Conclusion
Hopefully, you have a grasp of the government’s motivation to use price controls, given their terrible success rate throughout history. With this framework in the back of our minds, I’ve outlined specific areas where I can see price controls of various types entering the picture among those already in place.
While the full extent of price controls can only be felt under authoritarian rule, the temptation for those in free markets to “fix” certain parts of the economy is always there. Keep an eye out for sly implementations of price controls even in free markets like the US and Europe in the coming years. Until next week,
-Grayson
Leave a like and let me know what you think!
If you haven’t already, follow me at TwitterX @graysonhoteling and check out my latest post on notes.
Socials
Twitter/X - @graysonhoteling
LinkedIn - Grayson Hoteling
Archive - The Gray Area
Let someone know about The Gray Area and spread the word!