Latest Inflation Headlines an Opportunity to Revisit History of Price Controls as an Industrial Policy Tool

November 16, 2021

Headlines last week blared the latest price numbers, sparking speculation about the impact they would have on the Build Back Better agenda. To be clear: Today’s inflation is not a problem of an overheating economy, but of product- and industry-specific supply problems. COVID has forced policymakers to turn off and then turn on vast swaths of the economy, disrupting supply chains in certain sectors and shifting demand in others, which results in the inflation we are experiencing today. In the past, when policymakers took similar steps, they froze or regulated prices to protect consumers and guard against the kind of profit gouging we are seeing today—most notably in President Franklin D. Roosevelt’s conversion of the economy in wartime, but also during the Korean War and 1970s economic displacements due to rising trade deficits and other challenges.

As my colleagues J.W. Mason and Lauren Melodia wrote last month, these supply challenges call for a different policy toolkit than interest rate hikes by the Federal Reserve—including price controls. And just last week, Sammi Aibinder and Lindsay Owens wrote a Roosevelt Institute brief highlighting one industry where price controls could be particularly beneficial: the rental housing market. For more on the latest numbers, see helpful threads from the Roosevelt Institute, the Council of Economic Advisers, Melodia, Employ America, and Josh Bivens.

In an issue brief released today, I provide further background on price controls. This is the second installment of our series on the distinctly American industrial policy toolkit. From utility rate regulation to health care, US policymakers make regular policy interventions that do not “leave it to the market” to decide what prices are charged to whom, how, and in which industries. Rather, the needs of workers, consumers, and the national interest can and should guide active price policy.

US courts have repeatedly upheld the constitutionality of price controls. In Yakus v. US, a 1944 case dealing with wholesalers charging over the maximum prices allowed for cuts of beef, a 6-3 Supreme Court majority wrote “that Congress has constitutional authority to prescribe commodity prices as a war emergency measure, and that the Act was adopted by Congress in the exercise of that power, are not questioned here, and need not now be considered.” And in Bowles v. Willingham, another 1944 case (this time over rent controls), an 8-1 Supreme Court wrote that “a nation which can demand the lives of its men and women in the waging of that war is under no constitutional necessity of providing a system of price control on the domestic front which will assure each landlord a ‘fair return’ on his property.

These cases touched on a key matter of concern today in effective crisis response: how much power Congress can delegate to the executive. The New Deal and subsequent buildup of the administrative state were enabled by justices who came to see the value and permissibility of robust state action. As the Yakus court wrote,

[the 1942 Emergency Price Control Act is] an exercise by Congress of its legislative power. In it Congress has stated the legislative objective, has prescribed the method of achieving that objective—maximum price fixing—and has laid down standards to guide the administrative determination of both the occasions for the exercise of the price-fixing power, and the particular prices to be established… As we have said: ‘The Constitution has never been regarded as denying to the Congress the necessary resources of flexibility and practicality . .  .  to perform its function.’ . . . Hence it is irrelevant that Congress might itself have prescribed the maximum prices or have provided a more rigid standard by which they are to be fixed; for example, that all prices should be frozen at the levels obtaining during a certain period or on a certain date . . . Congress is not confined to that method of executing its policy which involves the least possible delegation of discretion to administrative officers. 

The 1950 Defense Production Act renewed the powers granted to FDR. While initially aimed at empowering the Truman administration to execute the Korean War, the DPA is still on the books, and in the years since, it has been expanded to be applicable not just in wartime but in other types of emergencies. As I’ve written elsewhere, it’s a particularly potent tool for fighting a range of health and supply chain challenges, and indeed, has been the source of authority for a number of anti-COVID actions by both the Trump and Biden administrations. 

At the same time, in the years since 1950, the specific DPA provisions for the executive to regulate prices, wages, rents, and credit have lapsed. As policymakers grapple not just with COVID but with the displacement of the climate crisis, revisiting this broader spectrum of powers would be wise. 

Stay tuned for more in our ongoing series. Next, we’ll be turning to some of the DPA powers that are still operative.