In a recent survey of 41 academic economists conducted by the University of Chicago’s Booth School of Business, 61 percent said that price controls similar to those imposed in the 1970s would fail to “successfully reduce U.S. inflation over the next 12 months.” Others said the policy might bring down inflation in the short-term but would lead to shortages or other problems.
“Price controls can of course control prices — but they’re a terrible idea!” David Autor, an economist at the Massachusetts Institute of Technology, wrote in response to the survey.
Have price controls worked in the past?
In August 1971, with consumer prices rising at their fastest pace since the Korean War, Mr. Nixon announced that he was imposing a 90-day freeze on most wages, prices and rents. Once the freeze ended, companies were allowed to raise prices, but subject to limits set by a council headed by Donald H. Rumsfeld, who later served as defense secretary for Presidents Gerald R. Ford and George W. Bush.
The controls initially looked like a success. Inflation fell from a peak of more than 6 percent in 1970 to below 3 percent in the middle of 1972. But almost as soon as the government began to ease the restrictions, prices shot back up, leading Mr. Nixon to impose another price freeze, followed by another round of even more stringent controls. This time, the controls failed to tame inflation, in part because of the first Arab oil embargo. The price controls expired in 1974, shortly before Mr. Nixon resigned from office.
Not all attempts at reining in prices have been such clear failures. During World War II, the Roosevelt administration imposed strict price controls to prevent wartime shortages from making food and other basic supplies unaffordable. Those rules were generally viewed as necessary at the time, and economists have tended to view them more favorably. In fact, there have been plenty of instances of wartime price controls throughout history, often paired with rationing and wage growth limits.
Why do some economists want to reopen the debate?
Few economists today defend the Nixon price controls. But some argue that it is unfair to consider their failure a definitive rebuttal of all price caps. The 1970s were a period of significant economic turmoil, including the Arab oil embargo and the end of the gold standard — hardly the setting for a controlled experiment. And the Nixon-era price caps were broad, whereas modern proponents suggest a more tailored approached.
Many progressive economists in recent years have reconsidered once-scorned ideas like the minimum wage in response to evidence suggesting that real-world markets often don’t behave the way simple economic models would predict. Price controls, some economists argue, are due for a similar reappraisal.
Retail Sales Fell in December, a Slowdown in a Robust Holiday Shopping Season
Retail sales fell 1.9 percent in December, the Commerce Department reported on Friday, reflecting a slowdown during an otherwise robust holiday shopping season that started earlier in the year for many consumers.
It was the first drop after four straight months of sales increases, though the gain in November slowed from October because of the lengthened holiday shopping season brought on by fears of product shortages and price increases. Total sales for October through December were up 17.1 percent from a year earlier, according to the report. December sales rose 16.9 percent from 2020.
Beth Ann Bovino, chief U.S. economist at S&P Global, said that although there was bound to be “headline shock” over a weaker number, the broader picture for retail sales had been strong over the past few months.
“This is not a sign of consumer weakness,” said Ms. Bovino, who had forecast a decline. “Given that households have relatively strong balance sheets with high savings levels and a strong job market with wages climbing higher, it seems that consumers are not necessarily closing their pocketbooks. They’re taking a brief pause.”
The retail sales report provides a data point on the mind-set of consumers after a report this week showed that inflation at the end of 2021 climbed to its highest level in 40 years. Prices have increased as new variants of the coronavirus have exacerbated supply chain issues and robust consumer demand for goods. At the same time, the Omicron wave has caused widespread staffing shortages and may have played a role in diverting some consumers from stores and holiday gatherings.
Ms. Bovino said that she did not believe inflation played a role in the overall sales decline but that concerns around higher prices were likely to show up in the first quarter of this year.
Understand the Supply Chain Crisis
Economists at Morgan Stanley had forecast retail sales to rise 0.4 percent in December. Even though inflation topped the coronavirus as the No. 1 concern for consumers whom Morgan Stanley surveyed in November, that “came with no dent to spending plans,” the economists said in a note last week.
Instead, the holiday shopping season appeared to break records and lower-income consumers seemed to be operating with relatively better buying power, the economists wrote. At the same time, they anticipated that the Omicron wave drove more spending to goods rather than services.
The pandemic has continued to shape consumer habits in the United States.
Fewer people shopped in stores this holiday season, even though the Omicron variant did not become a prominent threat until December. Retail foot traffic in the United States between Nov. 21 and Jan. 1 was down 19.5 percent compared with 2019, according to Sensormatic Solutions. That was a slight improvement from the depths of the pandemic in 2020, when foot traffic in the same period was down 33.1 percent from 2019, but still a significant change.
As retailers grapple with inflation and supply chain issues, it has given an additional advantage to the biggest U.S. retailers. They had already benefited during the pandemic by being able to remain open while others closed, from the variety of goods that they carry and through initiatives like curbside delivery.
“We’re talking about the Walmarts and Targets and Costcos, the big players,” said Mickey Chadha, a retail analyst at Moody’s Investors Service. “They’ve leased their own ships, and they’re bringing in product. They have a lot more power with vendors to get priority. And they actually planned ahead as well.”
At the same time, Mr. Chadha said, they have not had to raise their prices as much as smaller retailers, and are likely to benefit as lower-income consumers search for value to stretch their dollars.
“They are taking market share because they have the ability to price lower and absorb that hit to the margin a lot better than some of the smaller, weaker retailers,” he said.
Costco, for example, said on a December earnings call that it believed it was successfully managing the effects of inflation through its relative purchasing power and its relationships with vendors. That often meant that Costco and its suppliers were each taking less in the way of price markups, Richard Galanti, the company’s chief financial officer, said on the call.
“We’ve always said we want to be the last to raise the price and the first to lower the price, recognizing there’s a limit to what you can do based on these cost increases,” Mr. Galanti said.
How the Supply Chain Crisis Unfolded
The pandemic sparked the problem. The highly intricate and interconnected global supply chain is in upheaval. Much of the crisis can be traced to the outbreak of Covid-19, which triggered an economic slowdown, mass layoffs and a halt to production. Here’s what happened next:
Costco also acknowledged that although it was grappling with unavoidable supply chain issues, including delayed container arrivals on the West Coast, it felt “pretty good about staying in stock.”
Plenty of other retailers have said supply chain issues cut into their revenue last year, as pandemic-related factory closures in Vietnam and shipping delays kept goods from American shelves and warehouses.
“Holiday was weaker than expected as units that were slated to arrive in December did not clear through the ports in the time frame we had anticipated,” Fran Horowitz, chief executive of Abercrombie & Fitch, said at a conference on Tuesday. “This was beyond our control and resulted in a miss of sales during the peak selling period. Beyond those delayed units, we also experienced renewed Covid-related restrictions globally.”
Still, some retail executives have said they would rather have a supply issue than a demand issue, particularly given the sharp ebbs and flows in consumer preferences in the past 18 months. And it is not yet apparent whether price increases are tamping down demand given the quarterly performance.
Mr. Chadha said retail sales were strong for 2021 overall, though he anticipated that the picture would change in 2022, as supply chain issues and higher prices became bigger factors.
Ms. Bovino of S&P said she expected more selective purchasing to take hold later this year as savings accounts begin to deplete and consumers “remember what prices used to look like.”
January retail sales may also be affected by shortened store hours and closures as the Omicron wave causes widespread staffing shortages in multiple industries.
Taking On Starbucks, Inspired by Bernie Sanders
Starbucks allows employees who work at least 20 hours a week to obtain health coverage, more generous than most competitors, and has said it will increase average pay for hourly employees to nearly $17 an hour by this summer, well above the industry norm. The company also offers to pay the tuition of employees admitted to pursue an online bachelor’s degree at Arizona State University, helping it attract workers with college aspirations.
The Status of U.S. Jobs
Such people, in turn, tend to be sympathetic to unions and a variety of social activism. A recent Gallup poll found that people under 35 or who are liberal are substantially more likely than others to support unions.
Several Starbucks workers seeking to organize unions in Buffalo; Boston; Chicago; Seattle; Knoxville, Tenn.; Tallahassee, Fla.; and the Denver area appeared to fit this profile, saying they were either strong supporters of Mr. Sanders and other progressive politicians, had attended college or both. Most were under 30.
“I’ve been involved in political organizing, the Bernie Sanders campaign,” said Brick Zurek, a leader of a union campaign at a Starbucks in Chicago. “That gave me a lot of skill.” Mx. Zurek, who uses gender-neutral courtesy titles and pronouns, also said they had a bachelor’s degree.
Len Harris, who has helped lead a campaign at a Starbucks near Denver, said that “I admire the progressivism, the sense of community” of politicians like Mr. Sanders and Representative Alexandria Ocasio-Cortez, Democrat of New York. She said that she had graduated from college and that she was awaiting admissions decisions for graduate school.
And most union supporters have drawn inspiration from their colleagues in Buffalo. Sydney Durkin and Rachel Ybarra, who are helping to organize a Starbucks in Seattle, said workers at their store discussed the Buffalo campaign almost daily as it unfolded and that one reached out to the union after the National Labor Relations Board announced the initial results of the Buffalo elections in December. (The union’s second victory was announced Monday, after the labor board resolved ballot challenges.)
Ms. Ybarra said the victory showed workers it was possible to unionize despite company opposition. “The Buffalo folks became superheroes,” she said. “A lot of us spent so much time being afraid of retaliation — none of us could afford to lose our jobs, have our hours cut.”
Critics Say I.M.F. Loan Fees Are Hurting Nations in Desperate Need
At a time when the coronavirus pandemic is fueling a rapid rise in inequality and debt, a growing number of policymakers and economists are pressuring the International Monetary Fund to eliminate extra fees it charges on loans to struggling nations because they siphon away scarce funds that could instead be used to battle Covid.
The fund, which for decades has backstopped countries in financial distress, imposes these fees for loans that are unusually large or longstanding. They were designed to help protect against hefty losses from high-risk lending.
But critics argue that the surcharges come at the worst possible moment, when countries are already in desperate need of funds to provide poverty aid and public health services. Some of the countries paying the fees, including Egypt, Ukraine and Armenia, have vaccinated only about a third of their populations. The result, the critics argue, is that the I.M.F. ends up undermining the financial welfare and stability of the very places it is trying to aid.
In the latest critique, a letter this week to Treasury Secretary Janet L. Yellen from 18 Democrats in Congress, including Representatives Alexandria Ocasio-Cortez of New York and Pramila Jayapal of Washington, asked the United States to support ending the surcharge policy.
The surcharge “discourages public health investment by developing countries,” the letter said. “This perverse outcome will undermine global economic recovery.” The letter echoed several other appeals from more than two dozen emerging nations, including Argentina, South Africa and Brazil, as well as economists.
“Attempts to force excessive repayments are counterproductive because they lower the economy’s productive potential,” the Nobel Prize-winning economist Joseph E. Stiglitz and Kevin Gallagher, a professor of global development at Boston University, wrote in a recent analysis. “Both creditors and the country itself are worse off.”
They added: “The I.M.F. should not be in the business of making a profit off of countries in dire straits.”
The fund primarily serves as a lender of last resort, although recently it has expanded its mission to include reducing extreme inequality and combating climate change.
In addition to building up a reserve, the surcharges were designed to encourage borrowers to repay on time. The poorest countries are exempt.
The fees have become a major source of revenue for the I.M.F., which is funded primarily by its 190 member nations, with the United States paying the largest share. The fund estimates that by the end of this year, borrowers will have shelled out $4 billion in extra fees — on top of their regular interest payments — since the pandemic began in 2020.
The debate over the surcharge is emblematic of larger contradictions at the heart of the I.M.F.’s structure and mission. The fund was created to provide a lifeline to troubled economies so that they recover “without resorting to measures destructive of national or international prosperity.”
But the terms and conditions that accompany its loans have at times ratcheted up the economic pain. “They penalize countries at a time when they are in an adverse situation, forcing them to make greater cuts in order to repay debts,” according to an analysis from the liberal Center for Economic and Policy Research in Washington.
“Demanding these surcharges during an ongoing recession caused by a pandemic goes even more against” the I.M.F.’s founding principles, the center argues.
Voting power in the fund’s governance is based on the size of each country’s monetary contribution, with only the United States having veto power. That means that countries most in need have the least say in how the I.M.F. carries out its role.
In a statement, the Treasury Department reiterated support for the surcharges: “As the I.M.F.’s major shareholder we have an obligation to protect the financial integrity of the I.M.F.” And it pointed out that the interest rates charged by the fund were often far below market rates.
A review of the surcharges last month by the fund’s executive directors ended without any agreement to halt the charges. An I.M.F. statement explained that while “some directors were open to exploring temporary surcharge relief” to free up resources to deal with the pandemic, most others preferred a comprehensive review later on in the context of the fund’s “overall financial outlook.”
Strapped countries that are subject to the surcharges like Argentina balked earlier at the extra payments, but their campaign has picked up momentum with the spread of Covid-19.
“I think the pandemic makes a big difference,” said Martín Guzmán, Argentina’s minister of economy.
He argues that the pandemic has turned what may have once been considered unusual circumstances into the commonplace, given the enormous debt that many countries have taken on to meet its rising costs. Government debt in emerging countries has hit its highest level in a half a century.
The number of nations subject to surcharges increased to 21 last year from 15 in 2020, according to the I.M.F. Pakistan, Egypt, Ukraine, Georgia, Albania, Tunisia and Ecuador are among those paying.
The country is trying to work out a new repayment schedule for $45 billion that the previous government borrowed as part of a 2018 loan package. By the end of 2024, the government estimates, it will have run up a tab of more than $5 billion in surcharges alone. This year, 70 percent of Argentina’s nearly $1.6 billion bill from the I.M.F. is for surcharges.
“The charges will be undermining the mission of the I.M.F., which is to ensure global stability and balance of payments,” Mr. Guzmán said.
According to World Bank estimates, 124 million people were pushed into poverty in 2020, with eight out of 10 of them in middle-income countries.
Meanwhile, the costs of basic necessities like food, heating and electricity are surging, adding to political strains. This week, the I.M.F. warned in its blog that continuing Covid outbreaks, combined with rising inflation, debt and interest rates, mean emerging economies should “prepare for potential bouts of economic turbulence.”