In the world of economic journalism, we often look back to historical parallels in order to understand the current moment. And in today’s economy, there’s a lot we can learn from the 1970s.
Meg Jacobs, a history professor Princeton University, said the 1970s were “perhaps the last most chaotic time in terms of uncertainty in global oil markets.” She wrote the 2017 book “Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s.”
There were two oil shocks in the ‘70s: one caused by the Arab oil embargo in 1973 and another by the Iranian Revolution in 1979. It was also a time of stagflation — high inflation coupled with slow growth. And earlier in the 1970s, President Nixon had implemented a series of price and wage controls.
“I have a point of view based on the past about today,” Jacobs said. “I do not see any kind of price caps in our future.”
During the 1973 oil shock, Jacobs said, the gas shortages facing the United States were actually not severe.
“But we made them more acute by our panic-like behavior, by lining up for hours and hours and traveling around with much of the country’s gas supply in our tanks, rather than safely underground in oil storage,” Jacobs said.
Today’s oil shock is far worse — the largest supply disruption in history according to the International Energy Agency. And even though Americans are feeling the price increases at the pump, the effects are far more severe in other countries.
As a result, some are turning to price caps right now.
Last month in South Korea, the government implemented a price ceiling on fuel products. On Thursday, they extended those caps for another two weeks. In France, the company TotalEnergies voluntarily capped the price of gas and diesel at its gas stations through the end of April.
According to economic theory, price caps can cause big problems and lead to supply shortages.
On the consumer side, “there’s more that people want to buy than is available,” said Amihai Glazer, professor emeritus at the University of California, Irvine.
And for producers, price caps might make a product not worth selling at all.
“If the price is set very low, then it doesn’t even cover my cost,” Glazer said. “So I would lose money by selling some of the goods.”
In reality, price caps can work differently. That’s because they’re often paired with other economic policies like wage caps, rationing, and subsidies. During World War II for example, both Glazer and Jacobs said price caps worked effectively.
At the time, President Franklin D. Roosevelt implemented wage controls, as well as price controls and rationing on all kinds of items, including meat, clothing, gasoline and tires.
“If someone saw his neighbor have four brand new tires, he would look askance at that neighbor,” Glazer said, on why the regulations were successful.
“People largely abided by [the price caps],” said Meg Jacobs at Princeton. “It was seen as patriotic to relinquish your ration coupons when purchasing the scarce items.”
We are of course not living through the 1970s or World War II. But as the war in Iran and the subsequent energy shock continue, it’s possible other countries will look to price caps as a tool.
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