annenberg media ♪ ♪ istory and the federal government refuses to act. when the cost of food threatens to jump beyond the average american family's reach, should the government put a lid on prices? when the nation goes to war,

should the government institute total controls? what are the dangers of a well-intentioned price control program once it becomes entrenched? controls are to a politician like catnip to a cat. the politicians, in the end have very great difficulty resisting. economic efficiency-- what price, controls? with the help of economic analyst richard gill, we'll examine that question on economics usa. i'm david schoumacher.

[loudspeaker] we got bargains over here! we have bargains over here! come on, girls. don't be shy. check it out. come on. pick 'em out. they all are cashmere. everyone enjoys the ritual and the give and take in a market like this one. it is a demonstration in its purest form of the free-market pricing system. consumers take the lead in this commercial dance looking for the best deal. the merchants follow their lead, the joking not quite masking the intensity.

how much are they willing to pay? take less profit or lose the sale? it's an open-air demonstration of economic efficiency. the pricing system at this level is pretty much like the merchandise on display-- out in the open. the "invisible hand" is at work determining what is produced how much is produced keeping supply and demand in balance and all with the least amount of waste. but if the invisible hand and the free market have worked so well, why would anyone want to interfere? during the late 1960s, paying for both the vietnam war and the programs of the great society

put pressure on prices. inflation became the national concern during the administration of richard nixon. without too much managing of the economy, we're going to have some fine tuning of our fiscal and monetary affairs in order to control inflation. but inflation continued. the president and his advisers felt something dramatic had to be done. all the economic officials of the government were summoned to camp david on a weekend told not to tell anybody where we were going. our wives were not supposed to know where we were going. a lot of speculation was going on about what we were doing. at least the word did not leak out that we were about to impose a wage and price freeze.

the time has come for decisive action, action that will break the vicious circle of spiraling prices and costs. i am ordering a freeze on all prices and wages for a period of 90 days. it was august 1971. inflation had reached what was then considered a staggering 4%. president nixon imposed temporary price controls and they worked temporarily. then, the controls off prices started upwards again. by 1973, there were boycotts and demonstrations against high prices. president nixon decided he'd have to take action again. the question then arose-- should we go back into the initial freeze? in a kind of wise-guy way, i said to him, quoting heraclitus

"you cannot step into the same river twice." he retorted, "yes, you can if it's frozen," which is the best joke i remember mr. nixon making. we need action that will stop the rise in meat prices. i have ordered the cost of living council to impose a ceiling on prices of beef, pork, and lamb. the price control gamble was based on the hope that the underlying price factors would hold still. the odds almost always favor change. this time, the change was wheat. huge shipments were going overseas because of the surpluses but then a drought in the southwest destroyed much of the winter wheat crop. cattlemen saw their feed prices, which were not controlled, push higher and higher

while their beef prices remained locked in a vise. farmers are a pretty independent group and the first thing they tried to do was withhold their animals from markets. that had the effect of tightening up on supplies and putting real pressure on the whole system. here was the government trying to hold down prices at a time when farmers were withholding marketings. well, we gonna hold our cattle on the farm. rather than sell hold 'em. the price should come back. we don't want to give 'em away. keep 'em and let 'em get old if necessary.

by the middle of the summer, beef was scarce in many areas of the country. the price controls led not only to lower prices but to lower levels of meat production. i won't sell now because the demand's going to get greater and get us more profits later. that's a rational thing for them to do but you can only do that for a short period. those animals eventually had to come to market. when the controls were relaxed the animals came to market and down came the price. so it had a very serious and devastating effect. plunging prices drove many producers out of business. consumers felt the shortages for several years. dr. stein evaluates his price control experience.

it's something to be avoided like the plague. it probably gave us more inflation than we would have had if we hadn't done this. if you put them on in peacetime they're very difficult to get rid of. if they last for a long time, they're terribly destructive. economists now agree that price controls didn't work back in 1973. why would it have been better to let the market set prices? economic analyst richard gill explains. we have to understand a little about the price system itself. in this connection economists usually make some assumptions about human behavior-- namely, that people generally tend to act in their own self-interest.

consumers might want all the goods they could get but most of them have limited budgets. they must choose one good over another. in making these choices, they try to maximize their own welfare. the same is true of producers. they try to maximize their firm's profits. it will be in their own self-interest they will maximize their profits, if they use more efficient productive methods and produce goods that consumers will buy. let us examine the price system. suppose a new computer is introduced at $450. suppose that this is a low price, meaning that long lines of consumers want to buy one. under the influence of the bidding of these consumers the price rises to $750.

that price change has two effects. it will encourage other producers to produce similar computers. it will also, however, discourage consumers from buying those computers, leading to an oversupply. consequently, the price will come down to $600, let's suppose a price where demand and supply are equated. some producers have dropped out because of the lower price. some consumers have come back. supply and demand are equated. what do price controls do? the government sets a lower price a price below equilibrium supply and demand, say $550. this drives some of the producers out of the market. it encourages consumers to come back into the market. this creates overdemand, lines of people trying to buy nonexistent computers.

the price system has gotten out of whack, as happened with certain commodities when price controls were instituted in the early 1970s. [franklin roosevelt] december 7, 1941 a date which will live in infamy. the united states of america was suddenly and deliberately attacked by naval and air forces of the empire of japan. pearl harbor was a surprise, but america had expected war for some time. as german armies swept across europe, america began to build up its military. many adult americans remembered the hardships caused by inflation during the unregulated economy of world war i.

the cost of living then spiraled up more than 100%. every worker and resource was precious. military and civilian needs competed with no referee but the price system so prices shot higher. as another and potentially greater war approached president roosevelt prepared to initiate price controls. but the job of planning and controlling the economy was anything but easy. the roosevelt administration chose john kenneth galbraith for the job. we had a couple of dozen people and the task of taking charge of all the prices in the economy. in my more mature years, i would have been appalled. at that time i thought the right man had been selected for the right job. how does one select which prices to control?

the original idea was to control those prices where the war had brought something into very short supply. then we'd ration. we'd let the market take care of other prices, keeping demand equal to supply. that proved totally impossible. one had to control all prices, and we did. price controls were only one weapon in the economic war. scarce resources were rationed. silk, for example, was no longer available for stockings, so resourceful women found substitutes. before industrial conversion began-- before automobile assembly lines, for example, could produce tanks and planes-- there was resistance to overcome. president roosevelt's advisers assured him that business had to make money or business wouldn't produce.

so the government ultimately determined the prices paid for war materials, with incentives for producers. between 1940 and 1944, corporate profits nearly doubled from $6.4 billion to $10.8 billion. almost every business prospered. one has to remember that price control in world war ii came right after the great depression where there was a great experience with losses great experience with limited production, idle plant capacity. and so there was an expansion of demand an expansion of output expansion of employment, all of which made people very content as they looked back on their previous experience even though their prices or wages might be limited. the office of price administration not only had to set prices.

it had to see that the men and women on the home front would go along with the regulated market. opa provided patriotic guidance for the american public. ♪ oh, here's a plan that's fair and square ♪ ♪ everybody gets their share ♪ ♪ no more griping anywhere ♪ ♪ get the point mrs. brown? ♪ ♪ one for you and one for me ♪ ♪ it's as clear as a-b-c ♪ ♪ share alike for victory ♪ ♪ get the point mrs. brown? ♪ anything would sell pretty rapidly. it was really a seller's market rather than a buyer's market. and this became increasingly so as the war went into the third year and fourth year and fifth year.

they restricted the amount of material that could go into a woman's skirt. and the skirts got tighter and tighter and shorter and shorter. soon we were in tight, short skirts. the idea of a lot of barbecue parties was not to use beef, but horse meat. it didn't work very well. but there was a very strong feeling at the time that this was a patriotic thing to do. they were trying to use horse meat and other beef substitutes. most americans agreed that these shortages were trivial compared with the crusade to win the war. they cooperated with the emergency programs. they saved their money to buy goods after the war. the controlled market carried out its necessary functions,

and defense goals were met. it was a very successful experience. there was no inflation in world war ii when the economy doubled in output. although they caused some problems, there's general agreement that price controls @@ played a critical role in winning the war. richard gill explains. most economists agree that world war ii price controls were quite successful because of the special circumstances. the war involved a huge transfer of resources from the civilian to the military sector of the economy. without some sort of controls, this might have led to a rapid spiral of wages and prices. controls were instituted for a specific purpose

for a short time and under conditions of patriotic fervor. under these circumstances, they worked quite well. there are other circumstances where the market may not handle economic problems efficiently-- when it comes to monopoly power or to air and water pollution. and remember economic efficiency is not our only economic objective. we may want to use controls to improve the distribution of income to aid the poor or the disadvantaged. when it comes to rent controls these motives were very probably paramount. economists are generally pretty careful about what they say. but an economist once said that next to bombing

rent control seems to be the most efficient way to destroy cities. he was talking about new york city. who was it that pushed the button that caused all this destruction? after world war ii where would all these returning vets live? new york had a housing crisis. the returning veterans needed an additional 200,000 units. big price hikes were expected. when the federal government removed wartime rent controls, the state of new york contued them on all existing rental housing to give the vets a helping hand. when i got out of the service there were problems finding homes.

if you did want a home you'd approach somebody that would move out. you'd pay a few hundred dollars, and you would have an apartment. there was a need for rent control because of the unusual shortage of housing. and, of course it also was true that there was a great deal of pressure from renters from tenants-- obviously, there are an overwhelming majority of tenants in the city as contrasted to landlords. the fabric of neighborhoods and housing seemed unaffected by rent control at first. maintenance costs were stable throughout the 1950s but the costs could not hold still forever. inevitably, the system began to crack under the stress.

first, landlords skimped on some repairs. before too long, buildings deteriorated. costs were so high and returns so low they could no longer afford to keep their buildings. in the 1960s hundreds of landlords began to abandon their buildings. private housing construction in the city came to a standstill. rent ceilings cut into profit margins. profits or people? it was an emotional issue. while the debate raged investors took their money elsewhere. they were much wiser in lending their money to general electric than lending it to a company that would build a product subject to price control. the net effect of that is that new york city has a declining population.

over 300,000 apartment units have been abandoned in the last 10 or 20 years. no one abandons an apartment house unless it is uneconomical to continue to own it. when we first purchased the property i think i was paying 37, 38 cents a gallon for fuel oil. now i pay $1.23 a gallon. if i could get a decent rental-- i'm not out to overdo anything. i'm only asking for what is necessary to keep the property in good order. there are times when that may be true. at other times you have to subordinate the economic factor to the social factor. when people of middle income or low income

cannot find housing which they can afford, something has to be done to help. where rent controls don't apply, the natural laws of supply and demand have come into play. if there is demand for something, someone will oversupply it. that will drive down the rents. i've lived in this apartment for about 28 years. to move now to any other location without rent control, i couldn't afford it. i'm determined to keep what i got. rent control will probably always be an emotionally charged issue in new york city. it provided affordable housing to many in need, but over the long run, it put a stranglehold on the quantity and quality of available housing. here is economic analyst richard gill.

we can summarize a rent control situation through one of the most infamous tools of economics-- the curves of supply and demand. we measure price verticall the higher up we go, the higher the price. we measure quantity horizontally. the farther to the right we go the greater the quantity. the higher the price the more of these units will be brought to the market. therefore, the supply curve slopes upward. the lower the price, the more apartments will be demanded. therefore, the demand curve slopes downward. when we bring these two curves together, we have an intersection where quantity demanded and quantity supplied are equal. this is an equilibrium situation. rent controls bring into being a lower

price than this. as the quantity demanded now exceeds the quantity supplied, there's a housing shortage. apartments are sought and not to be found. this is economically inefficient. economic efficiency is not our only objective. we may want to improve the income dtribution, help the poor. the marketplace itself is not always perfectly efficient. not all interferences with the price system are necessarily harmful. almost always, however such interferences do have some costs in terms of economic efficiency. do you want vinyls? stay away. we got the leather for the weather, girls! $5.00 on the ladies' shoes. save $100 today! there's not much argument among economists

about the effectiveness of the invisible hand or the efficiency of the free market. it organizes the potentially chaotic forces of supply and demand. it leads to the production of goods people really want and does it at the lowest cost to society. any interference with the pricing system, no matter how desirable the goal can exact a price of its own. this is david schoumacher for economics usa. captioning is made possible by the annenberg/cpb project captioning performed by the national captioning institute, inc. captions copyright 1986 educational film center