A number of political candidates who promote price freezes—also called price controls—in industries like housing have recently won electoral victories. This trend makes it worth asking what will happen if the government freezes energy prices. And this isn’t hypothetical—it’s a tried (and failed) policy meant to keep energy affordable. The most notable and relevant example is the United States’ foray into price controls on energy and an array of other commodities, referred to as the “Nixon Shock.”
Back in 1971, the economy was in bad shape. Productivity was low, but high demand meant prices were rising, leading to inflation. Inflation is typically the most visible symptom of declining productivity, and people never enjoy paying more to get less. So, unsurprisingly, politicians attempted a political solution: price controls. Congress drafted legislation that gave the president the authority to implement price controls, and President Richard Nixon did exactly that.
Prices finally stabilized once price increases were essentially banned. Hooray! Except there was a new problem: Any producer of a commodity that was not profitable at the newly mandated price would incur a loss if they stayed in business. Many businesses either left the market or took desperate measures to cut unprofitable production as a result. A notable example is that some farmers resorted to drowning their chickens. In economic parlance, the outcome of the price controls was “stagflation” (stagnation and inflation).
In his memoir, Nixon wrote that the decision to impose price controls “was politically necessary and immensely popular in the short run. But in the long run I believe that it was wrong. The piper must always be paid, and there was an unquestionably high price for tampering with the orthodox economic mechanisms.”