Who’s afraid of price controls?

[MANNHEIM/AMHERST] Is it time to consider adding price caps to the emergency economics toolbox? The unprecedented surge in energy prices that followed Russia’s invasion of Ukraine has prompted much soul-searching in Europe regarding the effectiveness of traditional economic stabilisation policies. In response to this energy shock, the European Union has imposed a general price cap on natural gas, and several member states have capped profit margins, staple foods, and rents, in addition to reintroducing windfall taxes.

But despite the widespread adoption of price controls and the support of some prominent economists, the economic mainstream remains apprehensive about policies that might disrupt price signals. Nowhere has this reticence been more pronounced than in Germany, where the delayed use of effective price caps could have far-reaching political implications.

In a recent working paper, we argue that economists’ fear of price controls is baseless and may have disastrous consequences. Germany serves as a useful case study, given its heavy dependence on Russian natural gas and the direct impact of the 2022 energy shock on its economy.