The nationalist leadership of Hungary may have found fans in the conservative Anglosphere, but Prime Minister Viktor Orban’s understanding of classical economics is dismal indeed. Just like President Richard Nixon learned the hard way a half a century ago, the government cannot use price controls to tame away inflation.
By the end of last year, inflation in Hungary had topped 24%, the highest rate in the European Union, which averaged a 10.4% increase in prices throughout 2022. Both the fiscal and monetary responses of the state have been utterly lackluster. The country’s central bank has raised nominal interest rates to 13%, leaving real interest rates in negative territory. Orban, meanwhile, sidelined parliament to blow out the budget.
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But most damaging was Orban’s imposition of price controls.
In January of last year, Orban announced that starting in February, the government would cap grocery prices at the levels of October 2021. As the year went on and inflation spiked, Orban’s price controls expanded to include fuel, mortgages, and energy. The predictable result? Mass shortages and an utter failure at reducing inflation.
The Financial Times reports that Orban’s fuel price cap, which made prices the lowest in the EU, reduced oil imports to the point that Hungary had about one-third of its normal supply by the end of December. National oil company MOL told the government that it could no longer meet demand, resulting in Orban finally eliminating the cap.
Inflation, by definition, breaks the ability of prices to signal supply and demand. Price caps abuse economic forces even further, reducing the efficacy of the distribution of goods and hampering the willingness of suppliers to sell in legally regulated markets.
The parallel to Nixon is not exact because Nixon had the benefit of the dollar — the world’s reserve currency. And even then, he failed miserably.
Although the Nixon shock scored immediate political points — debasing the currency almost always does in the short term — the real and lasting consequences came after his reelection. In 1973, Nixon’s removal of his price controls resulted in another inflationary shock due to the pent-up demand that his controls had artificially induced. When he tried to reimpose them amid the beginnings of Watergate, suppliers, already burned by the first round of pricing by federal fiat, revolted. Nixon got to resign in disgrace, but the country had to cope with a decade of destructive stagflation, only solved by the fiscal and monetary tightening of the Reagan and Volcker era.
If the government minting the world’s reserve currency could not effectively use price controls to kill inflation, then there is no way that Hungary could.
