The Politics of Price Controls

Naive assumptions in the Mahoney-Ramamurti op-ed

A weekend NYT op-ed by Neale Mahoney and Bharat Ramamurti has caused a stir. It argues that policymakers should be open to considering price controls, given voters’ discontent about the cost of living.

Price controls, the authors say, are a “tool” to be used carefully. The key is to “design” them to avoid the classic long-term consequences of “less investment” in supply, but keep the benefits of providing “immediate relief” to customers through lower prices. This can be achieved, apparently, by pairing price controls with supply liberalizations like zoning reform and sunset clauses that ensure price controls’ eventual discontinuation. The key is committing that price controls are strictly temporary.

Jared Bernstein, of Biden administration fame, agrees. He goes further, in fact, and says that not just policymakers, but even economists, must get on board with price controls. We market-worshipping economists can go on “raging on the sidelines,” he says, or we can do something productive and “join in the fray” to help improve policy design.

The Cato adjunct scholar John Cochrane has an excellent post on the bad economics of the Mahoney-Ramamurti piece. He documents how price caps induce shortages, misallocation and black markets. I shan’t repeat that content here (though if you want a comprehensive treatment of price controls, you can still buy The War on Prices)!

Instead, in this post, I want to consider the politics. For I found myself maddened reading both the Mahoney-Ramamurti piece and Bernstein’s response. The political aspect of this argument is naive, at best, and highly partial at worst.

1. Why are voters pissed with high prices? They’ve lived through the highest inflation since 1981, and many goods’ prices are up 20-30 percent in dollar terms since 2020. Even if real wages are increasing, the public hates such sharp jumps in prices, often desiring redress or compensation through policy for their hardships. This reaction is an underappreciated cost of overly-expansionary monetary and fiscal policy, which overwhelmingly caused the most recent inflation.

2. It therefore takes some chutzpah for Bernstein—one of those who argued for “running the economy hot” with macroeconomic stimulus during the supply-constrained pandemic period—to now tell economists to get with the price control program. He spent years downplaying the risks of inflation from the fiscal and monetary stimulus he endorsed, and is now lecturing other economists by downplaying the risks of messing with market prices.

3. The Mahoney-Ramamurti piece constantly flips between talking about price controls as a political imperative and a helpful economic tool. On the one hand, they argue policymakers must be open to price controls because voters demand immediate cost of living relief. Elsewhere they talk as if controls can be a net benefit, and so presumably desirable regardless of the politics. Their piece therefore blurs the politics with the economics. This is not helped by the fact that they never evaluate a real-world example: do they think Mamdani’s planned rent freeze, government investment in housing, and zoning reform plans are, net-net, good economics? We leave the piece none the wiser.

4. Would “immediate relief” via price controls really prove temporary as new supply is brought onboard? Mahoney-Ramamurti provide no historical or contemporary examples of such a bundle. Yes, the broad World War II and Nixon price controls disappeared … eventually. But has there been an example of a price control, introduced as strictly temporary, that was cleanly abolished as pro-supply policies bedded in? It seems weird to just assume this without noting that New York first introduced rent control via emergency rent laws in 1920 and the current rent control program dates to federal wartime controls introduced in 1943.

5. Indeed, there’s good reason to think that price controls themselves make doing worthy supply-side reforms less likely, so leaving the market even less efficient long-term. First, binding price controls like rent caps reduce the supply of rentable accommodation, by encouraging shifts into other tenure types and reducing the profitability of new builds. The cheaper the price caps make renting, the worse this effect. So there’s already a direct trade-off between the short-term relief efforts and the long-term supply goals straight away.

6. Mahoney-Ramamurti pledge to carefully design around this problem by, say, exempting new rental housing from price controls. The effect of doing so on new construction is theoretically ambiguous. But if you admit your idea is driven by voter demands for improved affordability, then will investors accept your assurances that this won’t expand to new builds later? It seems sadly likely investors will instead see controls as the thin end of the wedge, with future tightening and expropriations likely. That means less investment in rental housing and a long-run supply hit from the price control.

7. Could supply-side liberalizations, like zoning, density, and urban growth boundary reforms, really offset these effects? In theory. Yet the political economy dynamics aren’t hopeful. First, as Stan Veuger writes, rent controls can reduce the political demand for supply liberalizing reforms because renters are shielded from price signals and like their effective subsidy, while owners will be more anxious to protect their lowered returns. These concentrated benefits therefore create powerful interest groups who oppose price controls’ removals and make it more likely that the supply reforms never come.

8. Second, as Jeff Clemens writes, “price controls, much like tariffs, tend not to be implemented “surgically” or “strategically,” at least with respect to the interests of the broader public, because they are so useful as a tool to shakedown market actors on behalf of narrow interests once they are viewed as permissible.” This, again, raises risks undermining the supply of new housing or energy or whaetever, longer term.

9. Third, the Democrats who like these policies tend to support other regulations that make new supply more expensive, undercutting even the zoning and land-use reforms they say they want. Zohran Mamdani, cited positively in the piece, supports layering private-sector development with restrictive measures such as mandated affordability quotas, prevailing wage requirements, and “good-cause” eviction laws. These diminish the profitability and supply of new private rental construction.

10. Fourth, the Democratic coalition itself will have a strong interest in maintaining rent control where it is introduced, expanded, or tightened. Indeed, they’ve hardly embraced price controls in a regretful posture since 2023. In fact, there’s a real Bootleggers and Baptists dynamic here. Mahoney-Ramamurti-Bernstein appear to endorse price controls because they think they are good news for the electoral prospects of politicians (and potential bosses) they favor. Yet there are also a range of progressive “greedflationist” and Hipster antitrust Democratic wonks who genuinely think price controls “work” (the sort of people who want price controls on beer in stadiums and think this will have no impact on raising overall ticket prices by boosting demand for seats). TLDR: if price controls were introduced, there would be an ascendant part of the Democratic coalition in favor of keeping them permanently. Indeed, their introduction or tightening would be heralded as a signature policy achievement. Think about it: even Mahoney-Ramamurti could have used today’s hook to say that zoning reform in New York should be combined with plans to completely abolish rent stabilization entirely in the coming years. Did they? No. The plan here is for more price controls long-term, not fewer.

When I commissioned The War on Prices, several other think-tankers and economists were bemused as to why I wanted to publish it. Price controls had been roundly debunked and abandoned by economists. But I saw the way the political winds were blowing. Minimum wage-ism and discontent at housing markets had seen wage and rent controls bubbling in the states. Populist sentiment driven by high inflation had reinvigorated calls for price controls and politicians keen to deflect blame for inflationary macroeconomic policies were only too happy to indulge them. This New York Times op-ed is just another step in the intellectual path to price controls being renormalized as policy. Sadly, no amount of wishful thinking about packaging this with supply-side reforms will prevent the damage.