Tyler Cowen is Correct on the Risks of "Affordability Politics"

All roads in that frame lead to a War on Prices

In 2014 in the UK and then 2018 in the U.S., I wrote papers arguing for a greater policy focus on the cost of living.

At a time when minimum wages were being raised aggressively and there were big pushes for higher fiscal transfers to those in work, I thought libertarians needed to explain that what mattered was people’s real incomes—how far their cash wages or welfare went in obtaining goods and services. A growing concern was the rising price of essentials like shelter, which was clearly becoming a politically salient issue.

Indeed, unlike most other libertarian and free-market conservative commentators, I still thought there was something in Oren Cass’s 2020 “cost-of-thriving index” that warranted pondering. Even if, overall, rising real wages meant things were getting more affordable for families given their increasing incomes, the sharply rising relative price of housing and labor-intensive services like education and childcare made people feel increasingly squeezed, and actually did squeeze them if they sought to operate as a one-earner household. As a result, high prices in core markets were becoming political again.

At the very least, to dampen prices elevated by bad policy, it would be prudent to liberalize these core sectors as far as possible, I said. There was a host of supply-side deregulation that might be bundled up into a political program to improve the affordability of the core goods and services that make up life’s basics.

Yes, there was deregulation of land-use planning and zoning to dampen pressure on home prices. But that same umbrella might also incorporate energy market liberalization, removing tariffs on food and clothes, removing credentialism and ratio regulation in childcare, and reforming a host of regulations that raise the price of cars and other transportation.

One could imagine similar supply-side pushes in healthcare and for universities too. The possibilities for better policy were endless under this affordability banner. And, in economic terms, at least, by improving efficiency, some of these would produce the double-dividend of raising pay somewhat too.

The most important reason for my advocacy, however, was that I could see how the rising cost of certain goods and services could quickly become claims of “market failure” in housing, childcare, and other industries, encouraging a push for highly damaging policies like price controls. Far better to have a market-friendly answer in the right direction than wait for others to devise interventionist ones.

Fail to take the cost of living seriously as politics, I said, and anti-market sentiment would likely prevail in the form of a reemergence of rent controls, more government subsidization of “cost disease” industries, and other bad ideas.

And what do you know: this week New York City voters elected a Democratic Socialist in Zohran Mamdani whose whole “affordability agenda” is a menu of this highly destructive War on Prices thinking.

Cowen’s Wisdom

In reaction to Mamdani’s success, some Republicans want to carve out their own affordability policy offer. Tyler Cowen has a good piece in The Free Press that warns about the consequences of both parties rushing headlong into fighting on this “affordability politics” front.

He is right, not least because the context has changed since I advocated for just such a focus. We’ve just lived through the sharpest burst of inflation since 1981, and inflation is still above target. Groceries (food-at-home) prices are up 30 percent since January 2020, having previously taken sixteen years to increase by that proportion. The pre-inflation price level is still recent enough that people remember how sharply prices have risen and hanker for those good ol’ days at the old price level.

Indeed, the fact that President Trump’s polling on inflation has worsened gradually since he took office (certainly with a helping hand from tariffs) suggests to me that many voters thought changing the President was a potential path to outright deflation and a return to the old price level under Trump in 2019. That was never on the agenda, of course, but the clearer it becomes that it ain’t gonna happen, the lower Trump’s inflation approval falls.

For Republicans to thus now frame new economic promises around affordability would be a fool’s errand. For unless the policy has big and swift effects to lower the price targeted, all it will do is add to disappointment and boost Mamdani-ism.

Cowen explains why using the example of food:

I find food prices shockingly high, even in so-so restaurants, and I wish the prices were lower. And if I were in charge of the economy, I would try to lower costs. But there are only so many ways to do that. One option would be to deregulate the energy sector, easing permitting for solar, wind, and nuclear power. Over a five- to 10-year time horizon, that would lead to cheaper energy and, indirectly, to modestly lower food prices. I would also repeal the Trump tariffs, which artificially inflate the cost of foreign goods. I might also refrain from minimum wage increases, which only cause the price of food to rise further.

But even in the best-case scenario, all of those actions would make food just a bit cheaper than it would be otherwise. I would hardly expect voters to hail my reign as a major triumph, or ask for more of the same. Instead, they might flock to the candidate who promises government-run grocery stores or price controls. Sound familiar?

Correct. Cash food prices are much higher today than in 2019 because of the underlying monetary and structural realities of the industries, which are pretty competitive already. There’s simply no deregulatory policy (however worthy it might be to liberalize input markets) that will get you grocery prices falling significantly and quickly.

Another example: childcare.

Some of my free-market friends get very excited about deregulation to improve affordability. And, certainly, I think there should be no government-enforced occupational licensing and educational requirements of carers, nor government-mandated staff-child ratios. Stripping these away through deregulation will certainly lower prices somewhat, and create more care options, especially for those on low incomes.

But the scale of impact on childcare prices, I suspect, would still be insufficient to depoliticize the issue. The main reason childcare prices are high is because it’s a labor-intensive industry that’s difficult to automate, and so suffers low productivity growth. Add to that high land rent costs in many places, plus parents’ preferences for “high quality” educational type care in the wealthiest parts of the country, and I think even if the regulations were gone, prices would remain very high.

Cowen explains how even in the areas where deregulation could have the biggest economic benefit—zoning and land-use planning reform—there are reasons why it might not result in significantly lower prices to diffuse concern:

Still, many of those victories achieve only marginal changes in affordability, for example, by allowing a limited amount of extra building in designated areas. Further, sometimes the new building resulting from the YIMBY movement ends up leading to higher rents, as the newly built area becomes more productive and more full of higher-wage jobs. That’s exactly what happened in Loudoun County, Virginia, where new tech jobs and data centers spurred rapid real estate development and made the once-deserted area more expensive. From an economist’s point of view that’s a good thing, as it’s a sign of value creation for the nation. But it hardly feels like a triumph of affordability for voters struggling with higher rents and home prices.

Promise that these deregulations will all make things substantially more affordable, then, and voters will likely be disappointed by the results.

And so, Cowen says, we have to understand the incentives of politicians. They want to win elections. If affordability is the frame, they will want to show that they are doing something quickly that binds on prices. Rather than careful deregulation, you’re just as likely going to get promises of huge new subsidies and price caps—Mamdani-ism.

These policies often worsen problems long-term, of course—the main topic of this Substack. Subsidies at best just change who pays rather than lowering costs of provision. In reality, the combination of the price-shrouding that government demand subsidies bring, plus the regulations politicians impose on subsidized services, often drive up costs and market prices further. Price ceilings, on the other hand, create shortages, misallocation, poor quality, and black markets. With policies like government-run grocery stores, you might even get bits of both.

The point is, in today’s environment, this is likely where “affordability politics” ends up. Democrats have shown their susceptibility to “greedflation” type thinking that legitimizes price controls. Republicans will now be looking for quick wins. Indeed, the Trump administration are hardly showing that the alternative to Mamdani-ism is affordability delivered through deregulation. President Trump spent the day after Mamdani’s win detailing new drug price controls.

In our politics today, high prices aren’t seen as information about a good’s relative scarcity. They are thought determined by malevolent actors or seen as barriers to our ambitions—things that raw state power can and should overcome.

We Should Still Do Deregulation Anyway

“If [policymakers] err on the side of inflation, there will be widespread complaining about rising prices to be sure, but that diffuse message is quite drowned in the rising babble of specific demands and concrete proposals from identifiable interest groups — to compensate me, to regulate him, to control x’s prices, and to tax y’s “excess profits”, etc.” Axel Leijonhufvud, 1975

It’s not inevitable that a period of high inflation only encourages bad policy. Many of the deregulations in the 1970s-1980s were undertaken because of significant worry about rising prices (even though these policies would never solve the macroeconomic phenomenon of inflation). But, historically, unpopular high inflation periods, with all the disorienting impacts and arbitrary redistributions they bring, create incentives for economic interventionism, for the reasons Axel Leijonhufvud outlined above.

That is our zeitgeist today. There was an opportunity to frame careful deregulatory reforms as a helpful way of easing living cost and cost disease pressures before the pandemic. Right now, political promises of delivering affordability are promises that won’t meet voters’ ambitions after a high inflation moment.

None of this is to say we shouldn’t still remove tariffs, end the Jones Act, liberalize land-use and energy markets, deregulate childcare, and all the other good supply-side policies that might lower prices. Call this what you like: abundance, or efficiency, or pro-growth policies or whatever. But if affordability becomes the frontline political promise in today’s environment, the quest for rapid results will see more Mamdani-ism and long-term destruction.