AFP via Getty Images
In recent years, the United States has been embroiled in a heated debate over how policymakers can best lower prices. Housing has reached crisis levels of unaffordability, and daily necessities feel out of reach for too many families. Voters now want relief, and politicians are responding with an increasingly interventionist playbook.
A recent New York Times guest essay by Stanford economist Neale Mahoney and Bharat Ramamurti noted how Democrats performed well in the November elections while adhering to price controls, something once considered unspeakable in polite economic company. They point to the election of democratic socialist Zohran Mamdani as mayor of New York, who ran on a platform that promised “freeze the rent.” Meanwhile, New Jersey’s new governor, Mikie Sherrill, campaigned successfully freezing of electricity rates. The authors argue that temporary, targeted price caps, combined with supply-side measures, can provide short-term relief in an affordability crisis.
Their argument reflects the current mood of the electorate. Voters are frustrated by a policy consensus that appears unable to reduce costs quickly. At the same time, the perceived incompetence of policymakers may stem from a deeper confusion in the public debate about what economics can and cannot realistically tell us about price controls.
Why the online debate feels so fractured
Scroll through social media today and you’ll find an almost theological devotion to the Econ 101 supply-and-demand model. The meme version of the model says that price ceilings cause shortages, and in an important sense this is true. If you keep the price of a good below the market clearing level, you will have excess demand. Rent control often leads to landlords converting or withdrawing units, just as the gas caps of the 1970s produced long lines and rationing.
But somewhere along the way this logic was blown up into a much broader and incorrect claim, namely that any deficit is necessarily inefficient and must reduce social welfare.
This is not, and never has been, an iron law of economics.
Why deficits are not automatically ‘bad economics’
Consider a luxury good such as yachts. Suppose the government imposes a price ceiling that makes yachts cheaper than the market price, and a shortage arises. In a simplistic model, this is labeled as “inefficient” because people are willing to buy more yachts at this price than sellers are willing to offer.
But that’s not the end of the story.
If wealthy households who would have bought yachts instead buy sports cars, there may indeed be inefficiency. Resources shift from one luxury sector to another, with little gain.
However, that is not the only possibility. Instead, suppose that limited consumers save or invest the money they would have spent. They may be lining up to eventually get their hands on a yacht, and in the meantime their dollars are flowing into the capital markets. Workers may lose some jobs in yachting, but other workers will gain jobs in sectors that benefit from those additional investments. Over time, the economy may experience faster capital accumulation.
This scenario is not guaranteed, but neither is it the scenario that economists often assume: that deficits necessarily make society worse off.
Now take the even more extreme case of a product ban. This is essentially a price floor set at infinity because the good is unavailable at any price, creating a shortage so large that the market disappears. If a product is truly harmful, such as asbestos-laden insulation or certain toxic chemicals, then the “deficiency” is less a distortion than a deliberate improvement in public health. The market is being eliminated because society is better off with alternatives.
So the existence of a deficiency in itself tells us little. What matters is the counterfactual. What would people do with their resources in the absence of the market transaction that is being prevented?
Some (but not all) economists know this about deficits. But they rarely emphasize it, and public debate suffers as a result.
Where this leaves the housing debate
All this said, housing is not hunting. It is not a luxury good. It’s a necessity, and we already have far too little of it.
Therefore, the recent enthusiasm for rent freezes is indeed misguided. Price ceilings only make the most sense if we are willing to tolerate less of what is controlled. In housing, inadequate supply is already part of the fundamental problem, collapsing the rationale for price ceilings.
Freezing rents may provide immediate relief for some households, but it also discourages construction and maintenance. The authors of the Times op-ed argue that combining rent caps with government-led efforts to expand supply could offset some of the negative side effects of price controls, but history suggests that the caps are likely to remain in place while supply reforms lag or stall altogether. Temporary controls have a way of creating permanent constituencies. If the product is something harmful, such as asbestos insulation or lead paint, that durability may be a feature and not a bug. But when the product is housing, making controls permanent creates scarcity.
If the real goal is to reduce housing costs, the only sustainable path is to build more housing. This will have to be done through deregulation of zoning plans, faster permitting, fewer construction barriers and perhaps targeted tax reforms.
Agreements with rates
This supply-side lesson is not unique to residential construction. Consider the recent tariffs imposed by President Trump. Tariffs raise domestic prices and reduce production in the short run. Yet their defenders argue that this pain will pay off in the short term by boosting U.S. investment and production over time. As with price controls, the ultimate economic impact is ambiguous. In either case, a short-term decline in output will make it more difficult to achieve the very long-term supply boost that policymakers claim to be seeking.
Moreover, with Trump’s tariffs there is an additional problem related to uncertainty. Businesses are understandably skeptical that these tariffs will remain in place long enough to justify major new investments. A well-considered, consensus-based industrial policy that is clearly articulated and credibly sustainable would be much more effective.
A better approach would therefore be direct investment rather than indirect, roundabout attempts to stimulate the economy by manipulating relative prices. If the goal is to increase production capacity, the simplest approach is to directly support investments.
Economists don’t tell the whole story
Economists often present their models as if they were complete descriptions of reality. But supply and demand are only a partial model. It is powerful and correct within its domain. Yet important dynamic effects are overlooked, especially certain investment responses.
Price controls can be harmful, but not necessarily harmful on the Internet. And the shortages and surpluses that arise as a result can sometimes play a constructive role in policy.
The right answer is therefore neither to eliminate price controls from the policy instruments nor to embrace them without reservations. It’s about understanding what they do and what they don’t do.
In the affordability crisis we face today, the only sustainable way to make necessities affordable is to produce more of them. But that doesn’t mean there aren’t situations where less really is more.
#real #story #price #controls #Economists #wont