Price Controls Won’t Solve the Affordability Crisis

The success of political slogans often brings forth intellectual defenders, even when the slogans themselves lack merit. Calls to “freeze the rent” and cap electricity prices before this month’s election triggered a frantic search for experts willing to justify outright price controls.

Now, two respected economic commentators—Neale Mahoney, a professor at Stanford, and Bharat Ramamurti, a former deputy director of President Biden’s National Economic Council—have published a New York Times op-ed arguing that price controls are a reasonable solution to our affordability crisis. Their article shows only that price controls are popular, not that they are good.

In fact, the article offers strong evidence of the harm price controls cause. It concedes that “the supply of rental housing declined” after San Francisco expanded rent control. It recalls that the 1973 oil-price caps produced “shortages, station closings, and round-the-block lines” at gas pumps. And it acknowledges that price controls “jam the signal that high prices send to companies to enter markets or expand production.”

The authors’ case for price controls rests largely on the fact that voters want them. They point out that most solutions to high prices take time to work. Even if deregulating sectors such as housing or electricity would eventually bring prices down, the new supply might not materialize until well after the next election. Thus, they argue, “temporary, targeted price controls that hold down costs,” combined with “supply-side reforms that encourage new production,” could be a politically appealing strategy.

The flaw in this argument: the most important supply-side reform that a government could undertake is eliminating price controls. The authors, like many left-leaning pro-abundance or pro-housing advocates, treat price controls and regulations that restrict supply as if they were separate issues. They want to believe that government can roll back zoning rules while simultaneously squeezing developer profits and still get more housing. It can’t.

The basic premise of what economists call a “supply curve” is that the higher the price of something, the more of it gets produced. There is no way to boost output without offering people rewards for producing more. If price controls block those rewards, the goods and services won’t be produced, no matter what the regulations say.

The authors offer another strategy for expanding production: subsidies. They argue that a “freeze on electric bills paired with government investments that expand solar, wind and other clean energy” could reduce electricity prices in both the short and long term.

They’re right, narrowly. If price controls prevent businesses from earning profits, government can step in and replace those profits with subsidies. But subsidies as a cure for the affordability crisis are the classic case of robbing Peter to pay Paul. Government can lower electricity prices by extracting money from elsewhere, but that only raises prices or reduces incomes somewhere else. And today, those subsidies would almost certainly be funded through additional deficit spending—fueling inflation and aggravating the very problem they’re meant to solve.

The Times piece should, in one sense, be a comfort to opponents of price controls. If this is the best case that the most distinguished scholars can make for such interventions, the argument for them is weak indeed.

The larger problem, as the authors themselves acknowledge, is that voters continue to demand price controls. Over time, such policies can lose their appeal, but this has required that voters experience firsthand the shortages and rationing that often accompany them. Argentina offers a vivid example: the country is now eagerly dismantling decades of destructive price caps that produced chronic shortages and economic dysfunction. Let’s hope Americans don’t have to learn the lesson the hard way.

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