Should the government just ban high prices? |
Voters want stuff to be cheaper.
To most economists, the best way to make things more affordable is to make them more plentiful: When the supply of a good rises, its price tends to fall. Thus, to push down the costs of expensive commodities, the government should make them easier to produce.
For example, zoning restrictions make it illegal to build apartment towers in many urban centers. This reduces the supply of housing, which leads to higher rents. Therefore, economists argue that the government should make housing more affordable by legalizing the construction of multifamily buildings.
But voters don’t love this answer. After all, it asks them to accept some immediate costs (construction noise, for example) for hypothetical future benefits. More critically, supply-side reforms do little to address their affordability concerns today. When a city council votes to upzone a neighborhood, a dozen condo towers don’t promptly sprout up through the concrete.
So, some politicians have recently gravitated towards a simpler solution to high prices: Make prices above a certain threshold illegal.
In New York City, mayor-elect Zohran Mamdani campaigned on a promise to “freeze the rent” on rent-stabilized apartments. In New Jersey, the incoming Democratic governor, Mikie Sherrill, vowed to cap electricity rates.
Economists consider such price controls counterproductive in most markets because they discourage investment, thereby reducing affordability in the long run. Yet some of the Democratic Party’s leading economic thinkers are warming to them — sort of.
Can voters have a little bad economic policy, as a treat?
In a New York Times op-ed last week, former Biden administration official Bharat Ramamurti and economist Neale Mahoney argue that price controls tend to be economically corrosive, but that Democrats should embrace them, anyway.
Their case is primarily political. In their telling, “voters are demanding short-term price relief” and “price controls may be the only viable way to provide it.” Ramamurti and Mahoney acknowledge that price caps have often backfired historically, leading to lower production and less affordability in the long run. But they contend that policymakers can largely avoid these pitfalls by making their price controls temporary. Essentially, they suggest that the government should increase the supply of energy and housing through public investment and regulatory reform — but, while we’re waiting for those new houses and power plants to come online, it should tide consumers over with price controls.
I think this argument is largely misguided, for four chief reasons:
The economic costs of most price controls are quite large. Price controls are rarely the best way to address affordability concerns, even in the short-term. Letting a “temporary” price control expire is politically difficult. Achieving the public’s preferred economic outcomes is more important than echoing its policy intuitions.Most price controls take a big toll
The case against price controls boils down to one simple claim: When prices move freely, they can make the economy work efficiently, to everyone’s benefit.
In competitive markets, rising prices are a symptom, not a disease. They signal that a good has become either more scarce or more desired: If a Labubu factory burns down, then the supply of Labubus available to consumers will shrink. If wearing a menagerie of slightly monstrous stuffed animals somehow becomes fashionable, then demand for Labubus will soar. Either way, a mismatch between how many Labubus people will want — and how many producers can provide — will emerge. If the price of Labubus is allowed to rise and fall freely, then this mismatch will become visible.
Price increases therefore surface critical........