John H. Cochrane
My colleague and friend Neale Mahoney writes in favor of price and rent controls in the Sunday New York Times, with Bharat Ramamurti.
Neale is also the director of the Stanford Institute for Economic Policy Research, of which I am a part. While SIEPR does not have “house views” and its fellows may write what they wish, as I do now, when the boss writes a New York Times op-ed in favor of price and rent controls, that inevitably tells you something about the strategic direction of the organization.
When even the Times, who chooses the title, has to start with “Economists Hate This Idea,” and your own op-ed acknowledges “this may terrify many economists, who have long dismissed price controls as failed policy,” maybe you should stop and think twice?
While Mahoney and Ramamurti pay lip service to standard objections, they miss the glaring elephant-in-the-room Econ 101 issue: Budget constraints. Every dollar of “relief” for one party is a dollar of “burden” for another, plus the inefficiencies of redistribution.
Sure, “sharply rising rents and utility bills wreak havoc on family budgets,” if the families don’t follow the screaming market signal to move. (Which is not painless, for sure. Incentives never are.) But the money comes from somewhere. Rent controls and energy price caps wreak havoc on landlord and electric utility budgets. The money must come from somewhere.
A rent control is the same as a tax on landlords used to subsidize the rents of current tenants. You may picture a giant corporation, but many landlords are sympathetic individuals who worked hard and saved and use the apartment to fund their retirement. Corporations are owned by the 401(k) plans of sympathetic workers too. But economists should know better than to tug on your heartstrings for who should get resources forcibly taken from who else. If you ask “what’s the optimal way to tax people in general in order to lower housing costs for a politically attractive group (current tenants)” the screaming answer is not “let’s tax the people who currently own the buildings.” Sure, “tax the rich.” If you want to go down this route, it’s a lot more efficient to tax all the rich. If you ask “what’s the optimal way to help families who just got stuck with higher rents,” the screaming answers is “send them a check, but then let them move to the apartment that best fits their needs.”
A rent control only makes rental “affordable” for the lucky recipient. It does not make rental housing more “affordable” for society as a whole. It does not increase the number of people who have housing. Indeed it reduces that number. It just changes who gets it. It does not even make housing more “affordable” on average. For those who want it must now pay with time, and inconvenience, or pay by foregoing the great opportunities that moving to the city provided.
The biggest losers of rent control are the young, the mobile, the ambitious, immigrants, and people without a lot of cash. If you want to move from Fresno to take a job in San Francisco and move up, and you don’t have millions lying around to buy, you need rentals. Rent control means they are not available. Income inequality, opportunity, equity, all get worse.
There is no blob of “government” money, or “policy” that can make something affordable for one without making something else less affordable for another.
Mahoney and Ramamurti pay lip service to the standard economic objections, and the long history of price-control failure:
They [price controls] jam the signal that high prices send to companies to enter markets or expand production, which can help lower costs over the long run. As any economist will tell you, capping prices below production costs causes shortages and rationing…. Even caps that sit above current costs can deter maintenance and investment….
They offer similar half-acknowledgment of some of the correct response,
For decades, the textbook policy response to high prices has been to increase supply, such as by offering tax incentives or reducing regulatory barriers to housing construction and energy production. But these solutions can take years to have an effect.
and of the standard policy response:
Demand-side fixes, such as subsidies or tax credits to offset the cost of expensive items, can sometimes provide short-term help. But in practice, these subsidies often create more demand chasing still constrained supply, pushing prices up and transferring most of the value of the subsidy to landlords or utility companies instead of the people who need it.
Absolutely. But instead of dismissing complaints — sometimes “textbook” is right — take them a bit more seriously. Supply does not need “tax incentives,” which are usually specific to a project and negotiated between developers and politicians. This is showy stadium construction finance, which does little for broader prosperity. Supply needs “get out of the way,” starting with reducing the taxes we have now. The problem with “regulatory barriers” is not that on removal it takes years to build housing, it’s that it takes decades to remove regulatory barriers. Remove the barriers tomorrow — zoning, planning, density and height restrictions, dozens of separate permits, labor restrictions (unions, high minimum wages), and so on — and you could get actual new housing before the next presidential election.
Everyone is focused on building, but “supply” is so much more than building. There is tremendous supply in using more efficiently what we have now. Most cities have laws against renting parts of single family homes, or sharing larger homes. Think how many spare bedrooms are empty every night. There is plenty of housing supply in the US, it’s just not in places where people want to move. Others moving out is “supply,” and greatly impeded. Older people stay in too-big houses and apartments, in locations close to work and school opportunities that young families desire, but the older people no longer need. Why? If they sell, they are taxed on capital gains, even just due to inflation. They lose property tax exemptions, and, of course, rent control protection. Each older person who cashes in, downsizes, or moves to a neighborhood more suited to them, supplies a house or apartment. The non-portable fixed rate 30-year mortgage, an invention of our federal housing subsidy regime, leads people to stay where they are rather than move to where they want to go, and free up a scarce house or condo for someone else. Strong apparently “consumer protection” laws in rental contracts dry up the supply, especially to the marginalized. If you can’t kick people out, you’re much more careful who you let in. Limits on short-term rentals limit rentals. Remove rent controls, permanently, and houses and condos can be rented. Many houses and apartments need rehab, not new construction, which can happen very quickly once owners know they will not be robbed of their investment. Even “affordable” housing leads people to stay where they are, rather than move to better opportunities for them and free up an apartment for someone else, because it’s rationed with long waiting lists.
When Javier Milei ended rent control in Buenos Aires, rent went down. Instantly. Nothing had to get built. It can happen in Manhattan.
Nothing rings more true of our government than restrict supply, subsidize demand, and watch prices skyrocket. Universities and health care are poster children along with housing and energy. “Landlords” and “utility companies” are not, in fact, making a killing here. Land owners benefit. Energy faces rising costs like anything else. AI, not corporate apartment companies, electric utilities, and oil companies, are the hot stocks of the moment.
Contra Mahoney and Ramamurti’s assertion that price or rent controls are alternative to demand subsidies, they are exactly the same thing as a tax on suppliers used to fund demand subsidies. With a fixed supply, the number of people who have houses is fixed. The only effect of rent controls or demand subsidies is to change who gets the houses.
Because “sharply rising rents and utility bills wreak havoc on family budgets,” despite the well known issues, Mahoney and Ramamurti opine
there is a case for temporary, targeted price controls that hold down costs, paired with supply-side reforms that encourage new production. Rent caps focused on existing units, combined with government investment in new housing and reforms to zoning, permitting and other land-use regulations, can protect tenants from rent spikes, while encouraging new construction to build the three to four million homes.
Oh, please. New York put in “temporary” rent controls in WWII. 80 years ago. Congress passed “temporary” Obamacare subsidies during the pandemic, and we just shut down the government for a month and a half over that. “Rent caps on existing units” have been tried by every single failed rent control regime in history. Tax away the hard-earned investment of existing landlords. But apartments need maintenance and even the Times (can’t find the link) runs stories of apartments vacant in Brooklyn because it’s not worth it for landlords to fix them, since they were built before the last “existing unit” freeze in 1974.
Plus, every investor knows that what can be done “just this once” can be done again. “Government investment in new housing?” California specializes in that, featuring $1 million one bedroom units for homeless people. Come tour the ruins of Chicago’s housing projects. And once again, just where is this endless pot of money? Let’s see, 3 million homes at $500,000 per home is $1,500,000,000,000—yes, one point five trillion, if I got my zeros right. Not exactly couch change on the government budget.
But just maybe…. If Neale can get the “reforms to zoning, permitting and other land-use regulations” in place first, I might listen. Taking a landlord’s hard-earned property with promises to someday reform is a lot more likely. We got where we are for a reason.
Similarly, a freeze on electric bills paired with government investments that expand solar, wind and other clean-energy production and transmission can shield household budgets until more power comes online.
You must live in quite a bubble not to know about the trillions of “government investment” in solar panels and windmills we already have. California leads the way. And also has the highest gas and electric prices in the nation. And you must have forgotten a lot of economics to not recognize that “household budgets” also have to pay the taxes that pay for these “investments.” California’s electric utilities and refiners are barely scraping by, rather than being effective pots of tax money, so that “shielding” of some household’s budgets will come from other households.
Energy prices have if anything more incentive effects than housing, and are more elastic in the short run. If gas prices go up, you can car pool, take transit, bike, or just drive less. Or move closer to work. Except rent controls mean you can’t. Energy is a smaller component of income. Another textbook rule of economics: don’t mess with price signals, especially of elastically demanded goods that are a small component of budgets, in order to transfer income. Energy subsidies do the opposite.
Oh, yes,
Policymakers should step in if there are signs of price controls becoming permanent or spreading to other parts of the market. Once enacted, price caps tend to stick, as interest groups mobilize to preserve them. Tenants who did not receive relief initially may argue for an expansion on fairness grounds.
Policymakers can reduce these risks by inserting sunset clauses, targeting controls to well-defined groups — such as existing tenants and low-income households — and backing long-term supply efforts with specific timelines and funding. But no government can fully bind its future self, and we may need to accept some trade-off between immediate relief and weaker long-run investment.
I hate the word “policymaker.” It’s every leftwing economists’ dream, I guess, to be installed as an aristocrat and “make policy.” This is politics, not policy, redistribution in the name of electoral gain, as Mahoney and Ramamurti make clear. There is no “policy.” There is politics.
This is redistribution by force. For better or worse, but don’t sugar coat what you’re doing.
“Step in if there are signs of price controls becoming permanent or spreading to other parts of the market.” Hello? 80 years is not permanent enough? Are not “policymakers” like the new mayor of New York “stepping in” precisely to extend and expand controls? Sunset clauses are sunrise clauses. “Targeting controls to well-defined groups — such as existing tenants and low-income households.” After “budget constraint” lesson 2 of Econ 101 is “incentives.” When existing tenants get a big break, they have a big incentive to remain existing tenants, see above. When households experiencing low incomes (I refuse to use “low-income” as an immutable characteristic) receive benefits they have a big incentive to remain low income.
Well at least they are honest enough to say “accept some trade-off between immediate relief and weaker long-run investment.” Yes, existing renters got relief in 1942. We are stuck with the long run.
The final paragraph
In a cost-of-living crisis, the question isn’t whether to intervene, but how to do so in a way that delivers relief today without creating new problems tomorrow.
The last directly contradicts the grudging admission that indeed we will “accept some trade-off between immediate relief and weaker long-run investment.”
Leaving aside “crisis,” that is not the question. The question is what should economists offer when it is plainly clear that there is no way to deliver “relief” to everybody — that any relief to A comes out of the pockets of B, with a sieve along the way, and that as the article just admitted any attempt to transfer from B to A will create new problems tomorrow — just as today’s problems are completely the effect of yesterday’s price, building, and rental controls.
Why would two excellent economists pander in this way, selling obvious fantasies to justify price controls that have been tried since Diocletian (300AD) and failed every single time? Well,
In New York, the democratic socialist Zohran Mamdani ran for mayor on a simple promise to “freeze the rent,” …
like it or not, voters are demanding short-term price relief, and temporary price controls may be the only viable way to provide it.
The insufficiencies of this policy playbook have helped create what we call the affordability conundrum: Voters want immediate cost relief, but standard policy tools can’t always provide it.
Apparently, when voters want something and politicians want to promise it, our jobs as economists is to offer somewhat fantastical “policy tools” to justify it.
I do not know Mahoney and Ramamurti’s motivation, and I make it a rule never to speculate on motivations. But I can warn against the motivations many feel to go down this kind of rabbit hole.
We all have partisan sympathies. It is tempting to buck up our team, right or wrong, especially against attacks by the “other side” which today each side views as an existential threat to the nation. We all want to be influential. It is tempting to offer what politicians want to hear, to become the darling of the moment, the adviser whispering into the ear of the powerful.
Republican economists are in a similar quandary regarding tariffs. If you want a job in the current administration, or just influence in today’s dominant Republican circles, you better have written nothing critical of tariffs that Google can find.
If you want influence it’s better to pledge allegiance. It is tempting to write “economists hate the idea,” and “textbooks say it doesn’t work,” but then bemoan “the insufficiencies of this policy playbook” to deal with “China’s economic aggression,” or “hollowed out manufacturing,” and so forth. Dissemble, advocate that “policymakers” “insert.. sunset clauses, targeting controls,’’ or tie tariffs to specific pie in the sky promises, ignoring just how permanent, corrupt, and temporary tariffs have been in the past. I would expect a review of such a proposal from Mahoney and Ramamurti every bit as savage as what I have just offered.
You can, at least keep your mouth shut, and salvage your own reputation.
Better, we economists can do a lot better by patiently holding out, even for our own team, on what works, in time-tested cause-and-effect ways, and what does not. Many rent or price controls in the 1,700 years (and likely more) on this earth have promised to be temporary, targeted, combined with structural reforms. I cannot think of a single one that ever has done so. If you want Mamdani to succeed politically, you will do a lot better to advise him against self-delusion not to pander to his ill-informed instincts.
A last thought. Mamdani, if he does follow through on his policies, will indeed make Manhattan much more “affordable.” Chase away all the wealthy people, all the businesses and business owners, and apartments will be cheap. Detroit is affordable too. Be careful what you wish for, you just might get it.
John H. Cochrane is an adjunct scholar with the Cato Institute. This commentary was first published in The Grumpy Economist.