More on Price Controls

Responding to critics of my recent NYT op-ed

My piece on price controls with Neale Mahoney in Sunday’s New York Times has prompted a lot of strong reactions. Speaking only for myself (as I will be throughout this piece), that was the point: to generate discussion about whether a long-derided policy tool was worth pursuing under certain circumstances, and if so, what those circumstances might be.

I believe there’s a substantive and political case for certain temporary, targeted price controls paired with supply-side measures that address the long-term causes of rising costs. But even if you think that’s nonsense, more policymakers at all levels of government seem likely to run on price controls given their recent political success so it’s worth trying to figure out the best possible design for them. As former Council of Economic Advisors Chair Jared Bernstein explains in a follow up to our piece, that’s why it’s useful to have more discussion on this topic.

Today, I want to expand on some points in the op-ed and respond to some critiques. One of the perils of an 800-word op-ed is that you can’t go into much detail on all the arguments and counterarguments, particularly in an area as fraught as this. I’ll focus mostly on the thoughtful responses to our piece from former CEA Chair Jason Furman and UC-Davis law professor Chris Elmendorf, which I recommend you read in full if you have a chance.

What people concede – and contest – about our price controls piece

The op-ed made three main points:

1. The public is asking for immediate help with the cost of living, but standard supply-side and demand-side policy options can’t reliably provide that (i.e., the “affordability conundrum”).

2. Temporary, targeted price controls can offer the immediate relief the public wants but undermine efforts to increase supply, which is what provides cost relief in the long run.

3. Pairing temporary, targeted price controls with supply-side policies that encourage more output could be a potential solution, especially because the popularity of those price controls can help enact the less popular but necessary supply-side reforms.

Neither Jason nor Chris contest points 1 and 2. (In fact, none of the op-ed responses I saw really did.) But they both dispute point 3, arguing that policymakers cannot credibly commit that price controls will be temporary and targeted, which stymies efforts to increase supply in the long run. As Jason writes, our “temporary and targeted vision of price controls will only not have the major negative side effects [we] are trying to avoid if: (a) price controls truly are temporary and targeted AND (b) everyone believes that they will be temporary.” Chris agrees, noting that “price controls aren’t going to be ‘a way out’ unless their advocates can credibly commit not to apply them to today’s projects tomorrow.” They both cite examples of price controls lasting many years.

This is a serious concern. In most situations, pairing short-term price controls with long-term supply-side reforms works best if the price controls act as a temporary bridge to the supply-side reforms bringing costs down in a sustainable way.

Is it possible to do temporary price controls? There appear to be some examples of temporary electricity price freezes expiring as planned, like in California during the 2000-01 energy crisis and in Texas from 2002-07 as it restructured its energy market.[1] COVID-era rent freezes in LA and Washington, DC – which were written to be temporary to cover the pandemic period – did in fact expire, defaulting back to the pre-existing rent stabilization laws in effect in those jurisdictions. New Jersey’s municipal rent control laws in the 1970s were systematically rolled back in the 1980s. And there is clearly a strong and politically powerful anti-rent control constituency. More than 30 states have laws banning rent control, including blue states like Massachusetts.

This is by no means an exhaustive list. I do not dispute that there are examples of politicians extending and expanding price controls. We acknowledge as much in the op-ed. But it’s hard for me to look at the relevant history and conclude that it is inevitable that a temporary price cap will be extended and expanded.

Most importantly, I hope economists, academics, and historians can dig into ways of making the necessary credible commitment. There is a deep body of literature on credible commitments (not just in economics, but in international relations). Perhaps there are ideas we can draw from there that help address the concerns Jason and Chris raise. To his credit, Chris notes one possibility: “development agreement laws,” which allow builders “to contract today for compensation if [rent control] kicks in down the road.” For example, the law could say that “If you build X, you may record a covenant that exempts that project from price controls for (say) the next 30 years unless compensation is paid.” As Chris points out, even those agreements are not 100% ironclad because a future government can always overrule them (a point we made in our op-ed when we wrote that “no government can fully bind its future self”). But there may be ways of further strengthening those commitments.

Price controls can help enact necessary supply-side reforms

The op-ed references this point but I want to emphasize it here because it is crucial to our argument: temporary price controls can help smooth the passage of less popular but important supply-side reforms that address the long-term drivers of higher prices. I hope critics of our proposal engage with that argument specifically.

I come at this with some personal experience. I have advocated for supply-side reforms for years. When I served as an economic advisor to Senator Warren, I worked with her on her landmark 2018 housing bill that made large federal investments in new supply and established strong incentives for state and local governments to end unnecessary exclusionary zoning rules. When I worked in the Biden White House, I helped put together a similar package of reforms as part of the Build Back Better push.

When I would discuss these types of proposals with state and local officials, they would lament how difficult it was to pass them, regardless of their benefits. Supply investments were seen as toxic “handouts to developers.” Zoning reforms were derided as “pro-gentrification,” resulting in more traffic and overcrowding at schools and parks. Our largely supply-side housing push in the Biden Administration fell short, despite the apparent need for more affordable housing and voters listing housing costs as a top priority.

Temporary and targeted price controls can offer a way out of this political rut for those, like me, who want supply-side reforms and have been frustrated by their lack of political traction. Don’t just take it from me. Listen to the on-the-ground advocates that Rogé Karna quotes in his excellent piece on rent control (emphasis mine):

Setting aside the specifics of New York City government, though, Mamdani may have hit upon a winning political formula for cities and states struggling to respond to the housing crisis. When I put Mamdani’s argument about rent control to YIMBY organizers—the people who are working to pass pro-housing laws in cities and states across the country—I expected them to roll their eyes. Instead, they lit up. In nearly every blue state that has passed significant pro-housing legislation, they explained, introducing some form of rent control has been crucial to getting those bills across the finish line. “It was absolutely essential,” Alex Brennan, the executive director of Futurewise, a Washington State think tank that helped spearhead an ambitious housing-reform package that passed in May, told me. “Saying that we’re going to have a lot more housing five or 10 years from now isn’t enough. Legislators want to know: What happens in the meantime? What are we going to do for those folks whose rents are increasing by double digits every year? We needed an answer for those people.”

I heard similar stories from organizers in other states, including California and Oregon. “We’ve seen this over and over,” Henry Honorof, the director of the coordinating team of Welcoming Neighbors Network, a national umbrella organization for dozens of YIMBY-aligned organizations, told me. “When major expansions in housing availability in blue places succeed, they usually pass alongside tenant protections and rent stabilization.”

The same dynamic appears to apply in New York City. Andrew Fine, the policy director of Open New York, the city’s most prominent YIMBY organization, told me that outgoing Mayor Adams’s relative success in getting housing built had much to do with the passage of a 2019 law that strengthened tenant protections. The law, Fine said, made progressive legislators more comfortable with pro-building policies. Fine spent much of the 2010s working on housing policy for the city. He watched as concerns around gentrification and displacement stymied dozens of proposed housing projects and efforts to change the city’s zoning laws. “That fear pervaded every single housing conversation in the city,” he told me. “We learned very quickly that you’re not going to get any support for new housing in an environment where people are scared of being priced out.”

The takeaway from Karna’s reporting is that “just pass the supply-side stuff I like” is often a recipe for doing nothing to address the long-term drivers of higher prices in places most in need of reform. The operative question then is whether the full package of price controls and supply-side reforms is better than nothing. I suspect some people might argue it’s not, or that it’s better to keep fighting for the supply-side reforms-only package, even if it takes years to get there. I disagree. There is an urgent need for short-term affordability help and to get the ball rolling on longer-acting supply-side reforms. Delay is harmful in and of itself.

All policymaking is tradeoffs

One of my goals in writing the op-ed is to emphasize that all policymaking is about weighing tradeoffs, and that price controls have tradeoffs like any other type of proposal.

As Neale and I wrote, the costs of price controls are well-documented. If set below the cost of production, they can lead to shortages. If set above the cost of production, they may not lead to shortages but could deter long-term investment, raising prices in the long term. They also impost short-term costs on owners/producers, who cannot charge as much as they might otherwise.

But there are also short-term benefits. An Urban Institute study finds rent control helps make more units affordable to extremely low-income people. Electricity price caps can save people from utility shut offs, credit score damage, and other harms. We can’t just ignore those benefits when making policy decisions.

And we should remember that other less controversial policy levers also have tradeoffs. For example, tax credits to promote affordable housing development cost public money. With tight state and local budgets, that may mean less money for schools, or nutrition, or transit, or public safety. They can also be inefficient, with a relatively high cost per affordable unit and multiple private parties getting their cut of the action. They can also be sticky, as developers insist upon renewing or expanding those credits, just as renters might insist on extending or expanding rent control.

The point is that there are tradeoffs all the way down. It’s ultimately the elected official’s job to decide what they are comfortable with. But as an economic policy advisor, I always felt it was my job to objectively lay out the political and substantive costs and benefits of different ideas so the official could make the most informed decision. When you categorically remove certain policy tools from consideration, you are limiting the ability to analyze tradeoffs and make the best possible decision. I hope the new conversation around price controls helps officials make the most informed decisions they can.

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[1] Energy price markets are extremely complex so it’s possible these are not entirely apt examples – I will defer to people with more expertise to make that judgment.