Price controls are literally a textbook example of a policy that creates market inefficiency, but an economist sees some merit in them as voters delivered victories to Democrats who promised to hold the line on the cost of living.
Zohran Mamdani, who vowed to freeze rent, won the race for New York mayor, and Mikie Sherrill, who proposed freezing electricity rates, was elected to be New Jersey’s next governor.
Given the affordability crisis many Americans face, more Democrats will run on price controls too, wrote Stanford economist Neale Mahoney and former White House economic advisor Bharat Ramamurti in a New York Times op-ed on Sunday.
“This may terrify many economists, who have long dismissed price controls as failed policy. But, like it or not, voters are demanding short-term price relief, and temporary price controls may be the only viable way to provide it,” they said.
To combat rising costs, standard policy tools often take longer than voters will tolerate or don’t work. For example, tax incentives or deregulation can increase supply but can take years to make an impact on prices.
In addition, subsidies and tax credits can offer some short-term relief but also eventually push up prices as demand increases faster than supply can catch up.
Mahoney and Ramamurti also acknowledge that price controls obscure market signals that encourage producers to expand output and lower costs, pointing to President Richard Nixon’s efforts to cap gasoline prices in the 1970s.
“Yet sharply rising rents and utility bills wreak havoc on family budgets. That’s why there is a case for temporary, targeted price controls that hold down costs, paired with supply-side reforms that encourage new production,” they added, noting that Mamdani and Sherrill have proposed similar ideas.
For housing, that could mean rent caps on existing units, plus government investment in new housing as well as zoning and permitting reforms.
To be sure, policies initially billed as temporary often last longer than intended as they inevitably create constituencies that lobby for them to continue.
Policymakers can use sunset clauses or target price control narrowly to mitigate such risks, according to Mahoney and Ramamurti. But they also admit “we may need to accept some trade-off between immediate relief and weaker long-run investment.”
“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,” they said.
While the annual rate of consumer inflation has cooled sharply since hitting a high of 9% in 2022, prices are still going up and President Donald Trump’s tariffs are not helping. In fact, headline inflation has remained sticky and ticked higher since he launched his trade war.
The off-year elections this month that delivered stunning losses to Republicans brought the issue of affordability front and center.
Trump has already rolled back some of his signature tariffs to help lower grocery prices, and “there are discussions” on extending Affordable Care Act subsidies as Republicans scramble to address soaring healthcare costs.
That’s as voters are demanding that overall affordability improve and want to see prices decline, not just rise at a slower pace.
“People are angry about the loss of affordability, and are inclined to blame incumbent governments for this,” Paul Donovan, chief economist at UBS Global Wealth Management, said in a note on Friday. “It is tempting to think of affordability as another version of the ‘cost of living crisis’—but affordability is subtly different, and may linger.”