The Real Story Behind Price Controls Economists Won’t Tell You

Over the past several years, the United States has found itself in a bruising debate over how policymakers can best bring down prices. Housing has reached crisis-level unaffordability, and everyday necessities feel out of reach for too many families. Voters want relief now, and politicians are responding with an increasingly interventionist playbook.

A recent New York Times guest essay by Stanford economist Neale Mahoney and Bharat Ramamurti noted how Democrats performed well in the November elections while running on price controls, something once considered unspeakable in polite economic company. They point to the election of democratic socialist Zohran Mamdani as mayor of New York, who ran on a platform that promised to “freeze the rent.” Meanwhile, New Jersey’s new governor, Mikie Sherrill, successfully campaigned on freezing electricity rates. The authors argue that temporary, targeted price caps, paired with supply-side measures, can offer short-term relief in an affordability crisis.

Their argument captures the current mood of the electorate. Voters are frustrated with a policy consensus that seems unable to reduce costs quickly. At the same time, the perceived ineptitude of policymakers may stem from deeper confusion in the public debate about what economics can and cannot realistically tell us about price controls.

Why the Online Debate Feels So Broken

Scroll through social media today and you’ll find an almost theological devotion to the Econ 101 supply-and-demand model. The meme version of the model says price ceilings cause shortages, and in an important sense, this is true. If you cap the price of a good below the market-clearing level, you’ll get excess demand. Rent control often leads landlords to convert or withdraw units, just as 1970s gasoline caps yielded long lines and rationing.

But somewhere along the way, this logic was inflated into a much broader and incorrect claim, which is that any shortage is necessarily inefficient and must reduce social welfare.

This is not, and has never been, an iron law of economics.

Why Shortages Aren’t Automatically “Bad Economics”

Consider a luxury good like yachts. Suppose the government imposes a price ceiling that makes yachts cheaper than the market price, and a shortage emerges. In a simplistic model this is labeled “inefficient” because people are willing to buy more yachts at this price than sellers are willing to provide.

But that’s not the end of the story.

If wealthy households who would have bought yachts instead buy sports cars, you may indeed have inefficiency. Resources shift from one luxury sector to another with little in the way of gain.

Yet that is not the only possibility. Suppose instead that constrained consumers save or invest the money they would have spent. They may wait in a queue to eventually obtain a yacht, and in the meantime their dollars flow into capital markets. Workers may lose some jobs in yacht manufacturing, but other workers gain jobs in sectors benefiting from that extra investment. Over time, the economy may experience faster capital accumulation.

This scenario is not guaranteed, but neither is the scenario economists often assume— that shortages necessarily make society worse off.

Now take the even more extreme case of a product ban. This is effectively a price floor set at infinity, because the good is unavailable at any price, creating a shortage so large the market disappears. If a product is truly harmful, like asbestos-laden insulation or certain toxic chemicals, then the “shortage” is not a distortion so much as a deliberate public-health enhancement. The market is eliminated because society is better off with alternatives.

So the existence of a shortage tells us very little on its own. What matters is the counterfactual. What would people do with their resources in the absence of the market transaction that is being prevented?

Some (though not all) economists know this about shortages. But they rarely emphasize it, and the public debate suffers.

Where This Leaves the Housing Debate

All of this said, housing is not a yacht. It is not a luxury good. It is a necessity, and we already have far too little of it.

That’s why the recent enthusiasm for rent freezes is indeed misguided. Price caps make the most sense only when we are willing to tolerate less of the thing being controlled. With housing, inadequate supply is already part of the fundamental problem, so the rationale for price ceilings collapses.

Freezing rents may provide immediate relief to some households, but it also discourages construction and maintenance. The Times op-ed’s authors argue that pairing rent caps with government-led supply expansion efforts could offset some of the negative side effects of price controls, but history suggests the caps are likely to stick while the supply reforms lag behind or stall entirely. Temporary controls have a way of creating permanent constituencies. When the product is something harmful, like asbestos insulation or lead paint, that permanence can be a feature, not a bug. But when the product is housing, making controls permanent entrenches scarcity.

If the true goal is to reduce housing costs, the only sustainable path is for more housing to get built. That’s going to have to come through deregulation of zoning, faster permitting, reduced construction barriers, and perhaps targeted tax reforms.

Similarities with Tariffs

This supply-side lesson isn’t unique to housing. Consider the recent tariffs imposed by President Trump. Tariffs raise domestic prices and reduce output in the near term. Yet their defenders argue that this short-term pain will pay off by boosting U.S. investment and manufacturing over time. As with price controls, the ultimate economic impact is ambiguous. In both cases, a short-run drop in output will make it harder to achieve the very long-run supply boost policymakers claim to seek.

Moreover, with Trump’s tariffs there is an additional problem related to uncertainty. Businesses are understandably skeptical that these tariffs will stay in place long enough to justify major new investments. A deliberate, consensus-based industrial policy that is clearly articulated and made credibly durable would be far more effective.

A better approach would therefore be direct investment rather than indirect, roundabout efforts to stimulate the economy by manipulating relative prices. If the goal is to increase productive capacity, the most straightforward approach is to support investment directly.

Economists Aren’t Telling the Whole Story

Economists often present their models as if they are complete descriptions of reality. But supply and demand is only a partial model. It is powerful and correct within its domain. Yet it omits important dynamic effects, especially certain investment responses.

Price controls can be harmful, but they are not necessarily harmful on net. And the shortages and gluts they create may sometimes play a constructive role in policy.

So the right response is not to banish price controls from the policy toolkit, nor to embrace them without reservation. It is to understand what they do and what they don’t do.

In the affordability crisis we face today, the only durable way to make necessities affordable is to produce more of them. But that doesn’t mean there aren’t situations where less really is more.