More on the White House's Discovery of Affordability, and Price Controls

Clutch not your pearls, my fellow economists!

First, a quick follow-up to yesterday’s “Trump-Discovers-Affordability!” note.

I’ve read three articles on this in the past two days, as political/econ reporters are drilling down on this shift. The points are mostly the ones I made yesterday so I won’t belabor, instead shifting to the policies. Here we have the benefit of a smart NYT oped on price controls by a couple of my pals: Bharat Ramamurti and Neale Mahoney.

But before that, a couple of broader points.

—Why is the White House just getting on this train? Very simple: the election results broke through Trump’s alt-reality fortress.

—The ballot boxes are the most consequential polls, but the opinion polls have been unequivocal on these points. From the NYT:

Only 30 percent of voters believe President Trump has lived up to their expectations for tackling inflation and the cost of living, according to a recent NBC News poll. That was his lowest mark for any issue respondents were asked about. And a meager 27 percent of voters in a CNN poll in late October said Mr. Trump’s policies had improved the country’s economic conditions — less than half of those who thought he had made matters worse.

—Repeating a point from yesterday, their easiest play is to reverse their tariff and immigration actions that have raised prices. Such backtracking comes with political blowback, but their bigger problem is that the affordability crisis, of course, pre-dated these actions. So simply getting a subset of prices back to where they were before—which, ftr, will not be instantaneous (tis said: prices that are shocked and then un-shocked take the elevator up and the stairs down)—is unlikely to make a big dent, vibes-wise.

So, can they do anything about this? One of their top spokespeople said that this is “something that we’re going to fix, and we’re going to fix it right away.” I refer him to what I told the WSJ, learned from personal experience: “There’s no secret dial under the Resolute Desk” to lower prices. And the “right away” part is an especially risky promise.

What makes affordability so challenging is that we have a mostly market economy. To be clear, there are tons of ways in which powerful forces affect prices—regulations, patents, unions, taxes (including tariffs), industry concentration/quasi-monopolies/pricing power, and so on. But even in partial market economies like ours, there’s a solid core of good, old-fashioned supply and demand setting the price.

Here’s where Bharat and Neale (B/N) come in. Their piece begins by emphasizing something I was also struck by re the recent election: both Gov-elect Sherrill from the center and Mayor-elect Mamdani from the left ran in part on price controls (PCs; him on rents, her on utilities). Economists almost uniformly object to PCs because, even with all the noise from the price-setting forces ticked through above, we still think price signals are critical to aligning supply and demand. Specifically, when insufficient supply is pushing up the price, that’s a supply-increasing signal to potential producers that we’d prefer not to jam.

But B/N stress three critical points. First, supply responses, like building more homes, take time—often years, and that’s even the case if we take down stale regs that slow the process. People struggling with high prices need help now.

Second, nothing spreads faster in politics than a policy idea that appears to have worked, where “worked” means helped you win. I’ll bet you a pound of Brazilian coffee that there are a lot more such PC policies coming down the pike.

Third, and this is the part that I, a humble policy wonk obsessed with crafting affordability policies, find most interesting (my bold): “The key for politicians who embrace price controls is to design them, and the policies that accompany them, to maximize their benefits and mitigate their costs.”

We want to go into PC-policy-crafting with our eyes wide open, meaning that if we decide to freeze a price, there’s a strong chance that doing so will jam price signals and dampen the necessary market-driven supply response. To offset that negative effect, PCs should come with both a) supply-side public investments and b) sequencing: as supply increases, PCs dial back. What we want are:

…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 that economists believe we need to make up the shortfall in the housing supply.

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. To their credit, both Mr. Mamdani and Ms. Sherrill proposed such measures.

It’s that pairing of PCs and supply-expansionary investments, with a strong mechanism to sunset the PCs, that can work in this space. Not a simple prescription, I grant you, but a potentially effective one.

Now, policy-oriented economists for whom PCs are anathema have a choice here. Go hair-on-fire against them, no-way, never, not in my lifetime, and end up raging on the sidelines, while policymakers of all stripes increasingly offer them up to an electorate that is very likely to take up the offer. Or, we can join in the fray, trying to maximize benefits while minimizing costs, in both senses of the word.

I, for one, am in on the latter.