Price controls are a bipartisan delusion
Now that inflation seems to be largely tamed, another threat has sprung up in its wake: the misguided notion that politicians can and should deal with high prices by capping or controlling them.
Both parties are guilty of this economic malpractice. President Joe Biden released a plan in July that would set a cap on certain rents. Vice President Kamala Harris wants the government to decide when food and grocery prices are too high. Most recently, former President Donald Trump assured supporters he’ll cut their credit card interest rates to a maximum of 10% “for a period of time.”
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Voters shouldn’t be fooled, and the candidates should know better. In a free market, prices respond to supply and demand — if prices are arbitrarily capped, suppliers exit the market and consumers hoard more than they need. Goods may be cheaper, but they’ll also be scarcer.
These not-so-complicated lessons have been learned many times. To take just a few examples: Decades of rent control in New York have helped make it one of the least affordable cities in the U.S. The Netherlands, with the highest proportion of rent-controlled homes in Europe, is facing a housing shortage of crisis proportions. Rents soared in Argentina in 2021 immediately after the government passed a law that would cap them; when a new president reversed course, empty apartments flooded back onto the market.
Volumes of academic studies, over many years, have buttressed these real-world examples. The solution to high rents is to increase the supply of housing, both by offering incentives to developers and by encouraging local communities to loosen restrictive zoning.
A similar dynamic prevails with groceries. The jump in food prices during and immediately after the pandemic has led politicians to blame retailers when the real culprits were commodity costs, supply-chain disruptions and staff shortages. Harris says she’ll ask Congress to pass a federal ban on corporate price gouging on food and groceries during emergencies, pointing to similar laws in effect in 37 states.
But determining what’s a fair price and what’s “gouging” during a time of extreme stress is both capricious and counterproductive. Rising prices signal added demand to producers, who amp up supply in response. An artificial cap impedes this process, making shortages all the worse.
As for credit cards, it’s true consumers are facing pressure. Americans are increasing their reliance on credit card debt and falling behind on payments at the highest rate in more than a decade.
Trump’s proposal is not the answer. There’s little doubt that a cap on rates would help some borrowers in the short term. But it would also induce banks to limit their credit card offers to those with higher incomes, driving poorer consumers — the ones Trump says he wants to help — to payday lenders and other less savory and more expensive options.
A better approach is for policymakers to focus on reducing interest rates more broadly, for instance by exercising fiscal discipline and helping boost competition in the credit card market. Such policies may be less satisfying on the campaign trail, but they’d be much more likely to help struggling consumers.
Most Americans, according to poll after poll, are worried about the cost of living. Their concerns are perfectly reasonable. But price caps will only make their problems worse.
— Bloomberg Opinion
