- Last year we made a video abou on tips legislation, specifically how a majority of Americans like the policy, while a majority of economists d Well, that was just a minor disa compared with the Grand Canyon sized divide over price controls.

- [Narrator] According to survey Americans across the countr overwhelmingly support the idea of the government setting legal on how much certain things can c - And yet, just like with no tax economists think Americans have this very, very wrong.

- Economists Harold Demsetz said that using price controls to fight inflation is like trying to control the we by smashing the thermometer.

Assar Lindbeck famously described rent control as "the most efficient technique presently known to destroy a city except for bom And David Autor said, "price controls can of course control prices, but they're a terrible idea!"

- And yet in the last few years, price controls have become a tool that many politicians are seriously considering using From New York Mayor.

So Zohran Mamdani's rent freezes to New Jersey Governor Mikey Sherill's power rate limits to a bill co-sponsored b Bernie Sanders and Josh Hawley, that would cap credit card interest rates at 10%.

- Some say economists are exaggerating the dangers of price controls.

Others say that even if they're the situation is so dire that we should try it anyway.

- Whatever economists may think, if voters want something ba enough, they just might get it.

So let's look at the pros and cons of price controls.

(bright music) - The obvious argument for price is that they lower prices.

That's a real benefit to certain If you lived in a rent control a you get to pay below market valu and live in a neighborhood you probably wouldn't otherwise be able to afford.

If there's a cap on how much electricity costs in your region, that's money you can use for necessities or invest in your retirement.

- But prices say economists are not just an arbitrary number that sellers pull out of thin ai They are a signal of underlying conditions.

When prices increase sharply on a certain good, that usually indicates a shortag either because the supply is dwi perhaps due to a natural disaster or embargo, or demand has spiked maybe because of a fashion trend or emergency need.

Either way, there's not enough s to meet demand, pushing prices s - Ideally, that high price acts as an incentive to producers who will make more of the good now that it's more lucrative.

This is the main reason why economists oppose price cont If you don't allow prices to ris you eliminate the incentive to produce more of it, and the shortage will continue or get worse.

- Today, no other good exemplifi the affordability crisis quite like housing.

Home prices have skyrocketed in the last few decades, and nearly half of all renters are now considered to be cost bu meaning they spend more tha 30% of their income on housing.

And the economic consensus is that these high prices are a result of a housing shorta Ever since the Great Recession, America hasn't been constructing enough new homes to keep up with growth, especially in desirable areas with good job opportunities.

- But wait a minute.

If high prices are supposed to incentivize production, why isn't that happening with ho Shouldn't it be a great time to build houses?

- Normally, yes, developers definitely want to build, but are being hindered by some n related constraints like zoning and permitting.

- Local governments have a lot of control over the what, where, and how of new constructi Their decisions are heavily infl by interest groups like unions, environmental organizations, historical societies, and neighborhood associations.

These groups, though across the political spectrum, tend to synchronize thei pressure against the constructio of new housing.

- The cutesy name for this dynamic is NIMBYism, not in my backyard.

People worry about the noise, the traffic and inconvenience that new construction brings.

Existing homeowners worry that new units will decrease their property values while rent that development will make their area less affordable.

Even though almost everyone agre that America needs more homes, it's almost impossible to find a voting bloc that wants to build them nearby.

- According to economists, rent control can act as yet another constraint on sup Developers won't finance new apartment buildings if they think they won't b able to turn a profit from them, and current landlords migh opt to take existing units off the market if they can't afford for renovations and upkeep.

This is what happened in 1994 when San Francisco passed a rent controlled law tha ultimately led to fewer units, and therefore higher rents.

In 2023, Argentina repealed their rent control law and the number of available units almost doubled, leading to lower rents for many - The same thinking goes for ene Demand for electricity ha already shot up in many places, thanks to the proliferation of power hungry data centers required for AI.

But if we cap the price of elect as some policy makers are sugges it could disincentivize th construction of new power plants and transmission infrastructure just when we need it most.

- Prices don't just act as a signal for producers, but consumers as well.

In a world of finite resources, there has to be some system of determining who gets what, and what you're willing to pay for something indicates the value you place on it.

If there is a gasoline shortage, for instance, those big numbers on the price b might make a retiree rethink a day trip out of town since it isn't really necessary.

That means there will still be gas available for the commuters who do need it - If this formulation seems over that's because it ignores a big complication: wealth inequality.

Some people are willing to pay higher prices, not because they value the produ but just because they can afford Others may have a greater need, but simply can't pay the price.

- There are also some categories that price allocation as a theory doesn't map well to, like healthcare.

If you need a life-saving treatm the value you place on it is virtually limitless.

And unlike buying a house, you can't really take your time to shop around, or opt for smaller square footag This gives providers such a profound market advantage that many advanced economies do put caps on the prices of certain medical procedures, - But for more common goods, the last time large-scale price controls were attempted in the U.S.

was during the early In response to rising inflation, the Nixon administration imposed price caps on certain goods like gas and fo Voters supported the measure by nearly the same number as today because they hoped it would stop that was escalating out of contr But producers like farmers and ranchers still faced rising costs of feed and equipment, since they couldn't raise their prices accordingly, many opted not to produce at all leading to widespread shortages.

- I've been a supporter of Nixon for many years, but he has certainly let us down on this deal here and we're going to have a shorta There's no ifs or and's about it - So if price controls have such a bad track record, why are we even considering them Well, basically because voters want relief on affordability, they want it now, not several years down the road, and price controls are really the only tool available to make that happen.

Some policy makers think they can offset the risks by making price caps temporary, and pairing them with big incentives for construction.

In other words, freeze the rent for a few years while you build like crazy.

Some studies have shown that residents are more open to new construction if they're also guaranteed that it won't raise their cost o - But economists warn that price controls, once enacted, are hard to undo.

Just like a tenant will cling to a rent control department for as long as possible, voters will likely punish anyone who tries to take their price controls away.

- We could end up in situation where the small number of lucky renters and consumers w from price controls rigorously d while the rest of us have to dea with the resulting shortages and price spikes.

- I'd like to think that won't h but it seems more likely than politicians telling their voters that they're wrong about something they really want - [Together] And that's our 2 ce