Government price controls are a bad idea that just won’t go away.
With prices skyrocketing, you will hear some people on the left saying that the US government should implement price controls. Meanwhile, President Biden’s “Build Back Better” plan would impose various price controls on prescription drugs.
For the economically illiterate, price controls seem like a great idea. If greedy companies are asking too much money, pass a law to stop them. But as Don Boudreaux explained in an essay published by the American Institute for Economic Research, price controls impose their own costs.
No government intervention in a market economy is as sure to cause damage as price controls. Market prices make possible the successful and productive coordination of the efforts of innumerable skilled workers and enterprises spread across the globe. Market prices also coordinate the resulting massive flows of economic products with consumer demands.
Any price controls imposed by the government reduce the effectiveness of this coordination.
It is not just an economic theory.
People have praised Sweden for its rent control, but as economist James Murphy explains, the actual impacts of rent control have not been as great as advertised. In fact, they have wreaked havoc on the Swedish rental market.
The following was originally posted by Mises Wire. The opinions are those of the author and do not necessarily reflect those of Peter Schiff or SchiffGold.
Rent control in Sweden is widely touted by many who do not understand economics as a model for how a property market works. Young Irish people, for example, like to point to Sweden as a nirvana where rent controls ensure the easy availability of affordable, high-quality rental stock.
Once, a young co-worker with strong socialist leanings told me he could move to Stockholm and get a modern, high-end apartment for a pittance compared to rents in Ireland. A quick Google search, which yielded a series of news articles attesting to various problems stemming from Sweden’s rent control, shed a harsh light on the fervent, but completely misleading belief of my young colleague.
Even leftist newspapers and media have had to accept (reluctantly) that rent control doesn’t work. In Sweden, as in other cities with similar policies, rent-controlled apartment contracts have become valuable assets to manage and operate. Many tenants who hold the coveted rent-controlled “primary” contracts sublet properties to “secondary” tenants on the black market at rates that double the amount of rent-controlled.
Once tenants have secured prime contracts, they rarely waive them. Only half a percent of primary rental contracts in central Stockholm go to the real estate agency. It’s almost impossible for newcomers to the city to get one of the contracts (woe to my young colleague and his putative flight to Stockholm!). People willing to jump the queue revert to a range of methods, ranging from exploiting personal networks (newcomers rarely possess leverage and barely anything but a “fair” and corruption-free model reward) to the payment of bribes (certainly corrupt) which can amount to several years’ rental.
As one might imagine, one class of people gaining an advantage (through chance, corruption, or seniority) over other classes of people is not a recipe for social harmony. The fact that the first class then dominates this over the others makes the situation worse. Another perverse effect of waiting lists is the decline in mobility across Sweden (people waiting on a particular housing agency’s list do not want to move and go to the bottom of another list). This lack of mobility is fueling difficulties for employers, with one in five citing housing shortages as a major barrier to hiring staff and growing their workforce.
The average waiting time for a rent-controlled apartment in Stockholm has risen from five to nine years over the past decade and has even doubled in the most desirable locations. The proportion of Swedes aged 20 to 27 living with their parents has increased and is currently the highest since records began.
It’s almost as if rent control has caused housing shortages. Who could have predicted it! Pretty much anyone with eyes, honesty, a passing interest in economic history, and a not entirely closed mind. Price control has always and everywhere produced the following results.
A ceiling price (set below the rate the market would set) will produce a shortage of said good/service and/or a decline in the quality of said good/service provided. Example: rent control (Stockholm, Hanoi, New York, Dublin).
A price floor (set above the rate the market would set) will produce an oversupply of said good/service of said good/service. Example: the Common Agricultural Policy (CAP) of the European Union, the ancestor of the legendary Butter Mountains, Wine Lakes and Milky Lakes. Many readers are familiar with similar gluts that necessarily stem from pricing in their own jurisdiction.
When rent price caps are set below market clearing rates, landlords tend to exit the market, never enter it, or adjust other costs (such as maintenance and repairs) down in order to reduce losses or maintain their margins. Landlords selling or not buying in the first place can only reduce the supply of rental properties. Postponement of maintenance and repairs reduces the quality of the housing stock available for rent.
Even socialist-leaning economists understand the negative and necessary consequences of rent control, with only bombings being more effective than rent controls in destroying urban areas (although some with experience of both conclude that rent control is even more effective than bombing in this regard). It says something when almost all economists (there are always a few skeptics) – even those who are big proponents of state intervention and punitive taxation – admit that price controls (of which rent control is a stark example) don’t quite work just not.
The Swedish government in 2021, taking small steps to address the dysfunction caused by rent controls, tried to reduce the scope of rent controls and remove them in newly built apartments. The government fell.
The surprise was not that those with a limited understanding of economics would reject the only moral, practical, and workable solution to the problem. Nor is it that the far right and far left in Swedish politics have banded together to try to overthrow the government. The real surprise was that some observers found it odd that the far right and the far left were coming together to do this. After all, authoritarians stand together to promote state control and especially if it is a futile, impossible, ignorant and arrogant effort to ignore the basic laws of economics.
The consistent advocacy of rent control across the world and throughout history is symbolic of one thing: the efforts of progressive ideologues to overturn reality.
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