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Affordability has become the new economic buzzword—but what does it actually mean? In this week’s Grumpy Economist rant, John Cochrane explains why rising wages and slower inflation have not translated into lower living costs for many Americans. The answer, he argues, lies not in income or price indices alone, but in where prices rose most sharply: housing, health care, education, and other services shaped by regulation and government intervention.
Cochrane walks through a series of policy responses—from subsidies and mortgage support to banning institutional buyers and imposing rent control—and explains why each fails to improve affordability when supply is constrained. The core lesson is straightforward: demand-side fixes cannot solve supply-side problems. Lasting affordability requires keeping inflation low, removing barriers to supply, and allowing productivity growth to lower costs over time.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my weekly rant.
Today, I’m going to rant about “affordability”—the new buzzword. It’s a little bit of a puzzle. Inflation was high. Prices went up 20 percent. But now inflation is slowing down, and wages have mostly caught up. Real wages are, in fact, rising. Why is everyone complaining?
Well, some things did go up more than others. Some people’s wages caught up, and other people’s wages didn’t. Status goods are expensive. If you’ve got a studies degree and now you work as an advocate at a nonprofit and would like a nice three-bedroom Upper West Side apartment, it’s not happening.
In the American economy, stuff got cheap—TVs, anything you can buy at Walmart. But services got expensive. Houses got expensive. Health got expensive. College got expensive. And you’ll notice all have the heavy hand of the government involved.
Well, let’s just give people money, huh? So they can afford it all. Ah, that’s not going to work.
Let’s think about housing. What happened? Zoning permits, construction restrictions meant there were not enough houses built, and so prices went up. What happens if we just give people more money? Well, there’s the same number of houses. Prices will just go up more.
Let’s subsidize mortgages. Well, there’s the same number of houses. Prices will just go up more. Let’s use taxpayer money to have Fannie and Freddie buy hundreds of billions of dollars of mortgages. What will happen? More people have money in their pockets. Prices go up more.
Let’s pass subsidies for firefighters, teachers, new home buyers, and other sympathetic types to buy houses. There are only so many houses. Prices go up more, and no new people get to be in houses.
A new interesting idea: forbid institutional buyers. Sounds nice—less people bidding and the price won’t go up so much. But wait. Institutional buyers don’t leave houses sitting empty. They rent them. People can live in institutional buyers’ houses as well as other houses.
They’ll then resell them, and they provide a great service. If you’re trying to sell your house, institutional buyers provide a liquid market and help you sell quickly.
In fact, President Trump in his Davos speech—I watched it and noticed him think, “Wait a minute. If we drive the price of houses down, homeowners will lose a lot of wealth. I want the prices up for the homeowners and down for the home buyers. How do we do that?” He moved on.
Over Mamdani Land, the answer is rent control.
Hilariously, a while ago, a landlord was trying to file for bankruptcy, and they sued the landlord, saying, “No, you can’t go to bankruptcy and transfer these apartments to someone else. Because of our rent control, no one can make a profit renting out these apartments. You have to give it to the city for free.”
Hmm. This approach might actually work. If you drive everybody out of the city, apartments will get cheap. Be careful what you wish form you might just get it.
Well, how about tax cuts, stimulus checks, loose monetary policy? Let’s just give everybody more money. We tried that in 2021. The price of everything went up.
How about what always happens next? Price controls. The answer is empty shelves.
What’s the answer? Well, first, keep inflation low—but that’s only half the answer, as wages and prices eventually end up the same.
The real answer is to unclog supply restrictions: regulations, energy, and a lot of that is going on.
Increase productivity, then real wages will rise, and everything becomes cheaper—and a lot of that is going on.
Basically, get out of the way.
Well, that’s a great economic answer. It’s not a great political slogan. Let’s try it: “Vote for me—I’ll get out of the way.”
Hmm. But it is the right answer.
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John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.