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In this week’s Grumpy Economist Weekly Rant, John Cochrane examines why economic policies with a long history of unintended consequences remain popular among American voters. From rent controls and housing subsidies to government efforts to lower everyday prices, he argues that policies designed to provide immediate relief often ignore how markets respond. What benefits one household, he explains, does not necessarily benefit the economy as a whole.
Cochrane explores the economic and psychological forces behind support for government intervention, including zero-sum thinking, the tendency to overlook unseen consequences, and nostalgia for lower prices. He highlights a central paradox: markets can function without participants understanding the entire system, while democratic policymaking requires voters and elected officials to understand the consequences of their decisions. Strengthening constitutional limits on government power and the institutions that protect economic freedom can help prevent misguided economic policies.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my Grumpy Economist Weekly Rant.
Today I’m gonna follow up on affordability, sparked by that remarkable Wall Street Journal poll in which large majorities left and right support populist economic policies.
Well, the rent is too damn high, so people respond: pass rent control, subsidized rents, force builders to construct and rent out so-called affordable units, or have the government build and provide housing. They gave the same answers for childcare, healthcare, prescription drugs, and gas.
Why are people so enamored of policies that have failed time and again over centuries? Why are simple cause-and-effect truths seemingly so hard to understand?
Don’t transfer income by distorting prices. That’s a bedrock economic principle. If the government wants to tax landlords and send the results to current tenants, giving more money to wealthy people who pay higher rents, well, okay, do it.
Raise taxes and send them a check. Don’t get in the way of who values which apartment more, who should stay, who should move, which apartment should get fixed up, and which one should be left alone and rented out cheaply.
“Absolutely do transfer income by distorting prices” is how the political system works. Why?
Well, one answer: when you’re negotiating the rent, the price is an income transfer. That’s the point. The income transfer is the whole incentive for you to shop.
If the government could force this landlord to charge you a lower rent, you’d be better off. It’s true. So it’s natural to feel that, well, if the government could just force all landlords to charge all tenants lower rent, we’d all be better off.
If you get a rent subsidy, it’s true, you’re better off. You don’t see that giving lots of people subsidies just drives the price up even more.
People naturally generalize their own experience. Good public policy thinks about how the whole system responds.
We’re also hardwired to zero-sum thinking. If rich people got rich, they must have taken it from someone else. Well, that was true for thousands of years. Still is true in many autocratic regimes.
That our billionaires got there by inventing new products and companies and making all of us fabulously better off too—well, that’s outside most human experience.
And everything is zero-sum in the short run. You do get more eggs if you carve up the golden goose. Abundance takes patience.
People are by nature tribal moralizers. They view the world as a battle between good and evil, our tribe versus their tribe. If we could just squash the evil people and force them to be less greedy, all would be well with the world.
Adam Smith’s vision—how greedy self-interest serves the public—that’s a very unnatural view.
People think in simple stereotypes. The large landlord can surely afford to lower rents for the struggling working family.
The market accommodates unimaginable variety. Some landlords are hardscrabble immigrants who saved a lifetime to run an apartment building in retirement. Some rent-control tenants are well-connected trust funders who moved in decades ago.
People also don’t see the unseen and the unseen variety.
We see the lucky family that got a break on their rent. We don’t see how immigrants, minorities, people with children, people with pets, anyone with sketchy credit or little cash for a down payment, or those who lost out on the affordable housing lottery can’t get apartments at all.
We don’t see the apartments that didn’t get built.
People long for yesterday. Populist policies all try to reverse a recent change. The rest of the country’s outraged at $6 gas. California’s had that for ages.
Bringing back yesterday’s price, but by government action in place of market forces, is not wise public policy, but it’s what people seem to want.
I think people are also nostalgic for childhood. Mom and Dad can surely come and set things right, but we have the government, the people who run the DMV and the disastrous public schools, not Mom and Dad.
Now, just why long experience with government doesn’t squash relentless optimism that next time they’ll get it right is a bit of a puzzle.
The founders were a lot more skeptical of government power in general.
Here’s the paradox. The market works even if nobody understands it. People just need to follow their narrow, greedy self-interest.
Democratic politics needs voters and their representatives to understand basic cause and effect of how the system works. They set rules of the game that lead to good outcomes, not the outcomes.
They need to understand the fallacy of composition—that what is good for one household or business is not always good for the nation as a whole.
So what’s the answer?
The ideas seem pretty simple, so you might say, “Let’s have more economic and historical education.” But many economists and most textbooks are pretty weak on these basics, and lots of people want to indoctrinate voters with their terrible ideas too.
In the past, these questions had a simple answer. Price and rent controls?
If 51% of your neighbors want to use your house for a homeless shelter, if they want to seize the business you built over decades, sorry. That’s his property to sell as he pleases. The government can’t interfere with that.
We don’t live in a pure democracy. We live in a constitutional rule-of-law republic with a sharply limited government.
Those limits and traditions encode much of the long and hard-won wisdom of what actually does work.
Revitalizing the institutions of limited government seems to be more promising, and people may think a little straighter when sitting down to do that.
Well, thanks for listening, and if you liked my Weekly Rant, please click to subscribe.
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.