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Free Market Meltdown? Economists Fret Over Return to Price Controls

It isn't only the federal government that is trying to fix the economy. Across the country, from Vermont to Alaska, state and municipal governments are doing what they can to ease the burden for Americans who are increasingly out of work and unable to pay their bills.

One controversial solution being considered is a move back to price controls. The New York Legislature and the San Francisco City Council are considering expanding rent controls. Some politicians in Vermont are trying to limit the price of milk. And in Alaska, a bill to cap oil prices is pending in the state legislature.

Proponents say the government has an obligation to provide relief for consumers during these trying economic times. But many economists say controlling prices and rents has failed in the past, and it often has bad consequences.

"Economists widely agree that price controls often lead to shortages. There are many examples throughout history, and we have seen more recent demonstrations of this principle of economics in Venezuela and Zimbabwe," said Dr. N. Gregory Mankiw, a Harvard University economics professor and former chairman of the Council of Economic Advisers under President George W. Bush.

Dr. Edward Glaeser, a Harvard economics professor who researches the effects of rent control, said price controls have "a whole litany of problems that make them among the most foolish forms of economic populism known to man."

"In a free market system," Glaeser said, goods go to the people who value them most; in a price-controlled system, goods go to whoever is lucky enough to get them. As a result, people hold on to rent-controlled apartments even if they barely use them."

But sponsors of pending U.S. price and rent control legislation dismissed such theories.

"The housing affordability crisis trumps any theoretical recommendations of economists," New York State Assemblyman Jonathan L. Bing, a sponsor of many of the rent-control provisions pending in New York, told FOXNews.com.

Bing supports bills that would further limit the amount landlords can increase rent after tenants move out, and that would increase to $240,000 the maximum income of people who qualify for rent control.

San Francisco Tenant Union Director Ted Gullicksen supports legislation that would allow tenants to avoid rent increases that would make them pay more than 30 percent of their income in rent. The city's proposed law would also force landlords to let tenants take in roommates, who, Gullicksen said, could help with the rent.

But should landlords be compensated for the new restrictions on their property? "I don't think so," Gullicksen said. "Rents are so extraordinarily high. Landlords in San Francisco are just making huge amounts of money."

Alaska State Sen. Bill Wielechowski says his state needs to limit oil prices because refineries are colluding to keep the price high.

"We just want to stop consumers from getting gouged," Wielechowski told FOXNews.com "We have oil produced right here in Alaska. We have the lowest transportation costs, the lowest gas taxes and yet the highest gasoline prices. Quite frankly, we should have the lowest gas prices in the nation."

Vermont legislators, on the other hand, want price controls to help farmers. They believe the difference between the retail price of milk and the amount Vermont farmers receive is unconscionable.

"What we really want to do is make sure our milk farmers get a fair price.... We are afraid of losing our farms," said Sara Kittell, a Vermont state senator supporting a limit on the retail price of milk.

But economists have long memories, and they point to price controls in the past that have had very negative consequences, such as gas lines in the 1970s that were caused by price caps on gasoline that made selling unprofitable.

"You had gas lines in the '70s.... The tougher thing is to think of cases where there was not a shortage due to price controls," said George Mason University economics professor Dr. Tyler Cowen, author of "Discover Your Inner Economist."

Rent controls are among the most pernicious of price controls, economists say.

"In many cases rent control appears to be the most efficient technique presently known to destroy a city -- except for bombing," said Swedish economist Assar Lindbeck, a former socialist who has been researching rent control since the 1960s.

"In New York City, the Bronx basically fell to pieces because of rent control. You even had the extreme of landlords burning down their houses."

The South Bronx lost 40 percent of its housing stock in the 1960s and '70s, largely due to arson. Many buildings were suspected to have been torched by the landlords themselves, who found that their buildings were literally worthless: There was no way to make a profit due to rent controls, and nobody would buy a building that could not make a profit. Burning the building allowed them to collect insurance money and pay off debts.

"The reason people ask for [rent control] is that those with contracts gain in the short term ... It's a way that politicians can buy votes," Lindbeck said. "But the policy really hurts people entering the market -- young people and immigrants."

Despite the contentious debate, price controls have a good shot in all the places except for Vermont, where legislators say they plan to amend their bill and replace proposed price caps with a different mechanism that would transfer profits from retailers to farmers.

The New York state rent control expansion has already passed the state Assembly, and the bill is waiting for a vote in the Senate, where similar proposals have failed in the past. But this time may be different, Bing said, because there now is a Democratic majority in the state Senate.

In San Francisco, both sides think it is likely that the proposed legislation will become law.

"There is a good chance it will pass," said Janan New, executive director of the San Fransisco Apartment Association, which opposes the bill. "But we hope the mayor will veto it."

In Alaska, Wielechowski said he thought the legislation had a "decent chance" of passing, and predicted that legislators would receive plenty of calls from upset constituents if it did not.