Often, people who want to immediately take away the pain and suffering of others opt for palliative policy solutions to what are side effect problems. We would never accept this in medicine: if someone is prescribed opiates to treat their pain from cancer, we would demand that (if treatable) the cancer itself be addressed because simply treating symptoms would allow the cancer to painlessly worsen.

And yet so often our public policy is the equivalent of treatment through opiates instead of chemotherapy. Instead, what people need to do is consider primary causes and secondary effects.

Take, for example, high housing costs and caps on rent.

• Problem: Rent costs are too high.
• Solution: Cap rent prices by governmental edict so that costs aren’t so high.

Seems pretty simple, right?

Not quite. Capping rent prices is an opiate that does absolutely nothing to treat the cancer and will actually exacerbate the problem.

Let’s dig a little deeper. To do so, we need to follow two paths of inquiry:

• Why did this happen? (Find the primary cause.)
• How will people adapt to the policy solution? (Determine secondary effects.)

Primary Cause

So, what’s actually causing the problem of rent prices being too high? Well, what causes prices in general to be too high? Really only one of two things: 1) Monopoly pricing power for a necessary good or service, or 2) Too little supply relative to demand.

When we’re talking about rent prices, it’s the latter (because there are innumerable firms that can build apartments, so there is no monopoly on apartment production).

So we have found the root cause of high rent prices: the supply of apartments is low relative to the high demand for those apartments. If there were more apartments to rent than people who wanted to rent them, the owners of those abundant apartments would have to heavily compete on price with one another to attract the relatively few renters.

Now that we have the primary cause of high rent, the question to ask is: does a cap on rent prices address the underlying cause of the problem?

The answer here is, of course, “no.” A cap on rent prices does nothing to increase the supply of apartments (or to decrease demand for apartments). So already we should suspect that this is not the correct solution to the underlying problem.

But, before we pass judgment, let’s evaluate the secondary effects of the solution of a cap on rent prices. Maybe a palliative approach will painlessly get us to a solution to the underlying problem?

Secondary Effects

People respond to incentives. Always. So how will they respond to this policy of capped rents?

First, let’s consider if there was no cap on rents (or other regulations that prevent apartment companies from building more apartments).

What would happen when demand far outstrips supply and rent prices spike? Businesses would see a ripe opportunity to build apartments because there would be ample profits to be made.

In contrast, what happens if rent prices are capped?

Potentially no businesses will want to build new apartments where the prices are capped. This should be obvious. First, businesses will be very hesitant to invest in a place ruled by a government that is willing to control prices. Why build there and take on the risk of even more price controls? Second, businesses will go where they can make the most profits (just like workers go where they can make the most wages for their work). Why would they build new apartment buildings in a rent capped city when they could build apartments outside of the rent capped city where those renters who can’t find apartments in the city will be forced to find apartments? Just like workers are unlikely to accept a position at a company that caps their salaries at a low level, businesses choosing where to build won’t build in a rent capped city. They’ll build almost anywhere else.

So notice what happens: fewer new apartments will be built in the rent capped city. That exacerbates the primary cause: a lack of apartments relative to the demand for them. Yes, those people already living in the rent capped apartments might immediately benefit, but they’ll do so at the expense of everyone else pushed outside the city who now has the extra expense of commuting, the extra time spent commuting, and the higher rent prices for apartments outside the city where demand will now be surging for apartments.

But, as we know in life, there are often ripple effects even beyond secondary effects, so let’s dig deeper.

Tertiary Effects

A common maxim in economics is “There is no free lunch” : there is a trade-off or cost to just about everything.

So at least do the renters who do benefit from the capped rent in the city get a free lunch?

Unlikely.

At some point, they might want to move to a larger apartment, but now they too might be pushed out of the city because the underlying problem of too few apartments has not been solved. And, because they will lose their cap on rent if they move, they might feel constrained to stay in an apartment that is now too small for their family.

Additionally, because rent caps exacerbate the limited supply of apartments, this forced migration of renters out of the city deprives the city of growth and opportunity. Businesses in the city will have fewer customers than they otherwise would have had, fewer customers will constrain the growth and thus hiring of businesses, less hiring from businesses will depress wages, depressed wages will cause people working in the city to make less than they otherwise would have, tax dollars that would have come from more people in the city will go to the surrounding suburbs, less tax dollars means less services to residents and a lower quality of life in the city, etc.

Far from a net benefit to renters, then, even the renters with rent capped apartments are likely to experience a long-term net negative relative to the alternative. The alternative would be actually fixing the underlying problem.

Solutions to Primary Causes

But let’s explore then you and I the alternative path of solutions aimed at the primary causes.

Without a rent cap (and in the absence of regulations that choke out the opportunity to expand housing), builders of apartments are sure to flood into an area where demand for apartments far exceeds the supply of apartments.

The solution wouldn’t give immediate relief. It takes time to build new apartments. But, the solution wouldn’t be in the distant future either (it would, at most, take years to build more apartments).

But this is quite literally the only solution (more apartments) to the actual problem (too few apartments).

And, as more apartments are built, more people can move into the city, businesses in the city thrive, the city has more tax dollars to improve the quality of life for people in the city, the city becomes even more attractive to businesses and to people, and a virtuous cycle of growth and prosperity follows.

Now, some people might instead say the answer is just more government: we should cap rents and then the government should step in to build apartments because businesses won’t want to do so in a rent capped city, etc. This approach, however, is completely misguided. If you’ve ever been to the DMV, you know it works less efficiently than basically any private business you have ever been to. You should know even just from firsthand experience that the government does not operate efficiently. Do you really want to assign the government to building apartments, to managing those apartments, etc? Think of how much that would cost. To pay for it, the city would have to massively increase taxes, so, again, the people of the city would not be better off because any savings from capped rent would then be more than offset by higher taxes to pay the government to build more housing for those renters who can’t find apartments in the city. There is no way that the government can solve this problem on its own; it’s better for government to, as much as possible, get out of the way than to get involved through rent caps and other palliative treatments.

When we chase palliative treatment for side effect problems instead of cures for primary causes, we instead set off vicious cycles of decline.

Broad Applications

The purpose of this exercise was not to simply talk about rent caps. If you actually drill down into most government regulations, you realize that they are well-intentioned, misguided solutions that actually make people’s lives worse in the long run compared to alternative cures. Some government regulations are good (such as ensuring clean food and water) that protect the public good from private excesses and moral hazards. But most are not.

Sometimes there is no action you can take to immediately take away someone’s pain and suffering, and sometimes taking action to immediately alleviate pain only makes pain worse in the long run (this is how a lot of kids get spoiled and entitled and then live lives of greater anxiety, confusion, low-resilience, and less success).

So, when a politician proposes a policy fix for a problem, ask yourself if they are prescribing a palliative treatment or a cure. To do so, dig deeper to understand what is actually causing the problem. Also think about secondary effects. To do so, think like a chess player. Don’t just think of the move right in front of you. Think of how another person will respond to your move (how people will adapt in real life to incentives). What chain reaction will you be setting off? Is there an alternative course that might not immediately take away pain but which fixes the underlying cause and sets off a virtuous chain reaction that will alleviate far more pain in the long run and bring much more success?

Think carefully. Choose wisely. All of our futures depend upon it.