Moneybeat: Socialist sticker shock

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JENNY ROUGH, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER,HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

DAVID BAHNSEN: Good morning, Nick, Good to be with you.

EICHER: Well, let’s start with something we’ve never discussed before: the likely next mayor of New York City, Zohran Mamdani. You know the city well, and what we’re seeing is a candidate who’s not only openly socialist, but also promoting a suite of policies that would have been considered fringe not long ago—things like expanded rent control, government-run grocery stores, and free public transit.

The theory seems to be that the wealthy will foot the bill. I don’t want to be glib about it, but I do think this moment creates a good opportunity to talk about the economic implications of these ideas, especially rent control. So wherever you want to begin, I’d love to hear your perspective.

BAHNSEN: Well, look, on the political side, it will be interesting to see what does happen. There’s a pretty massive movement to try to avoid this disaster. Mathematically, if there were only one other candidate running against this gentleman, he would have no chance of winning. But there’s also now something that there wasn’t in the time of the primary, which is a lot of time and a lot of seriousness to actually draw attention to the very things you’re talking about—his policies and his record, things he believes—which would be totally unelectable in normal circumstances.

Nobody in the primary—Governor Cuomo and his campaign foolishly didn’t take him seriously—and that’s what happened. So I don’t know that it’s a political fait accompli, but I think the odds are that he could end up being the candidate.

I think the opportunity to talk about the economic side of it is very helpful. You know, a lot of the things you mentioned are not things he, as mayor, would have the authority to do. Some of them are in the gubernatorial jurisdiction. Some would require a whole city council vote. Nevertheless, just the basic idea of price controls—I didn’t support it when President Trump said he wanted to do it with prescription drugs. I didn’t support it when Joe Biden and Kamala Harris said they wanted to do it with mortgages. I don’t support it with Josh Hawley and Bernie Sanders saying they want to do it with credit card interest. I don’t support the mayor of New York saying he wants to do it with chicken and rice from a street cart.

All of these things come from the same economic fallacy, which is the belief that a disinterested third party should set prices in the name of some sort of social justice, and that that will work better than buyers and sellers freely transacting—who do have what we call skin in the game.

Nick, I’m very sorry to say this: nobody should fool themselves into saying that this is just the crazy ideas of a 33-year-old socialist candidate. This is becoming bipartisan—that the government saying what groceries should cost is a good idea. I’m against it at every level of government because I believe that, time and time and time again, history has shown—even things like rent control—we’re in desperate need of new housing product, and you disincentivize the construction of new product when you regulate price controls before a hammer has ever even been pulled out of the toolbox.

That’s the issue at play. You distort the market and you end up making worse the very problem you say you’re there to solve.

EICHER: Let’s dig into rent control specifically. Housing affordability is a huge issue in New York, and everyone knows how punishing the market is there—prices are just sky-high. The city already has a rent control regime in place, and as I understand it, Mamdani wants to go even further with it, not scale it back.

Can you walk us through how rent control actually functions, economically? What happens—just in layman’s terms—when government steps in to cap what landlords can charge? What are the downstream effects?

BAHNSEN: So, to take what could be a very complicated question and try to make it as simple as possible: the issue in New York is there’s actually two different things—there’s rent control and there’s rent stabilization. The problem with that is it fails to understand the economics of supply and demand, which is a basic law of economics.

The thing that pushes prices down is either lower demand or higher supply. Well, contrary to what a lot of people believe about New York City, it is an incredibly desirable place to live—jobs, the culture, the history. There’s just a lot that brings people to a city like New York. Media, technology, finance have chosen to make New York a significant hub for a reason. There’s literally millions of people that work there.

So the question, Nick, is what is going to drive prices lower when demand is not going to come down? It’s obviously supply. There are two curves. There is a great step in the right direction, because they’re overbuilt in a lot of office and hospitality. So there’s been a big movement to convert certain hotel properties and offices to housing.

Then there are things like this—where he, what he’s suggesting, this would-be mayor—is not just maintaining the rent controls that are in place on legacy properties but forcing rent control on all new property construction, which would kill new property construction. It would kill new conversions. That’s why the real estate sector is up in arms about this gentleman, because you really would hurt the cause of lower rent.

Now, ironically, he may end up being able to help the cause by hurting demand. But eroding demand as a way of getting rents down has not been a very successful strategy in Portland, Oregon, as of late—or in Detroit, Michigan, you know, over 10 years ago.

I think the basic economics, apart from the New York example of rent controls, which were tried nationally—wage controls, price controls—the Nixon administration caused it. It was a disaster in the 1970s. European countries have tried it. There’s no credible economist that believes this works economically, for the very fact that it manipulates the supply.

What is the reason we want to bring prices down? Because they’re high. Well, what also happens when there’s high prices? It attracts a lot of people that want to swim in that pool. You mean, if I have apartment buildings, there’s good prices there, so it incentivizes more production.

Similarly, when you go, “Well, eggs are too high” or “certain grocery items”—he wants the city to actually run grocery stores. City-owned and managed grocery stores. This is Soviet-style, Cuba-style economics.

Why do we not believe in the city running a grocery store? Because the city isn’t any good at it. When you don’t have a profit motive, you end up with very bad delivery of goods and services, and ultimately set taxpayer money on fire.

EICHER: Let me bring up one detail I heard about Mamdani’s grocery store plan. He’s proposed that these city-run stores wouldn’t have to pay taxes, which he frames as a cost-saving measure that would allow them to undercut private competitors.

Is there any economic case to be made for that? In other words, if the city eliminates some of its own costs, could it actually deliver cheaper food? Or is that just wishful thinking?

BAHNSEN: Well, first of all, let’s say it did work. Where’s the city going to replace that revenue? The city’s running major deficits anyway. You’re talking about sales tax—7, 8, 9 percent on certain products—so where are they going to replace the revenue?

But then, if the margins are super tight and you now have these two competing forces—on one hand, there’s lower sales tax; on the other, there’s substantially worse experience going to the store: worse employees, worse service, worse innovation—why not do that in every sector, if the city was qualified to do it?

The reason that we don’t want city-run grocery stores is because the city has a very few things it’s supposed to do. Most of us don’t believe they always do those things great. The subways are not run well. The MTA, the transportation function…

Whenever—like in California—they would talk about “Let’s have the state run banks and get in the mortgage business.” Why do I want a group that is running tens of billions of dollars of deficits, and messed up the delivery of unemployment checks to millions of people, and has more cybersecurity fraud done against it than any private business I’ve ever seen—why do I want them running a bank?

It would be very similar. Like, I run a financial services firm, and I do not run an art gallery. The greatest argument against me running an art gallery would be if I ever tried to do it.

EICHER: All right, David Bahnsen is founder, managing partner, and chief investment officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thank you so much. We’ll see you next week.

BAHNSEN: Thanks so much, Nick.

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