Sowellianism Economic policy needs to be analyzed in terms of the incentives they create, rather than the hope that inspires them. Sowellianism deux Economics is a study of cause-and-effect relationships in an economy. Its purpose is to discern the consequences of various ways of allocating scarce resources that have alternative uses. It has nothing to say about social philosophy or moral values Price Controls What Are Price Controls? Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand via systemic causation Systemic causation?? What Are Price Controls? Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand via systemic causation Economics is concerned with what emerges, not what anyone intended What are price controls? Can be a ceiling (limits how high) such as rent control What are price controls? Can be a ceiling (limits how high) such as rent control Can be a floor (limits how low) such as commodity guarantees and minimum-wage laws What are price controls? Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand The Iron Lady (aka, Margaret Thatcher) The problem with socialism is that eventually you run out of other peoples money. Hello Venezuela Why do prices rise or fall? Prices rise when the amount demanded exceeds the amount supplied at existing prices: also known as a shortage Why do prices rise or fall? Prices rise when the amount demanded exceeds the amount supplied at existing prices: also known as a shortage Prices fall when the amount supplied exceeds the amount demanded at existing prices: aka a surplus Can there be a shortage and no less of the product? Housing after WWII: lots of it, but landlords not willing to rent at artificially low rents, people used more housing than they needed, no new housing was built In San Francisco, an estimated 10,000 units are currently kept off market by landlords because of rent control Why does that happen under rent control? People consume more at an artificially lower price than they would normally singles moving into own pad, elderly keeping four-bedroom Why does that happen under rent control? People consume more at an artificially lower price than they would normally singles moving into own pad, elderly keeping four-bedroom People often dont move out of rent-controlled apartments Shortages are a price phenomenon Other rent control fails New York, San Francisco, Sweden, Toronto, Santa Monica Other rent control fails New York, San Francisco, Sweden, Toronto, Santa Monica SF: 49% of rent-controlled apts occupied by one person; 75% of rental units 50 years old! Other rent control fails New York, San Francisco, Sweden, Toronto, Santa Monica SF: 49% of rent-controlled apts occupied by one person; 75% of rental units 50 years old! 25% of people with rent-controlled apartments in SF make more than $100,000/year Other rent control fails NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people Other rent control fails NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people Melbourne: No new buildings erected Other rent control fails NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people Melbourne: No new buildings erected Toronto: 23% of units pulled off market within three years of imposition of rent control Lessons of Rent Controls Policies intended to make affordable housing have opposite effect Lessons of Rent Controls Policies intended to make affordable housing have opposite effect In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price Lessons of Rent Controls Policies intended to make affordable housing have opposite effect In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price Scarce resources go to commercial & luxury Lessons of Rent Controls Policies intended to make affordable housing have opposite effect In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price Scarce resources go to commercial & luxury The affluent get more benefit from rent control than do the poor Assar Lindbeck, Swedish economist Rent control appears to be the most efficient technique presently known to destroy a city, except for bombing But most of New York isnt bombed! Rent control has been loosened for new construction that is not rent controlled Lots of new condos built Few apartments for average income folks Scarcity v shortage? Scarcity: not enough to go around Shortage: not enough supplied at current prices a price phenomenon Then why rent control? Politically effective: Ill stop the greedy landlords from gouging the working class with unconscionable rents. Price Control Failures: Gas Price Controls Remember: Intent vs Consequences Gas price controls The scene: : Federal government keeps oil prices artificially low Gas price controls The scene: : Federal government keeps oil prices artificially low Intent: prevent price gouging when Middle East suppliers decreased supply Gas Price Controls With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand Gas Price Controls With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand With gas, as other scarce resources put under price controls, shortages and scarcity are two different things Gas Price Controls With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand With gas, as other scarce resources put under price controls, shortages and scarcity are two different thing Shortages are usually price-related Price Control Blowback: Quality Quality suffers with price controls Price Control Blowback: Quality Quality suffers with price controls Shortages, caused by incentives created by price controls, means sellers no longer have to please buyers Price Control Blowback: Quality Quality suffers with price controls Shortages, caused by incentives created by price controls, means sellers no longer have to please buyers Stations kept open fewer hours to sell same amount of gas Price Control Blowback: Quality Quality suffers with price controls Shortages, caused by incentives created by price controls, means sellers no longer have to please buyers Stations kept open fewer hours to sell same amount of gas In housing, landlords let property deteriorate Sowellianism III In short, whether the product or service has been housing, apples, or medical care, quality deterioration under price control has been common in the most disparate settings. Price Control Blowback: Medical At artificially low prices, people with minor ailments make frequent visits to doctor Price Control Blowback: Medical At artificially low prices, people with minor ailments make frequent visits to doctor Among five English-speaking countries, only U.S. has a single digit waiting list for elective surgery Price Control Blowback: Medical At artificially low prices, people with minor ailments make frequent visits to doctor Among five English-speaking countries, only U.S. has a single digit waiting list for elective surgery Docs spend less time per patient when prices are controlled Price Control Blowback: Black Markets Price controls almost inevitably produce black markets: transactions outside of system Price Control Blowback: Black Markets Price controls almost inevitably produce black markets: transactions outside of system Bribes common to get food, gas, medical care, housing Price Control Blowback: Black Markets Price controls almost inevitably produce black markets: transactions outside of system Bribes common to get food, gas, medical care, housing In price control environments, goods/services get diverted to black market Price control blowback Hoarding People will keep a larger inventory of price-controlled goods than they ordinarily would be it gas or apartments Price Floors Prices set above the free-market will cause more to be supplied than demanded Price Floors Prices set above the free-market will cause more to be supplied than demanded During Depression, farmers going out of business led to price floors Price Floors Prices set above the free-market will cause more to be supplied than demanded During Depression, farmers going out of business led to price floors Government buys up surplus to keep prices high Price Floors Prices set above the free-market will cause more to be supplied than demanded During Depression, farmers going out of business led to price floors Government buys up surplus to keep prices high Huge surpluses were produced Price Floors Prices set above the free-market will cause more to be supplied than demanded During Depression, farmers going out of business led to price floors Government buys up surplus to keep prices high Huge surpluses were produced Surpluses, like shortages, are price phenomenon Blowback: Price Floors Americans spend $3.5 billion in artificially higher prices just for sugar Blowback: Price Floors Americans spend $3.5 billion in artificially higher prices just for sugar Every cow in Europe gets more subsidies per day than most Africans live on Blowback: Price Floors Americans spend $3.5 billion in artificially higher prices just for sugar Every cow in Europe gets more subsidies per day than most Africans live on Most subsidies go to wealthy, corporate farmers Blowback: Price Floors Americans spend $3.5 billion in artificially higher prices just for sugar Every cow in Europe gets more subsidies per day than most Africans live on Most subsidies go to wealthy, corporate farmers About 20% of U.S. farm income is government subsidies40% or more in E.U. and Japan The Great One All the vast resources used to produce sugar in the United States are wasted when sugar can be imported from countries in the tropics, where it is produced much more cheaply in a natural environment more conducive to its growth. If price controls are so bad, why do we have them????? Politics People demand political solutions to problems Politics People demand political solutions to problems Politicians happy to oblige Politics People demand political solutions to problems Politicians happy to oblige The solutions i.e., price controls, socialized medicine, free college education, affordable housing, etc. usually exacerbate the problem Politics People demand political solutions to problems Politicians happy to oblige The solutions i.e., price controls, socialized medicine, free college education, affordable housing, etc. usually exacerbate the problem Problem is lack of understanding of basic economics, not just by politicians but by electorate Assignment 2/4 Read I Pencil by Leonard Read. Link will be on website Read Chapter 5 in Basic Economics: The Rise and Fall of Businesses