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Sowellianism. “Economic policy needs to be analyzed in terms of the incentives they create, rather than the hope that inspires them.”. Sowellianism deux. - PowerPoint PPT Presentation
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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?
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 people’s money.”
Hello Venezuela
Why do prices rise or fall?
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?
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?
Why does that happen underrent 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 don’t move out of rent-controlled apartments
Shortages are a price phenomenon
Other rent control fails
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
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 isn’t 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 v shortage? Scarcity: not enough to go around Shortage: not enough supplied at current
prices… a price phenomenon
Then why rent control?
Then why rent control? Politically effective: “I’ll stop the greedy
landlords from gouging the working class with unconscionable rents.”
Price Control Failures:
Gas Price ControlsRemember:
Intent vs Consequences
Gas price controls The scene: 1973-74: Federal government
keeps oil prices artificially low
Gas price controls The scene: 1973-74: Federal government
keeps oil prices artificially low Intent: prevent “price gouging” when Middle
East suppliers decreased supply
Gas Price Controls
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
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
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 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 blowbackHoarding People will keep a larger inventory of price-
controlled goods than they ordinarily would… be it gas or apartments
Price ‘Floors’
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’
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
subsidies…40% 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”
