6. Sowellianism “Economic policy needs to be analyzed in terms of the incentives they create, rather than the hope that inspires them.”

7. 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…”

8. Price Controls

9. What Are Price Controls?

10.  Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand via systemic causation

11. Systemic causation??

12. 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

13. What are price controls?  Can be a ceiling (limits how high) such as rent control

14. 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

15. What are price controls?  Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand

16. The Iron Lady (aka, Margaret Thatcher) “The problem with socialism is that eventually you run out of other people’s money.”

17. Hello Venezuela

18. Why do prices rise or fall?

19.  Prices rise when the amount demanded exceeds the amount supplied at existing prices: also known as a “shortage”

20. 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”

21. Can there be a shortage and no less of the product?

22.  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

23. Why does that happen under rent control?

24.  People consume more at an artificially lower price than they would normally… singles moving into own pad, elderly keeping four-bedroom

25. 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

26. Other rent control fails

27.  New York, San Francisco, Sweden, Toronto, Santa Monica

28. 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!

29. 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

31. Other rent control fails  NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people

32. 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

33. 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

34. Lessons of Rent Controls

35.  Policies intended to make affordable housing have opposite effect

37. 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

38. 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

39. 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

40. Assar Lindbeck, Swedish economist “Rent control appears to be the most efficient technique presently known to destroy a city, except for bombing…”

41. 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

42. Scarcity v shortage?

43.  Scarcity: not enough to go around  Shortage: not enough supplied at current prices… a price phenomenon

44. Then why rent control?

45.  Politically effective: “I’ll stop the greedy landlords from gouging the working class with unconscionable rents.”

46. Price Control Failures: Gas Price Controls Remember: Intent vs Consequences

47. Gas price controls  The scene: 1973-74: Federal government keeps oil prices artificially low

48. Gas price controls  The scene: 1973-74: Federal government keeps oil prices artificially low  Intent: prevent “price gouging” when Middle East suppliers decreased supply

50. Gas Price Controls

51.  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

52. 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

53. 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

54. Price Control Blowback: Quality

55.  Quality suffers with price controls

56. 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

57. 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

58. 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

60. 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.”

61. Price Control Blowback: Medical

62.  At artificially low prices, people with minor ailments make frequent visits to doctor

63. 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

64. 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

65. Price Control Blowback: Black Markets

68.  Price controls almost inevitably produce ‘black’ markets: transactions outside of system

69. 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

70. 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

71. Price control blowback Hoarding  People will keep a larger inventory of price-controlled goods than they ordinarily would… be it gas or apartments

72. Price ‘Floors’

73.  Prices set above the free-market will cause more to be supplied than demanded

74. 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’

75. 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

76. 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

77. 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

78. Blowback: Price ‘Floors’

79.  Americans spend $3.5 billion in artificially higher prices just for sugar

81. 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

82. 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

83. 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

84. 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.”

85. If price controls are so bad, why do we have them?????

87. Politics  People demand political ‘solutions’ to problems

88. Politics  People demand political ‘solutions’ to problems  Politicians happy to oblige

89. 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

90. 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

91. 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”