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Affluent Investor | July 27, 2017

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Policy Tools That Honest Liberals Should Throw Away Once And For All

(Photo by TaxCredits.net) (CC BY) (Resized/Cropped)

(Photo by TaxCredits.net) (CC BY) (Resized/Cropped)

“Fight for fifteen!”

That slogan has been reverberating across the U.S. for the last couple of years, as politicians, union heads, and legions of social justice warriors demand that every worker be paid at least fifteen dollars per hour. To many Americans, that demand is obviously fair because it’s hard to live decently on less, but to many others, it is the worst sort of demagoguery, certain to have harmful economic consequences.

A book that powerfully supports the latter camp and could persuade some who are undecided on the question is the Institute of Economic Affairs’ Flaws and Ceilings, a compilation of essays written and edited by the husband and wife team of Christopher Coyne (professor of economics at George Mason University) and Rachel Coyne (a senior research fellow at George Mason’s Mercatus Center.) Most of the material comes from research done in the United Kingdom, but the universality of the laws of economics makes the lessons every bit as applicable in the United States, European Union, or anywhere else.

Despite centuries of economic analysis showing that price control laws invariably cause resource misallocation and harm many of the supposed beneficiaries, politicians and activists still press for floors (“flaws” in the title’s play on words) and ceilings. The book’s overarching theme is that such price controls are never the solution to a perceived social or economic problem, whether it is low earnings by some workers, the cost of rental housing, the price of energy, “unaffordable” university tuition, transportation costs, or any other.

Politicians and activists who sincerely want to improve matters for poorer people should cross price control measures off their list of policy options.

The world has had a great deal of experience with price controls. In 301 AD, Roman emperor Diocletian decreed price ceilings over a wide range of goods and services as a means of stopping rapid price inflation. Violators could be put to death, but rather than solving the economic problem of rising prices, the price controls compounded them by causing severe shortages of goods. Seventeen centuries later, Venezuela is wracked by shortages of staple goods for precisely the same reason – the imposition of price controls by an authoritarian ruler.

As the Coynes explain in their chapter on the economic and political consequences of price controls, prices play a crucial role in solving the economic problem of getting the greatest value from the use of limited resources. Whenever government officials dictate that something must sell for less than the price that would clear the market, the result will be a shortage and whenever they dictate that something must sell for a price that’s more, the result will be a surplus. There is no getting around economic reality.

Moreover, the waste and distortion caused by price control is not limited to visible consequences such as lines of unemployed workers and the disappearance of toilet paper from store shelves. They also drive people away from market competition and into political competition. “Efforts are shifted, “ they write, “from pleasing private consumers to attempting to influence the political process, which ultimately determines how controls are implemented and enforced.” Thus, we lose productive jobs and gain lobbyists – a bad trade-off for society.

Probably the chapter with the greatest immediate interest, given our current battle over the minimum wage, is Professor W. Stanley Siebert’s on the economics of wage floors.

In his analysis, wage floors (i.e., minimum wage laws) are just an easy way for politicians to garner votes by showing “concern” without addressing real problems, especially in education. “The low level of skills acquired by children from our many single-parent families is ignored, as is the worklessness among these families,” Siebert writes. Moreover, the minimum wage does palpable harm to disabled people who want to work but will never find jobs and also students who have to settle for volunteer work because low-paying internships are not allowed.

Siebert also examines the effects of the “living wage” movement, which is potent in the U.K. just as it is here. The proposed living wage for London would require increases for some 25 percent of the labor force, but of course that doesn’t shed any light on the actual winners and losers. Siebert writes that if enacted, the measure would wipe out jobs for 300,000 young and unskilled workers but also create new jobs for around 140,000 more highly skilled workers. He fears the “long-term consequences for those trapped outside the labour market.”

Especially interesting is Siebert’s discussion of the pitiable case of South Africa.

Under apartheid, the white regimes adhered to what they called their “civilized labour policy” which meant mandatory high wages to keep black workers from competing with whites. One might have thought that the post-apartheid governments would have done away with this market interference, but that’s not the case. Siebert informs readers that the minimum wage policy continues, but with a unionized African labor elite as the new beneficiaries. He sadly concludes,

“Thus, we see a policy originally designed to hurt African workers is now being carried forward by African politicians and unions themselves, and still hurting African workers.”

Rent control measures remain in force in a number of American cities, most notably New York, so Ryan Bourne’s chapter “The Flaws in Rent Ceilings” will be of interest here as well as in Europe, where they’re more common. Just as with minimum wage laws, rent ceilings are supposed to help the poor, but Bourne shows that they don’t.

The consequence that economists would predict from any law that keeps prices artificially low – shortage – has unquestionably occurred with regard to rent controls. Capital stops flowing into the rental housing industry because returns are depressed by the law.

Bourne presents some intriguing evidence in that regard. In Britain, following the introduction of rent control during World War I, private rental housing collapsed from three-fourths of the housing stock in 1918 to just ten percent by the late 1980s. He then cites research by Milton Friedman and George Stigler, who looked at housing advertisements in the San Francisco Chronicle. In 1906, there were about three times as many “for rent” ads as “for sale” ads, but by 1946, after the city had adopted rent control, there were 73 times as many “for sale” ads as “for rent” ads.

Among other wasteful consequences of rent control, Bourne points to a dead weight cost that is largely overlooked:

“With tenancy rent control inevitably comes an expansion of bureaucracy too – and this will also have a vested interest in more regulation.”

Like other kinds of regulation, rent ceilings spawn officials who will seek to enlarge their budgets and scope of authority – a cost to all taxpayers.

The book also contains excellent chapters on price controls in rail travel, energy markets, financial markets, and “minimum unit pricing” (a British regulation that public health advocates claim leads to a decrease in excessive drinking).

I will conclude with some comments on an area of personal interest, namely price controls in higher education, ably discussed by Professor Steven Schwartz.

In the U.K., the government limits tuition at public universities so that they are “affordable” for students. Taxpayers must then make up the considerable difference between revenues and costs, which gives university officials lots of room for dubious expenses. Schwartz writes, “Universities also use their surpluses to provide staff with higher salaries, managers with better perks and students with more lavish facilities. Just because an institution is not-for-profit does not mean that no one benefits.” The late Henry Manne made that argument for decades, most recently here.

Even with the tuition ceilings, many students need to take out loans and just as in the U.S., Britain now faces a serious repayment problem. Presently, about 45 percent of the loans have to be written off as non-collectible.

The root of that problem is moral hazard. Bearing no risk, the universities admit many academically marginal students who learn little and are unlikely to find employment that pays well enough to cover their loan payments. Schwartz offers good advice on that – make universities bear some of the risk of default. His solution is equally applicable here.

The value of Flaws and Ceilings is that it argues so persuasively against price control measures of all kinds. If only we could get “liberal” politicians and policy wonks to read it.

 

Originally posted on Forbes.

 

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