|Print | Back||April 22, 2014|
The Dismal ScienceEconomic Parallels
by Adam Smith
The desire to help those less economically less fortunate is one that I think all LDS people share. It is not possible to read about the ministry of Christ and not come away with a firm understanding that we have a responsibility to help those in need.
So the goal or mission is easy to understand; the difficulty is in the execution. So many ideas that seem to be good ideas turn out to have a deleterious effect on those that we are trying to help.
For example, one of the economic practices by local governments that seems like a good idea but always turns out bad is rent control.
The idea of rent control sounds pleasing. When the population of a certain city or area is growing rapidly, then there is an upward pressure on rent prices. The increasing rent prices make it difficult for those with limited means to find an affordable place to live.
In response to this hardship, many local governments implement rent controls. They enact laws that control rent prices and have the effect of putting the price of rent below the market price. That is great for the disadvantaged, right?
Well, yes it is — for the first year or two.
The impact of many economic laws takes time to be seen because it takes time for real people to react to a new set of incentives. And what is going to happen with rent controls.
The first is really obvious. With the price set below the market price, no more apartments are going to be built. The reason people engage in economic activity, believe it or not, is to make money. With no new apartments being built, then there will be a shortage of rental housing.
Thus, those that are in the apartments to begin with pay for a place to live at a great price. Those trying to find a place are literally left out in the cold.
But wait — that is not the only effect. Now that demand exceeds supply (with no new apartments ready to open), then the owners of the apartments have no incentive to keep the apartments in good working order. You don’t like the apartment, then move out. There are thousands behind you that are willing to pay. The apartments fall into disrepair.
So for the first year or two, the rent control law is great for those already in the apartments. But over time, or in the long run, even those that can get in an apartment live in poor conditions.
Of course one of the odd things is that if you let the market for apartments work itself out, then more and more apartments will be built and eventually there will be more apartments than people trying to live in apartments. This drives down the price and creates the incentive for apartment owners to keep their apartments up to date and looking nice to attract renters.
It has been shown that rent control, in the long run, actually causes the rent to be higher and the living conditions to be worse. Your government at work.
In some past articles, I have stated that Obamacare will, in the long run, be a detriment for the poor. The consequences from the example I provided above about rent controls will parallel the consequences of Obamacare for the poor. It is very easy to see.
The laws will not create the revenue expected and the cost to the government will increase. There really is only so much money the government can spend. They will expand the price controls they already have implemented for Medicare so that prices for medical care will be below market.
There will be less medical care available. There is not economic incentive to expand a practice or for smart people to become doctors.
The medical care will decrease in its response to individual concerns. You don’t want to come to my clinic, fine, there are a lot of people waiting to see a doctor. The level of service will decrease.
In the long run, the taxpayer will be paying more for an inferior product. In the real world, it means that those getting their insurance through Obamacare will be getting poor service from indifferent medical providers.
One other point from rent controls. While no one was building regular apartment building, luxury apartments flourished. The rent controls did not have any effect on the upper middle class or the rich.
The same will happen in medical care. For those who work for a large, wealthy company or who are independently wealthy, the medical industry will be paying more attention to you since you will be paying closer to market rates. They will compete for your business. Your level of medical care will go up and you will have more options.
So a law that was passed to help people will, in the long run, hurt their level of medical care and at the same time benefit the rich. Well done government, well done.
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