The Infamous Example of Rent Control in Introductory Economics

The latest post by Jodie Beggs rehashing the standard story about rent control has me quietly steaming.  It’s not her fault, of course: she is simply regurgitating what has become a mandatory morality tale, an unavoidable rite of passage in Econ 101.  You know the drill: in their misguided desire to be fair to the poor, the authorities have set a ceiling on rents below the market-clearing price, and the result is excess demand in the short run and reduced supply in the long run.  Now that you have mastered the supply and demand diagram, you are so much smarter than they are.

I’m agnostic about rent control myself (it depends entirely on the context and the details), but for me this story is a poster child for the ideological rigidity of economics as it is taught to impressionable youth, not the superiority of “the economic way of thinking”.

There are two huge holes in the textbook argument.  The first is that it overlooks neighborhood effects—literally.  The most compelling argument for rent control is neighborhood stabilization, the idea that social capital in an urban environment requires stable residence patterns.  If prices are volatile, and this leads to a lot of residential turnover, the result can be a less desirable neighborhood for everyone.  Thus the quality-adjusted supply curve is partly a function of price (or at least price stability in a dynamic model), and the S and D curves are not independent of each other.  You’ll notice that not a single textbook treatment of rent control mentions stabilization as an objective, even though this is a standard element in the real-world rhetoric surrounding this issue.  Again, I’m not taking a position, just saying that the representation you get at the introductory level is an ideological construct, not an honest analysis.

The second hole is that rent control ordinances are normally replete with measures intended to maintain supply incentives, like price increases tied to investment in housing quality or simply spreading out increases over a longer time so tenants are able to adjust.  Again, these measures may succeed or fail, but a simple horizontal line in a one-period S&D model doesn’t begin to address them.

In fact, advocates for rent control have taken Econ 101 (most of them), but they just disagree on how large the positive and negative impacts are.  The purpose of economics should be to help us think clearly about the matter—for instance by identifying the potential empirical data that could adjudicate between competing arguments—but in its textbook form it is a ritualistic way of curtailing thought.

UPDATE: Standing in the shower, my mind drifted back to Orwell: "Free markets good!  Price controls b-a-a-a-a-d!"

T-SPLOST: Financing Georgia’s Transportation Projects and Ricardian Equivalence

During the summer of 2010, the state of Georgia passed a plan to invest in its transportation network. The interesting feature to me was how they proposed to pay for this construction as well as the arguments for the proposal put forth by Doug Callaway:

If voters approve a new one-cent sales tax for transportation projects, it could be one of the greatest economic tools in Georgia, according to an official pitching the benefits of the proposal. “This is the best option on the table. Is it perfect? No. Is it the best thing going? Absolutely,” said Doug Callaway, executive director of the Georgia Transportation Alliance — a nonprofit group affiliated with the Georgia Chamber of Commerce. Come July 31, voters in 12 districts throughout the state will be asked to consider a 10-year, one-cent sales tax that will fund transportation projects in their region … Callaway outlined the key points of the T-SPLOST that voters will likely hear until they head to the polls this summer: More jobs, safer roads and revenue that stays in the region. “We’ve got high unemployment, let’s be honest, and little hope for an immediate turnaround,” Callaway said, while pointing to University of Georgia experts who estimate that the economy won’t improve until 2020.Those regions that approve the T-SPLOST stand to possibly create more immediate and long-term jobs — while recovering more quickly from the economic downturn, he explained.

T-SPLOST stands for the Transportation Special Local Option Sales Tax. If a county decides to increase its sales tax by 1% for each of the next 10 years, then construction on new transportation projects can begin. Mr. Callaway is justifying this proposal on Keynesian grounds. While I hope Georgia’s economy can recovery before 2020, we have to admit the current recovery is going slowly.
Not to dust off an old debate, but let’s recall what Robert Lucas once argued:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash. It has no first-starter effect. There's no reason to expect any stimulation. And, in some sense, there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that.

Several economists challenged Dr. Lucas including this from Simon Wren-Lewis:

If you spend X at time t to build a bridge, aggregate demand increases by X at time t. If you raise taxes by X at time t, consumers will smooth this effect over time, so their spending at time t will fall by much less than X. Put the two together and aggregate demand rises.

If Mr. Callaway has his way, maybe we can have an empirical test along the lines that Christina Romer talked about!

A Generally Positive Jolt

BLS just released its preliminary December figure for job openings (from its Job Openings and Labor Turnover Survey—JOLTS), and the news is good: 258,000 more vacancies.  Combined with previously reported unemployment data, the unemployment to vacancy ratio dipped noticeably from 4.3 to 3.9.  Here is how the ratio looks from the beginning of 2008 to the end of 2011:

Unemployment-to-Vacancy Ratio, 2008-2011

If the decline keeps to the trend it has established since the cyclical peak of 6.9 of July 2009, in another 18 months we’ll be back down to two workers looking for work for every job opening.  This is still above the ratio most economists would prefer (about one-and-a-half to one), but it’s not bad.  There is a big proviso, however: the unemployment numbers do not count the large number of workers who have apparently withdrawn from the (pathetic) labor market.  And, of course, there is no guarantee at all that this trend will stay on course.