The Price Would be Zero

Often government action perpetrates harm on citizens when human empathy, or a reelection bid, encourages elected leaders to focus on a superficial problem and not its cause. Unfortunately, unhappy and empathetic voters usually want immediate solutions from their government.

A couple weeks ago, for example, BBC commentators were discussing the impossibly high rents in London. Apparently, one of the reasons for the escalation of housing prices is foreign investment in luxury flats. One commentator favored rent subsidies, while the other noted that politicians could use this tool,  but it would only boost sky-high rents. The second opinion, while likely unpopular with London voters, is rooted in economic reality.

Economists see price as a rationing agent: we can not all have apartments in a swanky area of London, New York, or Chicago – there simply is not enough space. Thus price rations apartments to those who can pay the bill. The supply and demand for swanky apartments creates the price we see. There is a limited amount of ground in Manhattan, and some pieces of ground are more highly prized than others, hence buyers are willing to pay enormous sums to rent a flat on that piece of earth.

Ebay operates on the same economic principle. People bid on an item because they are willing to pay the price the seller is asking; the price increases when another individual offers to pay more for the same item. If the item is desirable and rare, the bid price grows steadily. Similarly, government subsidies for middle class apartment seekers in London, New York, and Chicago reduce the cost each buyer pays for his or her apartment, thereby allowing more potential buyers to bid for apartments they otherwise could not afford.

When the supply of a rare item remains the same, and more bidders are added to the mix, the price will rise – regardless of whether it is a vintage toy on ebay, or a swanky apartment in central London. This theory also works in reverse. If ninety percent of Chicago residents suddenly decided to move out of the city because it is too cold, too windy, and too corrupt, the cost of a nice apartment would quickly fall. In fact, if demand were nonexistent the price would be zero – landlords would give away apartments to worthy tenants, desperately attempting to avoid the problems associated with empty buildings.

In addition to being ineffective, subsidies are also expensive for tax payers. Therefore, politicians often seek to remedy sky-high rents by limiting what landlords are able to change their tenants – rent control. Superficially, this is a better solution than subsidies: the government is able to fix the problem without torpedoing the budget. Regrettably, the strongest proponents of rent controls – voters of modest means – often get hit the hardest.

If a modest neighborhood was having a garage sale, and the sale’s organizers established a price limit of $25 (they want a sale everyone can afford), one would find a great many things, but there would be a scarcity of things worth more than $25. Motorcycles, used cars, computers, bikes, car speakers, and TVs would be few and far between. Even some furniture would be scarce. Rent controls create the same problem: only a few landlords are interested in selling their space below its real value, therefore space becomes scarce as landlords and developers seek more profitable opportunities.

If politicians are worried about affordable housing, much better solutions are available. Building permits can be made easier to get, building codes can be reviewed to ensure they encourage innovative approaches to budget housing, owners of dilapidated and unused buildings can be offered incentives to renovate or tear down their building, and developers, builders, and landlords can be given a sales tax break on all materials they use to develop, build, or maintain affordable housing units.

Empathy is an essential trait, however it must be coupled with a focus on the root causes of the problems society seeks to fix. Yet all too often activists and elected leaders insist on immediate solutions to superficial problems – an excellent recipe for additional problems and heightened complexity. But if activists and politicians can resist the urge to find a sound byte solution, and instead find the economic causes behind the problem they seek to address, their solutions will be more effective, and society will be better off.

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