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Government keep out!

Everything has a price: the price we pay for goods and services, the price of money (i.e., the interest on borrowing) and of course the price of labor-wages and salaries.Last week I wrote about one form of price control being mandated by Chicago’s city council – the ordinance requiring “big box” stores located within the city to increase their minimum wage to $13 an hour, including benefits, by the year 2010.While this notion appeared noble, the unintended consequence of this decision (if it’s not vetoed by Chicago’s mayor) could be the flight of low-cost big-box stores to surrounding areas resulting in higher prices for consumer goods and loss of jobs in the very neighborhoods that need them most, not to mention the loss of tax revenues to the city.Nevertheless, there’s seldom a lack of rationale whenever it becomes expedient for politicians to pass laws controlling wages or prices on behalf of one group at the expense of a different group whose political support is deemed less important.An interesting aspect of Chicago’s decision to penalize the super-retailers was the choice of “experts” who were brought in to testify to the efficacy of this type of market manipulation. I use the word interesting because one of the experts was the San Francisco city supervisor.San Francisco has flouted the free market for years via its burdensome rent-control laws. With obvious disregard for the maxim, “Economic policies must be analyzed in terms of the incentives they create rather than the hopes that inspired them,” San Francisco has unwittingly produced one of the highest homeless populations per capita, of any city in America.The city of San Francisco implemented rent control in 1979. But because of its political popularity, the City Council didn’t bother to undertake an empirical study of the consequences of it until 2001, leaving the usefulness of those laws unchallenged for over two decades.When the study’s results were published, they underscored the negative effect of disregarding a basic economic reality: “Shortages in a capitalistic system don’t necessarily mean there’s any less of a commodity.”In his book “Basic Economics,” Thomas Sowell illustrates how during and immediately after World War II, the United States experienced a “housing shortage” even though both the population and number of housing units had increased by approximately 10 percent from before the war, when there was no housing shortage.But because rent controls were instituted during the war, the amount of livable space per person had increased dramatically. Put another way, because rents were kept artificially low, some people used more housing than they would have otherwise, causing others to find that there was less housing available. There was no shortage of housing units per se; rather, there was a shortage of housing units at a given price per livable unit.In San Francisco’s case, the 2001 study revealed that more than 25 percent of the residents living in rent-controlled housing had household incomes in excess of $100,000 – hardly what the council had in mind when it instituted rent controls. As a sidebar, similar situations have been found in New York, London, Stockholm, Melbourne and just about everywhere else rent control exists.But because of their desire to be re-elected, ignorance, arrogance or all of the above, politicians too often fail to grasp the true cause-and-effect relationships of a free market. One such relationship was that new housing wouldn’t be built unless the real estate and development communities felt it would be profitable. With rent control in effect, profits were being driven downward. Another disturbed cause-and-effect relationship was that with rent-control laws in effect, people who once rented rooms in their own homes sooner or later came to the conclusion that it was no longer worth their time and trouble, and took these rooms off the market. In other cases, apartment owners realized that condominium conversions could be far more profitable than renting in an artificially low-rental-income environment, which further reduced the number of available housing units. It should also be noted that landlords who no longer had to compete to attract tenants spent less on maintenance and upkeep, which resulted in the general deterioration of the existing inventory. This phenomenon has been repeated in Australia, England and continental Europe, where studies have concluded that physical deterioration is greater with rent-controlled housing than in non-rent-controlled housing. This confluence of factors has produced fewer new housing starts, fewer available units, and a deteriorating inventory of existing units. But perhaps the most striking example of this dynamic can be found in New York City, where it’s estimated that there are four abandoned housing units for every homeless person living on the city’s streets. If one thinks about it, this makes perfect economic sense: When government makes it difficult or impossible for landlords to make a profit, it’s reasonable that landlords will abandon their properties rather than operate them at a loss.”Shortages” result in situations where sellers no longer have to please buyers and when pleasing buyers is no longer part of the economic equation, quality of life diminishes for everyone.Price controls of any sort can lead to black markets where prices are higher and quality inferior to what they would be when they function under the law of supply and demand. But the true tragedy, to paraphrase Sowell, is that all too frequently real but transitory problems lead to enduring government programs that long outlive the conditions that caused them to be created in the first place.Butch Mazzuca, a local Realtor and ski instructor, writes a weekly column for the Daily. He can be reached at bmazz68@earthlink.net Vail, Colorado


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