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When the price is wrong.

"Fight for $15!" That slogan has been reverberating across the United States for the last couple of years, as politicians, union heads, and legions of social justice warriors demand that every worker be paid at least $15 per hour. To many Americans, that demand is obviously fair because it's hard to live decently on less. To 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 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, and anywhere else.

Economic distortions/ Despite centuries of economic analysis showing that price controls necessarily cause resource misallocation, politicians and activists still press for floors ("flaws" in the title's play on words) and ceilings. The overarching theme of the book 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 should cross price control measures off their list of policy options.

The Coynes begin by pointing out that 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 now 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 tradeoff for society.

Yet another cost of price controls that few people grasp is what economic historian Robert Higgs calls "regime uncertainty." It is hard enough for people in business to forecast market changes, but once government gets into price setting, the uncertainty is compounded. The cost of planning and investing is increased.

Wages / Probably the chapter with the greatest immediate interest, given our current battle over the minimum wage, is W. Stanley Siebert's on the economics of wage floors. In his analysis, wage floors (in other words, minimum wage laws) are just an easy way for politicians to garner votes by showing their 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," writes Siebert, a professor of labor economics at the University of Birmingham. Moreover, the minimum wage does palpable harm to disabled people who want to work but will never find jobs and also to 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 UK 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, while creating new jobs for around 140,000 more highly skilled workers. He fears the "long-term consequences for those trapped outside the labour market."

Turning to other nations, Siebert finds consistent evidence that raising the minimum wage leads to the destruction of jobs for unskilled workers. Two points he makes are especially interesting.

First, he is aware that U.S minimum wage advocates have been citing a 1995 study by David Card and Alan Krueger as proof that the conventional economic wisdom that minimum-wage increases lead to job losses is wrong. Siebert rightly dismisses that argument. "The work," he writes, "is sold as a 'powerful new challenge to the conventional view,' but this is misleading--it is a very specific challenge and a weak one at that."

Second, there's 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 / 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 such laws are more common. Just as with minimum wage laws, rent ceilings are supposed to help the poor, but Bourne shows 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, who is head of public policy at the UK's Institute for Economic Affairs (IEA), presents some intriguing evidence on this. In Britain, following the introduction of rent control during World War I, private rental housing shrank from three-fourths of the housing stock in 1918 to just 10 percent by the late 1980s. He then cites research on the San Francisco market 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.

Bourne also shows that rent controls do in fact lead to other problems that economists have predicted, such as declining quality and misallocation of space. "In the UK," he writes, "the long-term effect of rent controls was severe disrepair--with 18 percent of rentable accommodation defined as unfit and needing repair" in a 1982 study. Rent control also interferes with the efficient use of space. Bourne cites a 2003 study of rent control in New York that found that 21 percent of interviewed landlords said they offered fewer rooms than they'd rent if there were no rent control.

Among other wasteful consequences of rent control, Bourne points to a deadweight 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.

Other topics / Rail travel is more prevalent in Britain than the United States, but Richard Wellings' chapter on the regulation of rail fares contains valuable lessons for Americans. Naturally, when government mandates "affordable" fares below market prices, we find overcrowding. Wellings, who is deputy editorial director and a transportation specialist at IEA, refers to "sardine-like conditions and hundreds of passengers left on the platform."

But a less visible consequence is the rent-seeking by special interest groups. He notes that the rail industry takes advantage of the inefficiencies caused by fare ceilings to lobby for increased government spending on infrastructure and rolling stock. Wellings argues that the British rail experience strongly supports Mancur Olson's point that government regulation leads to "distributional coalitions" of beneficiaries.

The book also contains excellent chapters on price controls in 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 finish this review, however, with some comments on an area of personal interest, namely university price controls, ably discussed by Steven Schwartz, vice-chancellor of Brunei University.

In the UK, 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 precisely that argument for decades.

Even with the tuition ceilings, many students take out college loans. And just as in the United States, Britain now faces a serious repayment problem; presently, about 45 percent of the UK loans have to be written off as uncollectable. The root of the problem is moral hazard: bearing no risk, the universities admit many academically marginal students who don't learn much of value 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.

Summing up, the great value of Flaws and Ceilings is that it strongly argues against price control measures of all kinds. It would be an excellent choice as an ancillary text in grad school or even upper-level undergraduate classes in economics and public policy.

Flaws and Ceilings: Price Controls and the Damage They Cause

Edited by Christopher Coyne and Rachel Coyne

198 pp.; Institute of Economic Affairs, 2015

GEORGE LEEF is director of research for the John W. Pope Center for Higher Education Policy.
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Title Annotation:Flaws and Ceilings: Price Controls and the Damage They Cause
Author:Leef, George
Publication:Regulation
Article Type:Book review
Date:Dec 22, 2015
Words:1830
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