Sunday, May 02, 2004

Visual Economics

reykjavik airport

Government mismanagement. This a picture of Reykjavík Airport. It is situated very close to the town center and supports national flights for the region. The airport is situated only half an hour drife away from an international airport that could easily support all of those flights. The only apparent reason that the airport stays, and therefore locking in the most valuable building sites in the region, is because of the majority of Icelandic parlamentarians are from remote regions and enjoy the comfort of the airport close to the town center and the parliment.

rent sucks joe pesci rental building

Rent control from cradle to grave. Above is an interest group (angry man) as well as a intermediate product (Joe Pesci) and a final product (abandoned building) of rent control.

It might be strange that in Iceland there is no governmental rent control and people can make rental deals without too much influence from the government. The cause probably is that there is a tradition for people in Iceland to own their houses and to rent an apartment is usually a temporary arrangement. Therefore there is no large infuence group that begs politicians for rent control and politicians therefore pay attention to other groups that need special attention in order to win their vote.

Ok, one less evil for Iceland, but the results can be quite dramatic when the rent control has been in place for several years. One of those evils that no one sees in the beginning. Thomas Sowell has a good passage on this in his book Basic Economics:

Under rent control, for example, property rights can be reduced to worthlessness or even become negative. That is why owners of many apartment buildings in NYC have simply abandoned their buildings and fled the scene, when the costs of the legally mandated services they are required to provide exceed the rents that they are allowed to collect. Since abandonment of the buildings is illegal, these owners go underground when the value of their property right becomes negative. Under these conditions, selling the building is out of the question, since it has become an economic liability, rather than an asset, and finding a buyer may be impossible.

Property rights matter economically because of the incentives they create and the consequences of those incentives for people’s behavior.

In the Soviet Union, a country without property rights, or with the food being owned “by the people”, there was no given individual with sufficient incentives to ensure that this food did not spoil needlessly before it reached the consumer.

Widespread corruption and inefficiency found even under Stalinist totalitarianism suggests the limitations of official monitoring, as compared to automatic self-monitoring by property owners.

Property rights create self-monitoring, which tends to be both more effective and less costly than third party monitoring. (It also points out why employee ownership can truly make a difference.)

The only animals threatened with extinction are animals not owned by anybody. Colonel Sanders is not about to let chickens become extinct. Nor will McDonald’s stand idly by and let cows become extinct. It is things not owned by anybody (air and water, for example), which are polluted. In centuries past, sheep were allowed to graze on unowned land – “the commons” as it was called - with the net result that land on the commons was so heavily grazed that it had little left but patchy ground and the shepherds had hungry and scrawny sheep. But privately owned land adjacent to the common was usually in far better condition.

The empirical question of how the existence or non-existence of property rights affects the economic well being of society as a whole which provides the strongest evidence for the social benefits of property rights.

While strict adherence to property rights would allow landlords to evict tenants at will, the economic incentives are for them to do just the opposite – to try to keep their apartments as fully rented and as continuously occupied as possible, so long as the tenants pay their rent and behave themselves.

Under rent control and tenants rights laws, landlords have been known to try to harass tenants into leaving, whether in New York or in Hong Kong.

Under stringent rent control and tenants rights laws in Hong Kong, landlords were known to sneak into their own buildings late at night and vandalize the premises, in order to make them less attractive or even unlivable, so that tenants would move out and the empty building could then be torn down legally, to be replaced by something more lucrative as commercial or industrial property.

Henry Hazlitt also has a good passage in his modest free online book The Wisdom of Henry Hazlitt:

Still another example of our shortsighted legislation is rent control. This is usually imposed in the early stages of an inflation. As the inflation goes on, the discrepancy between the rent the landlord is allowed to charge, and the rent necessary to yield him a return comparable with that in other investments, becomes greater and greater. The landlord soon has neither the incentive to make repairs and improvements, nor the funds to make them.

When the rent control is first imposed, the government promises that new buildings will be exempt from it; but this assurance is soon repudiated by a new law. It becomes unprofitable to build new rental housing. New mortgage money for it becomes increasingly difficult to obtain. Landlords of old housing often can no longer supply even heat and other essential services. Some cannot even pay their taxes; their property has in effect been expropriated; they abandon it and disappear. Old rental housing is destroyed quicker than new housing is built

Some favored tenants, already in possession, are momentary beneficiaries, but tenants or would-be tenants as a whole, in whose interest the legislation has been professedly passed, become the final victims. The irony is that the longer rent control is continued, and the more unrealistic the fixed rents become as compared with those that would yield an adequate return, the more certain the politicians are that any attempt to repeal the rent control would be "politically suicidal."

More articles on price controls. A very good collection of articles in Capmag. I recommend the article on the book Forty Centuries of Wage and Price Controls. On my to-buy-list.

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