 This afternoon's lecture is on case studies and price controls. Dr. Klein touched on price controls this morning, but I'm going to go into more detail about them. Let's start with what's called the price ceiling, which is a legal maximum on the price which a good can be exchanged. The general effects, Dr. Klein went over, but I will just refresh your memories here. The immediate effect of any attempt to set the price of a good below the equilibrium price, the price at which supply and demand intersect, is, as you can see, a shortage. So in this case, we use milk as the example here. If the government with the best of intentions, and I'm just assuming that for argument's sake, the best of intentions puts a price ceiling on milk in order to allow lower income families and their children to enjoy milk, what occurs is, despite these good intentions, an immediate shortage. As the price falls, the law of demand kicks in and the amount quantity demanded increases from 13 million gallons, let's say per month, to 25 million gallons. While on the other hand, at least for the time being, we have a vertical supply curve and we have 13 million gallons on the market. So there's an immediate shortage of 12 million gallons. There are people out there who are willing to pay the $2 price but yet are frustrated in their search for a gallon of milk. So one of the advantages of an equilibrium price is that everybody who wants to buy a unit or more of a good can always find a willing seller and every willing seller or every seller that wishes to sell at the equilibrium price can always find a buyer. And that includes the labor market, as Peter Klein pointed out. But once we begin to manipulate prices politically, we find that that is no longer the case. So who winds up with the 13 million gallons of milk that are on the market? Well, there are different ways of rationing. We have first come, first served, it's most obvious. But for example during World War II, it was very difficult to find meat. And what the butchers would do, they would put the meat away or a part of it, the meat they knew was in short supply and they could easily sell out. And they would keep it for family members, neighbors, and particularly good customers. So you were out of luck if you went shopping, so to speak, for beef during World War II outside your own neighborhood. There was no way you could find it. There's also racial, ethnic, or religious discrimination that comes into play. If you know there's a big waiting list out there, then you can pick and choose the people that you wish to deal with. It's no longer those people who have the highest valuation for the good in terms of money that you sell to. If you don't like redheads, which is Murray Rothbard's favorite example, you say, no, I'm sorry, we're all out. Knowing full well that during the course of the rest of the week or the rest of the day, you can easily sell whatever you have at the control price. We'll talk more about this when we come to rent controls. It's particularly important there. Then there's political rationing schemes according to bureaucratic determined needs. So the bureaucrats determine how much gas each person can consume. So not only must you have the money to pay for it, but you must also have ration coupons and so on. If you recall in 1973 and 1979, when we had the shortage of gasoline in the U.S., there was a rationing scheme according to which certain people with odd numbers could come on Monday, Wednesday, and Friday to fill up their gas tanks. Other people could come on Tuesdays, Thursdays, and Saturdays and everybody could buy gas on Sundays. So it's according to some arbitrary criteria and that is what was the last number on your license plate? Was it odd or even? So you see how arbitrary it all gets. Of course then black markets are organized and in a case of milk, even something like milk, you'll find organized crime beginning to get involved because now it's very, very risky to provide the milk and so those people who are willing to provide the milk at the higher prices and undertake the risk for the high prices tend to be those elements in society that are at least law abiding. So you'll see people hang around schools, guys with long trench coats saying, kid, you want a pint of chocolate milk? And you sell it to the kid for not $2, but if you go up to maybe $8 or something like that because over time as we'll see at the lower price as costs keep rising for the production of milk, the long one supply curve becomes relevant and we have an exacerbation of the shortage. So the shortage now goes from 12 million gallons, the difference between 13 million and 25 million, all the way to 20 million gallons. So price controls the scourge production right in the middle of a shortage and it makes the shortage worse. And then generally what happens is that Congress either repeals the price ceiling on milk or imposes further price ceilings, that is on the cost of the inputs. As they see the shortage getting bigger and they realize that the profit margins have disappeared for the producers, they then begin to impose price controls on cattle feed, dairy cows, milking machines. That causes the shortage of these things and then the price controls radiate out to control more and more inputs until the whole economy becomes socialized or approaches full socialization. Now that's the general effects of a price ceiling. Let's go into some specific examples. Let's go into rent controls. We do have as we point out a shortage of apartments so let's do a quick diagram here. Rent controls. This is a small city in which... Can this be magnified Chad? Zoom, I see. Zoom. Oh, there we go. Just hold it. So that the equilibrium rent in a small city is $900. At some point in the past, it was at a fair rent, $600, let's say, and at that rent there was a no shortage. And then as inflation has continued or as population has increased, the demand has gone up in money terms and what has happened is that now we have $900. So let's assume then that the city council steps in, passes an ordinance that rolls back the rent to the old price of $600. So initially, we have 700 apartment units available. That's the fixed stock, the short run or immediate run vertical supply curve, intersecting with the demand curve D1. But now it no longer intersects at $600. We have 300 more people and households who wish to live in this city in a rental unit than are available. So there's 1,000 people desiring to rent and only 700 units available. So we have an immediate shortage. Now the reason why we have this shortage is because people are using space wastefully. In other words, despite the popular view and the view of left-wingers, that well, if you allow the price to rise back to $900 or if you take off rent controls in New York City, people will be living out in the streets. Well, that's simply not true. People are very ingenious in finding arrangements by which they can conserve on living space. So for example, college students living in New York City, if you live in a two-bedroom apartment and you have one roommate, you would take on two more roommates, which would allow you then to pay the rent, the higher rent. And at the same time, you'd be economizing on space. Multifamily arrangements would occur, certainly occurred with immigrants from Southern and Eastern Europe in the 1870s to the 1920s. You had more than one family living in an apartment. If you have a widow whose husband is passed away, obviously, and her children are gone living in a three-bedroom apartment, she may very well then at the higher rent begin to rent to other seniors to conserve on space and to save money. It doesn't mean people are going to be thrown out and living in the streets. People are very ingenious. They have bureaucrats to tell them what kind of living arrangements to make. In New York City, there is no controls on luxury apartments, quote, unquote. But these are just tiny, small apartments that have been built in the 1990s and so on that aren't subject to price controls. And yet there arose a phenomenon called mingles, where single people would live together, even a male and a female, but not in a romantic relationship. There was another social adjustment to the higher price or higher rent. So you would, in the short run then, if you took off the rent control, find that through alternative arrangements and so on, people would adjust. That is, a quantity demanded of apartment units would decrease. Other people would move out to the suburbs and undertake a more costly commute at the higher rent. So there is elasticity in the supply curve. People think that there's a fixed amount of houses, a fixed amount of people, and if there's more people demanding at the lower rent than there is supply of houses, then you're going to get some people living in the streets. Of course, that's not true, as I've just shown. Now, what are the supply side effects? These are very interesting. The supply side effects are such that, in the long run, not only are you going to freeze the shortage, but the shortage is going to get worse. That is, over time, the owners of apartment buildings will adjust. That is, you'll move down your supply curve. They'll take some of the units off the market. Now, the units will come off the market in a number of ways. First way is what we called in the New York metropolitan area, back in the 80s and 90s, condominia. Remember, the price for this property of the landlord is only controlled on the rental market. Now, if New York City, for some reason, put a control on, let's say, salaries of accountants in New York City in order to make business more attractive by lowering costs and so on, what would occur? Well, since the accountants' salaries controlled in one market, they would be able to move to other markets. They would move geographically to other Baltimore and Boston or wherever on the one hand, over time, or they would move out of accounting. Well, the same thing is true in the rental market. There's no control on what you can sell condos for or what you can sell co-ops for, so many of these rental units will be taken off the market and transformed into co-ops and condos. So you get a shrinkage of the rental market, and the shortage will grow from 300 to, in this particular case, 600 units. The shortage will grow worse. But that's not the worst of it on the supply side. What will occur is that you'll find that almost immediately, as costs continue to arise, utilities, taxes, the costs of maintenance labor for the buildings, as those costs continue to arise, they're not controlled. The profit margins will be squeezed. So the owners of the rental units, if they're not going to turn them into condos and so on, will begin to cut down on costs. And the way to cut down on costs in the market for apartments is to cut down on maintenance. Now that's not a big deal if you live in a middle income apartment. All right, they fire the doorman. They don't paint the common areas as frequently. They don't, their response time to problems in the apartments become, instead of two days, maybe a week or two weeks, the apartment doesn't become unlivable. But in a low income apartment, which is by definition no frills, you begin to get a deterioration of the physical building itself. The heating system goes out in the middle of the winter, and it's not fixed for a week or two weeks or at all. Lights in the common areas, if the bulbs burn out or the fixture is smashed, they're not replaced. So the hallways become havens for junkies and so on. Broken windows in the halls aren't replaced. So you begin to get a deterioration into slums. So the result then is a further, in the long run, deterioration and not only deterioration of the housing stock, but further reduction in the quantity supply. As after a while, the taxes and utilities are, the costs are higher than the rents that they're getting. So that the landlords literally walk away from the buildings. And then the city takes over, and the city is the worst possible landlord, as many tenants can attest, and the tenants get almost no services. And this very interesting article, which I would like to read you by a landlord, a former landlord, this was written a while ago in the 1970s, and it was entitled, I Was a Slum Lord. It's very, very revealing, because it gives you specific statistics and data about what resulted from the rent controls in New York City. It starts off, I was a slum lord. Here's how I came to be one. I was born 69 years ago. I learned the craft of cabinet making my native land hungry. This would have been my 50th year of working, actively creating in wood many things of lasting beauty. My name is well known and well respected in the trade. About 20 years ago, where I worked together with my team of 10 to 12 men with changes improvements and additional construction the factory cost me about $65,000. A few years after I bought the building, the adjoining building, number 510, was offered to me at a bargain price because it was in poor repair. With the idea of expanding my workshop into it or using the lot for parking, I bought it. For $12,500 cash, I became the owner of a four-family house. Remember, he is talking about 1972 when this is written. These are 1952 prices. The four families living in the house are all decent working people. To my knowledge, they do not need and never ask for charity, public assistance or help. Yet this law forces me to give them shelter and heat at lower prices than my own cost. He points out that for several years his cash expenses have exceeded his income by about 25%. Those are out-of-pocket cash expenses for utilities and taxes. This is without interest or amortization on the mortgage. He is not even covering the mortgage. We are paying a penny towards it. The building was in poor repair when I bought it. By now, it is the favorite hunting ground of every city inspector. The building needs a new roof, new walls, new ceilings, new plumbing, new wiring, new doors and a new heating system. It needs about $15,000 worth of repairs. The building now has a gross income of $2,600 a year. And gross rents of which I am paying for taxes and heat, about $3,000. So every year, he is losing $400. Why didn't I apply for a hardship rent increase? My accountant told me there would be a blizzard of paperwork and any increase that he could get him, his fee would more than eat up. At least the first two years of the increase would go to the fee for the accountant. So far, I have been fined four times for failure to comply with orders of building violations. I was summoned to court again only a few weeks ago, explained my predicament to the judge, assured me of his sympathy, and then fined $40 and promised that the next fine would be much more burdensome. I did not go home from the court. I went straight to the offices of the local Roman Catholic church and asked them to accept the building as a free gift. They didn't. Of course, they are not economically ignorant. They are holy, but they are not stupid. An hour later, I made the same offer to the Protestants. Obviously, the Protestants are no done with the Catholics. Again, the answer was no. Next, I offered the building free without any money to the four tenants. They didn't want it. Of course they didn't. They'd have to come up with the extra $400 at least. I will abandon the building as my next thought. I will stop collecting rents, will not pay taxes or heat. I will let the city take over. This sounds like an easy way out, but my lawyer tells me it cannot be done without financially responsible. Here I am with a building assessed by the city at $21,000 that you can't give away. It's basically garbage. Yet, they are assessing it for tax purposes at $21,000. That I cannot give away, I cannot sell, and I cannot abandon. I am forced by law to operate. He's sort of a serf to his own building. You can't get away from it. That is I was. I am not any longer. I have sold the building for $30,000. How do you do that? An extra inducement, I threw into the bargain my factory building. He gives up his business, which cost me close to $70,000 for nothing. He threw in the factory building for nothing, and he got $30,000 for the whole. In economic terms, he really sold both buildings for $30,000. In other words, I sold real estate that cost me $80,000 about 15 years ago for $30,000 to be paid without interest in six years, so it's much less than $30,000. With the $50,000 that I lost in the deal, which is a major part of my life's savings, I bought freedom. At 69, I am too old to start a revolution or to fight City Hall. On the other hand, I do not like to be summoned to appear in criminal court. My only crime is that I dare to own a building in New York. I'll badly miss my shop where I spend 49 happy years, but I am no longer a slumlord. Well, think about this happening on a vast scale in New York City. What do you get? You get abandoned buildings, even though it's against the law, this guy was law-abiding. The landlords just walk away from these buildings. And you get the spectacle of the South Bronx. Now, economists have said, and it may have come from Milton Friedman and George Stigler and their famous critique of rent controls written in the early 1950s called roofs or ceilings. If you have price ceilings, you're not going to have roofs. You're not going to have new housing built or housing maintained. And they said, the statement they made was that the easiest way to destroy a city besides bombing it is to impose rent controls. So what we have here is a series of pictures of bombings of cities that were bombed out during World War II and some pictures of photos of what the South Bronx looked like I guess in the 1980s or so. Okay. So let me just show you some of these. Okay. Is that bomb damage or rent control? I have the answers on the back. Okay. That's that's bomb damage. Right. That is Aachen, Germany. I think one of those was on top of his house. Bomb damage or rent control? Yeah, that's rent control. That is that is the South, that's the Bronx. It's hard to tell, but that looks like what? That looks, I'll tell you what it is. It's, I think that's the bomb damage. Yeah, that's Hiroshima. It is. Okay. No, that's Nagasaki. Yeah, I thought I focused what that is. Let me get that focused for you. There we go. That's Hiroshima. That, I believe, is rent control. Yes, it is. That's the Bronx. That's rent control again. Focus. It's hard to tell. I would venture bomb damage. Yeah, that's Nagasaki again. Yeah, that's rent control. And last but not least. Yeah, that's rent control also. Okay. That's the South Bronx. Okay. Yeah. Okay. So, you get a deterioration of the housing stock and a shrinkage of the housing stock from conversions and from abandonments. Okay. You also get a spillover of demand, okay, to the condominium markets. Prices of condominiums go up. Houses in surrounding areas. Prices of houses in New Jersey and Connecticut are commuting distance. They're forced up. So, you do get a diversion of demand. Okay. But you also get a number of other effects. You get tenant immobility, which is an interesting phenomenon. That is, you might have in a neighborhood a, let's say, an older woman living in a four bedroom house who had been there for years. Since rent control was, let's say, imposed in 1946. She inherited from someone that was in, who lived there when rent control was imposed. And yet, you might have a family of six living, you know, around the block from Harvard in a two bedroom apartment. People don't move. Okay. With no rent control is a natural flow, right? Because the four bedroom apartment, a lot of things equals more expensive than the two bedroom apartment. But under rent control, the longer you've been there, okay, because it's generally what we call the lower the price you're paying. So you don't get this natural flow that you would get on the free market where a single woman would cut her costs, move into a building with one bedroom. In fact, if she leaves her apartment, she has to wait on that long line that we showed. Okay. There's a long waiting list for apartments. That's how that shortage manifests itself. And number two, even if she gets an apartment, the apartment prices have risen in the meantime. It's rising in New York City. There's partial vacancy decontrol by 15% every time a new tenant moves in. So she'd be paying a higher price, okay, in many cases. So you get a massive misallocation of resources. We have one family, maybe two families jammed into a two bedroom apartment and a single person, you know, in a three or four bedroom apartment. That does not occur on the free market, obviously, because the pricing reflects the differences in the amount of space. Okay. We call non-price rationing where landlords can now indulge their personal preferences and prejudices. You get allocation by race, lifestyle, pets, children, okay. People of races that are not as well liked by the landlord will be turned away because he knows there's this huge shortage and that someone he likes will show up, okay. In other words, what we might call the opportunity cost of discrimination falls, okay. Also, people with children and pets, since pets and children cause noise that annoy other tenants and also raise maintenance costs. They are not a desirable family to rent with families with these, so they turn them away. Even though it's against the law, they have ways of turning these people away. In fact, I give my undergraduates my example of what I call the letrus landlord. Let's say he'll only rent to females between 18 and 25 years of age, okay. I'm turning everyone else away. And let's assume that he has an apartment. Now on a free market, he has to pay for that in a sense of foregone rents because he'll have a greater vacancy rate, okay. And I want to show you some figures I have here. Let's see what it is. Yeah. Yeah, here we go. I don't seem, oh, okay. Let's assume for a moment that he has $1,000 a month. On a free market, let's say the rent is $1,000 a month, he has 20 units, okay. And that he can rent them, his vacancy rate maybe is one unit at any given time is not rented out on the free market. Okay. Now there's suddenly a rent control and now he's limited to, let's say, $500 a month, okay. Now what he can do, or actually before we do that, let's say he discriminates on the free market. If he discriminates on the free market, let's say his vacancy rate then goes up to five, okay. And so what we got is at $1,000 a month which is the equilibrium rent, he has 20 units to rent out. On a free market, he may have vacancy of five if he keeps turning away people that don't meet his criteria which is young, female, 18 to 25. So it's going to cost him the five vacant units which on average is what he has, times $1,000 a month times 12 months. It's going to cost him $60,000 a year to indulge his prejudice, or in this case his positive preference for a certain type of person. Now, what happens if suddenly you have rent controls and the price is $750? Okay. Well, he knows that there are many people out there so if he turns, there's a huge shortage so if he turns one person away it's very likely someone else will show up. What happens is that that $60,000 a year falls possibly to zero, okay. He has almost no vacancies because of the massive shortage. He can find the people that he likes because they've been, they're not able to find departments. So obviously, according to law of demand, a person will indulge this preference more likely to indulge his preference at a lower price than at a higher price. Okay. And then all crazy things that are in the lease okay, are actually enforced because with vacancy decontrol you want your tenants to leave because the next tenant will bring you 15% more as it works in New York City. So for example, if you ever lived in an apartment basically you can't do anything after 10 o'clock except breathe. Can't have unrelated people staying overnight can't play the television set if you live in garden apartments as I have done, you can't wash your car in a parking lot, you can't have any pets and all of these crazy, but they don't enforce them necessarily. They only are there to protect the landlord and the other tenants against someone who's very, very noisy or someone who is disruptive and easily easier to get them out to evict them. So what happened when we had under Nixon's wage and price controls a lot of small towns New Yorkers had rent controls the longest by the way from 1946 onward but after World War II rent controls were taken off in most of the rest of the country. They reinstated in the early 1970s with the wage price freeze that was imposed by Nixon from a personal experience. I lived in Southern New Jersey where most of the towns did not at the time impose wage and price controls. So when I moved in there I noted that it said no pets we had a cat and so I asked one of the neighbors, we have to hide our pets or what she just noted that they never enforce it. Okay and also I noted that people were washing their cars and open daylight out in the parking lot and so on which in the least said you weren't allowed to do. And I moved to Northern New Jersey where they did impose rent controls and those rent controls stayed on even after Nixon's wage and price controls ended they stayed on throughout the 70s in many places and so I figured the same thing they're not going to enforce these so my neighbor comes running over as I was moving in and she says you better hide that cat and I said why? And she says well the landlord hires kids it goes around during the day when you're at work and looks in the windows to see if anybody has pets and then it sends you an eviction notice because he can charge the next tenant more okay and also I noted people at night with flashlights washing their car at midnight okay because they're hiding from the land so all of these sort of fascistic clauses in the rental agreement, the lease agreement are now enforced because if one tenant leaves well you know what we have other tenants out there waiting to come in would be tenants, prospective tenants and I personally know of a landlord I mean it goes beyond just neglecting the building landlords become the enemy of tenants so there's sort of a class warfare between especially in New York City if you ever see it the landlords are always bad mouthing tenants they hate one another and the reason being that the landlord would love to have the tenant out of there and so he makes conditions as unpleasant as possible for the tenant and I personally know of a landlord that hired, that allowed allowed a band to practice to all hours of the night in a vacant apartment to drive the other tenants out okay okay so you get that type of malicious behavior by landlords now do you hate the person who you buy an automobile from, do you hate the guy you rent the hotel room from, of course not but if there were similar types of controls and it was in the interest of those people to allow these products that you're buying and services to deteriorate then there would be an abiding hatred as is in New York City I was shocked when I went to Houston in the mid 1980s during the oil bust and you know tenants and landlords said hello to one another okay I stated at a friend's apartment and not only that there were advertisements all over free six months rent first six months rent free free microwave ovens were being given away there was a lot of competition there were no rent controls there was continual building going on that overbuilt because of the oil bubble that had had occurred and so there was competition and that kept the rents low a few other points I want to make about rent control one of the most interesting let's say unintended consequences of rent control occurred in France after World War II France had had rent controls for a long time on and off from the end of World War 1 and what happened in that case was that the only way the only way you could find an apartment was through the black market in New York you have these black market arrangements you have people going and bribing the you know the janitor or the superintendent to be placed higher on the list or they would sell you they would charge key money they would charge you $2,000 for your key and that was the way of getting around the rent controls but in France it went much further than that there was absolutely no way of getting an apartment young couples soldiers that returned had to live with when they got married they had to live with their in-laws which is not a great thing to do especially when you're first married and so the wife's full-time job was to go around to the parks in Paris and find the most sickly looking older person I'm serious there's an article by an economist about this just describing this phenomenon follow them home and then find out their address and then go immediately to the superintendent or what they call in France a concierge and pay them a big bribe I think it's $1,500 a room or something to be the first one notified so then you would immediately put your furniture in before they were even cold so if they were being carried out you'd get the call and you'd rush over there by the way rents this was after World War II were between $1 and $1.50 $1 for a single person, for a family $1.50 it's about between 6 and 11 packs of American cigarettes at the time which was circulating also as sort of a quasi-money in France alright I'm sure the government's intent was not to turn Parisians into a city full of ghouls that sort of followed old people around waiting for them to die but it happened okay I recommend that article it's called No Vacancies by Bertrand de Juvenel a political economist actually wrote on political philosophy as well as on economics okay there's a key question we want to ask here and that is as Mari Roppo would always say cui bono meaning in Latin who benefits okay who benefits from rent controls well we can think of it in the following way according to popular belief well it's the small group of greedy landlords that are hurt by rent controls and it's the large group of poor tenants that benefit from rent controls so the large less wealthy group is benefiting at the expense of these small greedy rapacious landlords now that view is completely wrong of course in many cases especially with middle and upper income apartments the landlord might very well be less wealthy but there's something else that we have to really point out here the people that benefit are the existing tenants tenants that have the apartments under rent control those people who on the diagram are the 400 lucky enough in this town to have those apartments and now so the existing tenants benefit but there's another group of tenants they're the people that have just let's say gotten married and want to stay in that neighborhood but cannot find an apartment they're the people who have been have their jobs shifted into that city and would like to live in the city near their jobs but can't find an apartment and therefore must undertake longer commutes into the city the landlord certainly are hurt but so are these prospective tenants now of course who else benefits the politicians and rent control board they benefit they get re-elected they appear on the one hand as friends of the poor but on the other hand of course the poor people are another one of the victims of rent control the lower income tenants are living in buildings with very poor or no services buildings that may have very well been abandoned they're still living there so we got a list of victims the landlords prospective tenants and lower income tenants whose buildings have turned into slums the beneficiaries are the existing tenants who tend to be middle and upper class middle and upper income tenants politicians and the rent control board you know people get job and enforce all these regulations why then do these things get passed well this is a political political economy question they get passed because who does who votes in large numbers do lower income people tend to vote in as great proportion as higher income of course not it's the existing tenants who vote first of all and it tends to be the middle and upper income tenants who contribute to campaigns and vote and they are the ones who are widely interested in maintaining rent controls the prospective tenants they can't get appointments in the city so they don't vote you don't have to worry about them they don't vote or contribute or they don't vote in as great numbers and you can appeal to the ones that do vote by saying that you're keeping the prices low for them so what you get then is basically rent controls being a government welfare program for middle and upper class tenants and there's a great article in the Wall Street Journal pointing out just two benefits from rent controls and of course it's not who you would think benefited and not who the news media tell you benefits rent controls are very very complicated in New York City there's different classes stories of apartments and so on but it's clear that today who benefits and that as we'll see from this article is certainly people of upper and middle income people from all walks of life have locked into rent regulated New York apartments actresses Mia Farrow and Cicely Tyson the Baroness Ingrid Thyssen Sydney Biddle Barrows who was the so-called Mayflower Madam State Senate Democratic leader at the time leveraged buyout specialist Tom Goodwood and so on let me give you some idea of the extent to which they benefit Philip de Montabello who was the director of the Metropolitan Museum of Art pays about $1900 a month for a seven room apartment on Fifth Avenue the market rate would be about $6000 per month so he's being subsidized to tune a $4000 per month okay or $48000 per year okay by these lower rents Jack Futterman was the chairman of Pathmark Stores pays $1336 a month for an apartment on Central Park South okay that's about half the free market rent so he's getting $1300 per month benefit um some other people that benefit Alistair Cook the late Alistair Cook the late writer the former host of public broadcast Masterpiece Theater lives in an eight room apartment on Fifth Avenue overlooking Central Park the rent is about $1500 according to the landlord and in fact would be much much higher than that amount okay on the free market some inherit their apartment so if your relative there from like say 1946 your mother and grandmother you can inherit the apartment the same extremely low rent that was enforced then Mia Farrow pays about $2900 a month for 10 rooms on Central Park West a fraction of the market value the actress grew up in the apartment which was a setting for one of her movies her mother Moreno Sullivan was the one who had rented it entertainment lawyer Alan J. Grubman who was done deals for the likes of Billy Joel Madonna Michael Jackson David Geffen he has he pays about $9000 a month for his rent stabilized apartment okay now it's astronomical some $9000 but Mr. Grubman gets the entire 17th floor of an old Park Avenue building that spans half of a city block his landlord says his landlord says it's the size of four large two bedroom apartments and real estate agency that could rent it for $20,000 a month so he's getting subsidized to the extent of $11,000 a month okay and that's why rent controls aren't changed these people have a lot of political influence economists have long pointed out I'm not necessarily in favor of this that if you really want to target the poor if they cannot afford a free market rent let's say $900 but only $600 then the way to do that is to send them simply a rent voucher of $300 a month okay then you would not have any controls there would still be a market price and supply would be equal to demand there would be no shortage there would be no deterioration of the buildings and so on okay now I think even better than that is for example some of these southern cities policies, the Houston's policy of not having much zoning laws and allowing building which that increase in supply naturally keeps the prices lower okay so that's the story with rent controls let me talk a little bit about another form of price and that is the market for organs okay in effect people are and in law people are not allowed to sell their organs they can donate them at a zero price okay but they cannot sell them at a positive price there was something called the transplant act of 1984 which made it a felony to buy or sell organs this was in the US so what is in effect happening and I can show you the diagram for this but also give you an idea of the numbers okay the actual numbers okay this is in 1995 I believe yes in 1995 I don't know if you can see those figures there the demand for kidneys okay people waiting for the people that demanded 40,000 people that were eligible for that were medically qualified for kidney transplants and there were 10,000 kidneys donated so the price control was set at a zero price so there were 10,000 people many of whom were relatives of the recipients of the kidneys who donated these kidneys okay but there was a shortage of 30,000 kidneys in the US in that year the same thing with hearts there were 6,400 people on a waiting list for new hearts and there were only 2,400 donated at the zero price not necessarily all but yeah right they were catavaric as we say they were from cadavers right so basically in 1995 US doctors performed 2,400 heart transplants operations while 4,000 patients waited for hearts 70 731 of which died waiting situation was worse for kidneys 10,000 kidney transplants were performed 30,000 patients waited and 1,375 died waiting for kidney donation for lung and liver transplants 290 and 674 patients died waiting for organs during that year now what is the argument against paying for organs well the argument is that somehow it's immoral to sell organs of course they focus only on the person receiving the money how dare someone benefit monetarily at the expense of someone who is in such dire need of a medical procedure but of course these physicians and these so called medical ethicists don't tell you is that surgeons get paid hospital gets paid the nurses and so on the staff get paid everyone gets paid except the donor so should we say that these people are also benefiting monetarily heart surgeons and people who perform kidney transplants are making a good part of their living doing this not only getting paid but they're making a living doing it so these organs are no different than any other sort of commodity on the market the government makes them different in a sense by keeping the price at zero but again we can see reasoning that that's simply a price control prohibiting the sale of this now the reason why people are reluctant to be organ donors that is catavaric organ donors we're talking about after they pass away why won't people sign organ cards people reluctant to designate themselves legally as organ donors part of that can be contributed to procrastination partly to anxiety harbored by some potential donors that in the event of an accident emergency room medical treatment might be less aggressive for accident victims whose driver's license are stamped organ donors so in matters of one owns life one's own life most people tend to be quite reluctant to take risks for free now would that all change if the price of signing a card a donor's card was $50,000 or $60,000 most certainly would people would overcome that reluctance okay for everything of the morality of it we know one thing fewer people will die on waiting lists more people will get the transplants that they need the quantity supplied and demanded will be greater at the equilibrium price than the quantity supplied at the zero price that's an iron clad law of economics okay we cannot as I make any value judgment to say it's a good thing to get rid of of these laws that prohibit sales of organs but we can say positively what the effects will be and that is more successful transplants okay now some doctors are beginning to change their tune about this they still want to control it though okay they think that medical policy makers are now ready to consider relaxing the laws to allow some form of financial incentives for organ donors but they're unwilling to allow the market to operate well let's look at the other side of the market yes it's true organ donors will benefit okay but then again so will those people who receive the organs remember just go back to simple analysis of exchange it's mutually beneficial the people getting the money aren't the only ones benefiting that's a discredited 17th century mercantilist view of exchange it's ridiculous okay and there's been some movements in the illegal kidney trade very interesting article of a few years back okay 2001 on the lengths that the people on the waiting list will go to to get organs okay there's certainly a black market we've heard of an Arab or Saudi shake who donated $2 million for the new wing of a hospital in St. Louis suddenly being pushed bumped up on the waiting list okay and Mickey Mantle got his liver transplant pretty quickly after it was determined he needed one okay again I don't know the details of that so there is a black market going on in that sense but there's even a more widespread black market and this article I think really gives you good feel for it starts he was desperate for a kidney transplant but getting a donated kidney he was told would take 10 years that's how long the line was that's when Tati decided to pay a broker $145,000 to buy a kidney okay there are nearly 49,000 people in the United States waiting for kidneys now this is in 2001 that was in 1995 and some of that has to do with the fact that they're coming up all the time with better technology for suppressing the rejection of the organs okay so more and more people are becoming eligible for these transplants so it says these numbers along with desperate economic conditions in the third world have given rise to a secret underground industry that is also fueling an expansive, explosive ethical debate paying $145,000 Tati got a call from the broker late at night telling him to come to Israel's Ben-Gurion Airport he and three other kidney patients were whisked onto a private plane joined by a surgical team they arrived at the Turkish city of Adana two hours later the operations took place in the private hospital the patients were brought in the back door Tati only glimpsed the man who sold them the kidney he was an Iraqi soldier they told me who had defected and needed money buying and selling organs is prohibited in almost every country and yet it's happening almost everywhere most of the people who sell their kidneys are from poor countries in the former Soviet Republic of Moldova one woman told ABC news she sold one of her kidneys for just $1500 to get food for her children in Israel doctors can lose their license for doing operations but there is no law preventing brokers from arranging these deals now there's the ethical debate of course by people who don't need the organs of course these are the medical ethicists the idea that organs can be bought and sold used to a pole doctor Michael Friedlander but then some of his patients started to get into the market seeing patients who were in dialysis treatment says Friedlander some of them were in very bad condition and suddenly two or three weeks later coming back well transplanted very happy in a completely different state of health most physicians in medical ethicists say that buying and selling kidneys is wrong period according to whom and what is their argument it seems to me a violation of the very nature of what medicine is about explains Dr. Nancy Sheper hyphen use I'm always suspicious of people with hyphenated names sort of an upper class disdain for the rest of us to suggest that the poor should be allowed to dismantle themselves bit by bit with the help of the medical profession so she's condescending the poor people don't know their best interests they're going to dismantle themselves what are they going to sell with each arm and leg it's just an appeal a blatant appeal to emotion fortunately the market is responding it's a black market to this shortage and is helping some of these poor souls get their transplants let me get now to the case of price let's see we have time the price floors which tend to exist in agricultural markets in the US and elsewhere in Europe in particular once again Peter Klein did go over price floors and I want to just sort of give you a little refresher somehow these notes got all mixed up here we go the price floor in this case the price floor is in the milk market let's say you want to keep a higher price of milk in order for farmers to have stable incomes the argument is usually look if the price of milk suddenly falls let's say to say the equilibrium price is $5 a gallon and it was $8 and then the supply increases due to technological improvements and so on price falls to $5 well then what happens is many of the farms go out of business and supply the next year is much smaller so that the price of milk might be $15 a gallon and poor people suddenly can't afford milk and you have babies screaming for their milk it's not available and then at the high price of $15 a gallon farmers robotically then re-enter the market and everybody tries to produce a lot of milk and the price goes down to $1 the next year bankrupting almost everybody according to the price of milk to go up to $20 and then on and on so we have too much milk one year and not enough milk the next year and you have starving babies when there's not enough milk so all the government wants to do is to stabilize the price so they set a price floor making it illegal to sell milk for less than let's say $8 per gallon well there's a couple of things that happen right off the bat one is a surplus as we noticed farmers want to sell 22 million gallons of milk or in the short run we have a fixed stock they want to sell 13 million and people cut back at the higher price of $8 they only want to purchase 7 million instead of the full 13 million as they did before and there's suddenly a surplus of 6 million gallons of milk per month now once that occurs there's this problem of the surplus but in the longer run there's another problem and that problem is that farmers will begin to invest in more dairy cattle more milking machines and so on because of the higher price so the surplus will grow larger and larger the quantity supplied will respond positively to the higher price and what we'll get then is an even larger surplus but not only that very interestingly what's going to happen is that they're going to bid up the price of land and machinery and other farm implements capital goods that are used in the form and electricity and they're going to make it more expensive of course the production in farming is going to rise and farmers in other markets producing other crops will now have to crops or producing this is wheat now for a moment producing other types of crops those farmers will now reduce the amount they're producing so we'll have too much milk and surplus in one hand and the high prices will now spill over into other farm markets as costs of production go up as the farmers respond to the higher price by buying more inputs higher prices up now the first problem is this how does the government deal with that surplus because that's a big temptation for a black market the farmers have all this extra milk now they have something like 15 million gallons a month that they can't sell they're going to begin to undercut the price and the whole thing will collapse so the government has to do something to rid the market of excess wheat or sugar whatever it might be what they do then is they then tax you and I as taxpayers we pay higher prices as consumers and now we're also taxed as taxpayers and that milk is bought up and turned into cheese in the case of milk it's turned into cheese and butter and it's frozen in the case of wheat in the 1950s and 60s the government had an ingenious addition to the whole thing they bought it up and they stored it on North Bald World War II battleships that were in the Hudson River and of course they just let the wheat rot there and after a while this became scandalous there are people in the U.S. that were hungry remember the book came out by Michael Harrington I forget the name of it but it was a famous book about how there's wheat rot and so on the other America that was it and here you have the government allowing wheat to rot there's also a famous case where the Canadian government forced egg farmers to destroy 28 million eggs so it's to get rid of the surplus so once that's found out then the U.S. government gets bad publicity and so it must do something in 1954 they passed public law in 1984-80 which was basically a foreign aid giveaway of U.S. food okay so they let's say gave it away to India for a number of years and that was true but of course what does that do over time the local Indian rice producers or the producers of other crops since the Indian consumer is not irrational he's getting free food he's going to cut back on his demand to go bankrupt so after a while this direct aid in kind was rejected because local producers were facing lower prices some of them going bankrupt so the U.S. came up with the idea of giving it away domestically to poor people and this is where the free lunches free school lunches came into play in the 1960s under Lyndon Johnson and breakfast programs by the government okay of course poor people also demand food that's a big part of their budget and food stamps also so if they're getting free food what do they do the demand for food shifts to the left and the surplus gets even worse okay so that's not a long term solution right so the government turned to restricting supply okay oh there's another solution to have the government sell it on foreign markets and then put tariffs on the wheat so it can't be exported back at a lower price to the U.S. but then what happens is that the world price falls below the U.S. price and then foreign countries like Australia that grow wheat in Canada say that we're dumping wheat so that's not a viable solution so they come up with restricting supply forcibly pushing the supply curve to the left intersects with the demand curve at the fixed price oh let me mention one other thing here very quickly going back to the Indian case sometimes we have bad crops so that the supply curve does shift back of its own and the surplus disappears now when the surplus disappears what happens to the amount of food we send to India goes down and they suffer a famine that's another reason why they reject our largesse in kind okay they don't take our money they don't want our food and so on okay so restrict supply force it back well there's acreage allotments it's one way of doing it that is to say teleformers that they can only produce on a maximum amount of acreage or even pay them to leave some acres without any crop on it but of course what happens let's say they cut back by 20% and they're only producing 80% of their acres but of course you can always produce more by farming more intensively so they buy more fertilizer and so on and the remaining acres become more productive and you still haven't gotten rid of the surplus market quotas alright there what you can do is you can tell each farmer no matter how much you produce you can only market a certain amount and that sort of works to push back supply but of course all the wild consumers are paying higher prices then there's soil bank programs where you directly pay farmers not to grow and then very interestingly what happened for a while there government was running out of ideas on how to restrict get rid of the surpluses they actually had government scientists using wheat experimenting on using wheat in place of gravel to mix as fault but of course that bomb that didn't work at all so what this is is really a reverse welfare program because if you think about it when you keep prices higher than equilibrium okay first of all who benefits let's say you have a farmer let's say the price of wheat is four dollars per bushel that's the free market price and why isn't it showing here that's the free market price okay coming at the view so p sub e of the equilibrium price and the control price let's say is let's say five dollars so control price is five dollars per bushel let's take a small farmer that produces ten thousand bushels a year and a large farmer that may produce let's say five hundred thousand bushels they both get the higher price but of course whose income is supplemented more yeah because times one so the small family farm has income supplemented by ten thousand the large farmer has his income supplemented by five hundred thousand dollars now what's interesting is there are also direct payments to farmers to keep their incomes up just direct payments and those are limited to only fifty thousand dollars direct payments from the agricultural department a while ago they were limited to fifty thousand dollars per year per farm and what of course what many people did was to sort of put up the farms at least in name and give them to each relative so each one can get fifty thousand dollars so large farms still are benefiting but the key is that they ignore the fact that just pushing the price up by that one dollar benefits agribusiness okay let me just give you an example of why this actually let me backtrack one moment who benefits again we asked the question qui bono who benefits obviously the primary beneficiaries are the largest farms who's hurt the most by it well consumers are hurt near capacity others are hurt near capacity of consumers of the product and of tax payers okay but which class of consumers pays the greatest part of their income or the greatest proportion of their income for food the poor the main food is very income and elastic as well as price and elastic so the poor pay the largest part of their income for food so it's in a sense a regressive tax and it's a reverse welfare program in reverse okay that is you're redistributing wealth and income from poorest members of society to wealthy farmers now why is it then that since farms are a very small part of the population I don't know if they're 1% Peter do you know they're 2% yeah they're about 2% of the population how in heaven's name are they able to get these programs passed well let's take the case of sugar there's about 1200 sugar farmers in the US it's very uneconomical to grow sugar in the US US citizens pay 3 or 4 times the world price US residents 3 or 4 times the world price for sugar so if sugar is 5 cents or 6 cents per pound we pay 20 cents per pound not only directly in the form of sugar of course but the price of corn syrup then goes up because companies shift the corn syrup a number of years ago Coca-Cola which claimed that it would never change its secret recipe for making Coca-Cola substituted the sugar with corn syrup and if you look at your favorite candy bars they all have corn syrup so the corn syrup farmers now also are lobby for price supports for sugar even though sugar farmers compete with them because of the substitution effect in economics that is the higher the price of the substitute the greater the demand for your product the greater demand for the corn syrup so when there's any talk about repealing subsidies for sugar and tariffs on sugar and so on the sugar farmers but the corn syrup producers also go down to Washington to lobby against removing that but in any case I have figures here for sugars now there's two types of sugar sugar beats which I think is in the northwest I think in Idaho that's extremely high cost production all those farmers about 1200 of them would go out of business also sugar produced in Florida sugar cane this just deals with the sugar cane producers in Florida they gain about 5 million dollars per grower that was in the late 1990s I believe you and I so they're a small group and they if you gain 5 million dollars a year in income from a government program are you going to spend maybe even a million dollars are you going to contribute that to your lobbyists personally U.S. consumers of sweeteners in that year paid $5.60 each so for a family of 4 that would be $22 in higher sweetener costs higher costs for sugar and corn syrup so in other words it's a classic case of extremely concentrated benefits and widely dispersed costs I mean I tell my students, my graduates, my MBA students I said what if graduate students were all told that their student fee would go up by $1 and it would go to the Joe Salerno Teaching Development Fund which would allow me to go to conferences in Hawaii and Cancun and so on to learn how to be a better teacher so it would be we have let's see how many graduate students we must have two or three thousand graduate students so that would supplement my income by two or three thousand dollars I guess would you look into this fund because you're losing a dollar a semester and they all say no, no, no but so the point is that the more concentrated the interests are the easier it is to get these things passed because then will I take out the graduate student government officials would I take them to buy them wine wine and dine them yes certainly I would I'd spend a couple hundred dollars doing that out of the possible three thousand dollars more per semester of course I would same thing with the sugar producers also I just took a look at the budgetary outlays to the U.S. Department of Agriculture first for all agricultural programs and that includes much more than just the price support now I think they're in a form of loans price support loans where the money is loaned to the farmers and rather than an outright it's a little more complicated to call non-recourse loans and if the price is changed they can default on the loans but it comes out to be a price support but in any case the agricultural department spent sixty-eight point nine billion dollars on farm programs in two thousand and two thousand was seventy-five point seven billion dollars that does not account that's just the taxpayer cost that does not take into account the higher prices we pay as consumers which is also billions and billions of dollars as a result of the higher prices now in stabilization of farm prices and incomes the direct budgetary costs were nineteen billion dollars in two thousand and two but again that grossly understates the redistribution of wealth because it does not take into account that money is redistributed through the price supports that is the higher prices that we have to pay or through the restriction of supply which also drives prices up overall any interference with the market economy brings about in the form of manipulating prices and controlling prices reduces consumer welfare if we look at the economy as serving consumers okay and that should always as Basiat said be our perspective we should always look at from the point of view of consumers because all production takes place ultimately for consumption if we look at it that way we see that that it decreases welfare of consumers I'll stop here and I'll take I'll take questions yes I find your argument very persuasive with the destructiveness of price controls what about the positive case that is what happens when after a long time rent controls are removed is there a case of recovery because that case would be even more persuasive that the rent controls have done the damage okay so the question is that the case for the destructiveness of rent controls economically is very persuasive but that again the case could be made stronger if there was a case study of in a market about what occurred after in this case rent controls were removed okay is that what you're saying can you give an example or a study I can give you an example we had rent controls in Boston when I was an undergraduate there and they were repealed about 10 years ago and they were repealed it was very interesting somehow it was a state repealed through the state legislature this was in Cambridge many people wanted to live in Cambridge and they were unable to get close to the tremendous shortage of apartments and so what happened was they remember I said one of the problems was that prospective tenants can vote but since it was a vote in the state legislature everybody in Massachusetts could vote and it was swept away it was an overwhelming vote against the rent controls to free up the market and they rolled that up one of my students husband had been the lawyer for the people in favor of rent controls and he said they never stood a chance and she actually gave me his notes which I subsequently lost but that would be very revealing to go back and I think Cambridge would be a great case study now let me just mention when I was a student in Boston though there were rent controls students never had much problem finding apartments but there were rent controls what happened was that Boston College where I was an undergraduate wanted to build more dorms and the college itself was released from obeying zoning and building codes to an extent to a low cost housing that you could build for lower people lower income people by being permitted to truck in huge modular pieces and putting them together that could not be done anywhere else in Boston because of zoning laws because of building codes that benefited skilled unions and crafts and so on so these went up very quickly they're very clean, they're very nice and that's providing housing for poor people modular units building in factories and of course so the local construction unions hate this and so the zoning codes to a great extent reflect their wishes because they're a powerful voting block also they contribute to campaigns building codes I meant building codes in particular reflects their wishes yes there's a difference between a market with price controls like the airline industry where you had actually the providers of the service actually competed to offer better services like better meals that's a good point as opposed to a price ceiling that was a price floor it was a cartel set up under a government agency the CAB civilian aeronautics board and what happened there was that the airlines still were separate entities rather for customers but they couldn't compete by lowering their prices so for example what they would YATTA which was the international sort of agency when they outlawed they said minimum prices so the competing airlines began to serve beef burgundy these scrumptious meals very lavish meals and then they began to regulate the meals and the same thing happened on US airlines before 1978 when they were decontrol what you found was that they were becoming more more luxurious if you remember the stewardesses there they were competing for stewardesses that were prettier and prettier my next door neighbor I forced her to grow up next two gorgeous twins about three years my junior we became close friends you can look on me as a brother but anyway that's besides the point but she went for a stewardesses job she was also very smart and they rejected her because the picture of her voice wasn't right she had a very soft voice and so they told her that that was back before you could be fine for saying things like that okay so they compete remember the commercial they competed in advertisements they have a beautiful woman there saying hi I'm Cindy fly me okay that's basically yeah alright okay so that's the opposite right because then you're competing to increase quality but you can't compete on the price dimension maybe Peter Klein will get into this when he talks about monopolies but that's a good point that is an effect of a price floor but you really can't do much with foreign products okay you can differentiate your art like Purdue chickens and you can differentiate them and you can you know sun kissed oranges and so on in some sense and make them more appealing and try to win some greater share of the market that way yes right now the market brand is both regulated and we just started with the deregulation but the problem is that you know you cannot really actually see it immediately because it's going to take about 10 years before the deregulated brand approaches the market which is the first case and the second case I know the owner of the building where I live and she said that her funds are completely exhausted so she has to recover first before she invests into the building and another problem is that she is not sure whether the deregulation is going to continue after we have a new government like socialists she's going to rather save the money for herself than invest it into the building so that's another political uncertainty meaning for investment uncertainty so the recovery is going to take very long time let me just ask you do you notice as the rents have gone up have people begun to make alternative arrangements as far as living with more people per square foot than before the problem is that it's been about a year and it's rising like 10% the year so the change hasn't been that great yet so as far as I know people started moving to a smaller part so it freed the market up you got more tenant mobility as prices go up it will be more and more any other questions? yes Ron of the airlines and trucking absolutely that's right they eliminated that when it was open competition we personally we saw smuggers we saw transportation costs drop 25% in maybe a year and that was seen almost across the United States but I read then I can think of this but I read then after that that far more money was saved by the ability of industry to reduce inventories because they always had higher inventories because of the delays and difficulties of getting trucking and things like that I see the amount of inventory reduction billions of dollars it's incredible far more than they saved and just trucking costs now we're just in time just in time inventory ok thank you