> June 7, 2000
> PAUL KRUGMAN
> A Rent Affair
> Almost every freshman-level textbook contains a case study on rent
> control, using its known adverse side effects to illustrate the
> principles of supply and demand. Sky-high rents on uncontrolled
> apartments, because desperate renters have nowhere to go -- and the
> absence of new apartment construction, despite those high rents,
> because landlords fear that controls will be extended? Predictable.
This argument makes no sense. Landlords in New York have no fear that controls will be extended, and it's a rational lack of fear -- there's no chance of it, and there hasn't been for years. Without that assumption, this whole argument falls to the ground. Sky high rents should therefore lead to huge amounts of construction -- in fact, in a perfect market, there would be so much construction that the price of unregulated apartments would approach that of regulated apartments, on which landlords still make a profit.
If none of those things happen, and they don't, the only fair conclusion is that the housing market bears little resemblence to a perfect market and therefore this reasoning doesn't apply. It sure would be nice to know what rules do explain the housing market. But I guess we'll have to look beyond elementary textbooks.
Elsewhere, when this sort of perfect model reasoning leads to conclusions that gore Krugman's ox -- like that competition between workers in different countries should drive down wages -- he immediately takes the opposite tack, that empirical studies are more important, and that only a simpleton would cleave to a model that doesn't fit the facts. Soapbox economists are like litigators: if they have don't the facts, they bang the law, and if they don't have the law, they bang the facts.
Michael
__________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com