21 April 2011

Paul Krugman, money and rent control
A couple of days ago I chanced upon a wonderful column by Paul Krugman. It appeared in the New York Times of 7 June 2000 and I must quote from it at some length.

"... consider an article that appeared in yesterday's New York Times, 'In San Francisco, Renters Are Supplicants.' It was an interesting piece, with its tales of would-be renters spending months pounding the pavements, of dozens of desperate applicants arriving at a newly offered apartment, trying to impress the landlord with their credentials. And yet there was something crucial missing -- specifically, two words I knew had to be part of the story.

"Not that I have any special knowledge about San Francisco's housing market -- in fact, as of yesterday morning I didn't know a thing about it. But it was immediately obvious from the story what was going on. To an economist, or for that matter a freshman who has taken Economics 101, everything about that story fairly screamed those two words -- which are, of course, 'rent control.'

"... The analysis of rent control is among the best-understood issues in all of economics, and -- among economists, anyway -- one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that 'a ceiling on rents reduces the quality and quantity of housing.' 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. Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out -- what yesterday's article oddly described as 'free-market horror stories' -- and constantly proliferating regulations designed to block those strategies? Predictable."

Based on the above I thought I would set Mr Krugman a brief examination paper. I suppose you could call it Money 101:

1. Keeping rents low reduces the quantity of housing made available by landlords.
2. Interest is the rent on money.
3. Keeping interest rates low is a good way to encourage banks (moneylords) to lend (rent) money.
4. Explain briefly, using the logic of rent control, why John Maynard Keynes was wrong in thinking 3.
5. Point out at least one other instance where Keynes committed an error by considering only the demand side of an economic situation.
6. Do you think inflationary expectations affect banks' decisions to lend money?
7. Write a brief critique of QE1 and QE2 from the standpoint of rent control.

Though the examination paper is specifically intended for Krugman I cannot think of any economists (especially economists of the Federal Reserve) who would not benefit by answering it. No need to send in the answers.

Category: Economics

Philip George
Understanding Keynes to go beyond him

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