WEBVTT

NOTE Price Controls

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For this lecture I'm going to drop my usual mask of cool, scientific, dispassionate, value-free science,

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because I happen to be hopping mad, and the thing which makes me hopping mad, well, there are two conditions for making me hopping mad.

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One is that a monstrous injustice is being done, which is almost always, in fact I can't think of any other counter examples, almost always by the government,

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and secondly that everybody's in favor of it. In other words, the no voice, at least the no voice that I read or hear, comes out against it.

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So these two, I mean, yeah, no voice comes out against it. These two conditions being fulfilled, that's when I sort of get activated.

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My anger glands will be, you know, like a little Abner sort of thing, start getting moving at a high speed.

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Well, it so happens the last two things that have activated my anger glands have been both

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connected with a topic for tonight, which is basically price controls and its attendant

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evils.

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The last time was August 15th, the Black Day of August 15th, 1971, when President Nixon

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reimposed price control for the first time since the Korean War, and really basically

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for the first time since World War II, that means the first time in, quote, peacetime,

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unquote, after many years of saying, and he and all his economic advisors have put together,

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saying time and again that they will never impose controls, that it wouldn't work, and

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it's terrible, and it interferes with free enterprise, and so forth.

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So that was, and since then we've had many phases, some of which I'll talk about, none

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Part of which have worked phase one, two, three, three and a half, and four.

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And now we have the final sort of conclusion of this, the price control, which those of

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us free market economists have predicted for many years that after price control come shortages.

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And so of course we have shortages all around us now, all over the place, and after shortages

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have come rationing, and there was sort of the icing on the cake.

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The thing that's got me hopping mad now, of course, is the announcement of imminent gasoline and fuel rationing.

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And as the announcement came pouring off the presses, as President Nixon made his announcement on the subject,

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for some incredible reason, which really, to understand it, I think you need a psychopathologist rather than an economist,

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For some reason, this buoyed up his credibility, which had reached about zero or minus something,

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the President's credibility, and it rallied the disenchanted masses of Americans to the Nixon banner.

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The fact that he gets on television and tells everybody they have to tighten their belt and suffer and stop using electricity and turn down the heat and stop using gasoline and all the rest of it.

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For some reason, this sort of pronouncement activates the siege mentality, which is somewhere

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in the American psyche, and everybody says, yes, yes, we have to rally behind the cause

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of the great strong statement to make, and yes, sir, we've got to tighten our belts.

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Of course, now we're in the sphere of, phase one of belt tightening is always the voluntary

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belt tightening.

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That's when everybody says that you and him go out there and tighten your belts.

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And that, of course, never works. I mean, it's done with a great deal of enthusiasm and voluntary bell pining, and you and him turn down the heat.

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Some enterprising reporters, the day after the Nixon Statement, went to the White House and several other federal buildings and sort of thermometer,

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and checked on and found out that the thermometer, the temperature range from 71 to 74, that the old, the 68, you know, sphere of 68 degrees had not been imposed yet.

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That's of course the typical line-house is their comeback to this as well. It takes several days for the thermostat to change the temperature.

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So you and him go out there and sacrifice. That's sort of the phase one. And phase two is of course when this doesn't work,

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and then you turn it to the coercive arm of the government to make sure that everybody sacrifices and everybody's supposed to shape up.

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And usually with a coercive arm, everybody says, yes, yes, you're right, voluntary methods don't work.

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This sort of ties in a little bit with the Galbraith stuff, the attack on affluence I was talking about last week, and I'm going to get back to the whole conservation movement later on, after we talk about capital, and we start talking about private property and capital.

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Because the conservation movement, the environmental movement in general, is the old joke or the current joke, just about my second favorite movement.

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But my first favorite movement is, I don't know, something like Genghis Khan or something like the restoration of the Hapsburg or something like that.

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And it ties in with the attitude, and this I think ties in with everybody's willingness to belt-tighten, or at least proclaim willingness to belt-tighten.

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It ties in with the attack on comfort, on consumption, on any sort of really human survival above the barest subsistence level, otherwise really attack on man, period.

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If you think this is overdrawn, attack on human beings, period. If you think this is overdrawn, I'm going to get back to that scene later.

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If you think it's overdrawn, read some of the conservation movement literature.

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It's an instructive, some years ago I had to, it was part of my job to read some of it.

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It's an instructive lesson because what really animates the conservation of the environmentalist movement is not really worried about sulfur dioxide and that sort of stuff.

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This stuff is only grist to the mill.

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Man, the Destroyer, Man, the Garbage Can, Man, the Polluter, Man, the Evil, whatever.

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And the theme is basically that nature, before man existed, everything was great.

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Everything was terrific.

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Nature was harmonious and balanced and ecologically.

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The animals were eating each other to the proper optimum.

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and all that, and the plants were whatever the plants do, and everything was going great

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and it was a circular world, as I like to put it, in other words, the planets went around

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the sun and everything was sort of balanced, nothing much happened, obviously it was a

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pretty boring world, but we didn't have to worry about it because there were no people

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anyway, the concept of boredom didn't even come into the picture, so it was a circular

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world, everybody was sort of happy and contented and the beaver was doing the beavering and

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and all that. And then, into this pleasant and happy, ecologically balanced picture,

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people enter. Right, evil man enters the picture, an evil man entering the picture, not having

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any instincts, not working within a given environment, not bound by the temperature

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of wherever he happens to be born in, moving around, changing the environment, chopping

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down trees, catching fish and all the other stuff, altering the environment in a linear

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Manor, a manner of progress. The man progresses from a caveman, from dying at the age of 21 or whatever, builds stuff, builds factories, increases the standard of living, builds capital equipment, builds medical techniques and all the rest of it, and survives and prospers and flourishes.

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And this is a linear thing. By doing that, the beaver tend to die out, and the trees are chopped down, and all the other terrible fish are fished, and all the other terrible things that happen to the other species.

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And I confess, right here I have a value judgment. I am a human chauvinist. In other words, if there's a choice in the old lifeboat between people and caribou, I'll go for the people any time.

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And I think it's rather bizarre to take the other position, that if there's a choice between the people in the caribou and the old lifeboat, you dump the people and you bring in the caribou.

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But I really think that this is the gut core of the environmentalist movement, and so anytime there's any kind of a clash between the interests of human beings on one hand

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In the interest of trees, plants, fish, caribou, aesthetics, in other words, the landscape,

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on the other hand, people are always supposed to lose out.

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And this is, of course, very relevant to the energy crisis, which I'm going to talk about

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tonight anyway.

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So, getting down to the price control, this was a topic, which up until a couple of years

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ago, up until two years ago, the topic of price control is the sort of thing I've done

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World War II

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The Theory of Price Control and Rationing

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It's fairly clear and fairly simple, and as far as I know, it's not really contested by anybody.

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Even the economists who don't say anything or favor pipe bills may come in.

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Basically, going now to figure five, we have our supply and demand curve for any product.

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Pipe is on the y-axis.

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There's a quantity purchased from the x-axis.

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The falling demand curve and the rising supply curve, or it could be a vertical supply line in the short run, equilibrium point of the intersection, equilibrium price.

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As you remember, we have sort of a feedback arrangement, a built-in feedback arrangement in the free market so that any temporary shortage is eliminated because the price rises,

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and any temporary surplus is eliminated very quickly because the price falls to the equilibrium free market level where demand is equal to supply or the market is cleared.

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So then what happens if some outside agency, namely the government, there's really no

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other, it's possible it's going to be done voluntarily by businesses, but it's very

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unlikely.

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An outside agency using coercion, namely the government, steps in and prevents this process

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from working.

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In other words, prevents the market from reaching the equilibrium point.

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Well, let's take the above market price. Say that we have a price above the market, which the government says, thou shalt not sell below X amount.

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And if you think this is rare, it isn't. I'll get to it in a minute.

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So the government says, enforces a minimum price floor, minimum price control, above the...

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Well, presumably it's above the free market price. If it's below the free market price, it doesn't matter.

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I mean, in other words, if somebody says, the government passes an edict saying,

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the General Motors, thou shalt not sell Cadillacs for less than $500, new Cadillacs,

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it's not going to make an imprint on the market. It's going to be sort of a dead letter rule.

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If on the other, so the only relevant edict is minimum price controls above the market.

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So, we have a minimum price control above the market, we have a horizontal line above the

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equilibrium price.

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What happens is that at that minimum price, the public will only buy this much up to the

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point A, but pouring out on the market in response to this high price is the amount

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B, which is much greater.

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We now have an unsold surplus, a gap between A and B, which the market doesn't, unless

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you engage in black market illegal activities, is rather rare with a four minimum price.

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The government is now, by outside coercion, preventing this natural equilibrium process

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from taking place.

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So what you have then is a situation of a permanent unsold surplus.

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You're sitting there then with the government saying, okay, thou shalt not sell widgets

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for Below $10 a Case, Soybeans for Below $X Dollars, Bushel, or whatever.

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So what happens then is that we have this unsold surplus which somehow sits there aggravating the situation. Something has to be done about it.

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The most famous example of the unsold surplus, well let me finish the theory before getting to that.

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In other words, the minimum price control brings about a permanent, aggravated, chronic, miserable, unsold surplus.

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What happens when the price is set below the free market price?

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In other words, we have a maximum price control below the free market.

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Again, a maximum price control above the free market price would be meaningless.

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So in this situation, when the price is set below the free market price of government, saying, thou shall not sell catallacts for more than $500, a new catallact, then you have some trouble, the opposite kind of trouble.

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Then the free market again prevented from reaching the equilibrium point, from clearing the market, from equating demand and supply.

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Now we have a permanent unsold, a permanent shortage, permanent excess demand over supply.

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We have demand permanently greater than supply in the case of maximum price control and supply

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permanently greater than demand in the case of minimum price control.

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So we have another chronic, miserable, permanent shortage.

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People are clamoring to get Cadillacs, the government says Cadillacs are now $500, you

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can't sell them for more than that.

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Where are they?

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Boy, I want my Cadillac.

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I went and find all the Cadillacs.

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Ain't got them.

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Sorry, not there today, and so forth and so on.

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There's a sudden disappearance in the Cadillac.

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So prices are nice and cheap, but you can't find anything to buy the stuff at, at the

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cheap price.

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And we'll see what happens with that.

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And then you have this chronic, I'm going to say, shortage problem.

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Okay, this, the minimum, the famous example of permanent minimum price control, which apparently

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is just this year going to be eliminated.

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I don't really believe it.

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I mean, I believe it when I see it, but that way.

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The famous case is the, there's also a case of the minimum wage law, but we'll get to wages a little later.

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It's very similar. The famous case is of course the foreign, the American, all other foreign programs, the foreign price support program.

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The foreign price support program began, well first of all the story is, starts really with World War I.

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World War I. During and before and during World War I, the American farmer had the biggest

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bonanza in his history, because he was in a situation where European countries were blockading

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each other, and then they were at war with each other, so they didn't buy from each other.

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So all the European countries turned to an American farmer to buy the wheat and the cotton

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and so forth. So there was an enormous increase in demand for American agriculture. So the

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American farmer had the biggest, let's say, the biggest fun time, the biggest boom time

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and the relationship to other prices, non-farm prices, as they were on the good old days of 1914.

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And of course this is an absurd and idiotic demand, because economic conditions are not the same as they were then.

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You don't have this peculiar wartime boom.

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Also, the chronic situation with farms in general is, obviously we start with the world.

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In 1789, almost everybody was a farmer.

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Either everybody was a farmer or they were selling farm products.

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So you had 95% of the population was farmers.

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Then as the world progresses and the industry comes in, and services come in, and all the rest of it, people leave the farm and go to the big city, Sin City, and do other things.

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And so we now have a situation where 5% of Americans are farmers, something like 5%.

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Well, I mean, I suppose in a sense it's too bad if you're an agricultural romantic, which I am not.

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So if you're an agricultural romantic, you could pine for the good old days of the young men, the sturdy young men.

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But, I mean, you know, you're willing to pay the price for this, the price largely being

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smashing all of the production that's been going on for the last 150 years and going

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back to the production conditions of the old farm where I'm afraid most of the public would

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die out because we can't, we're now geared to a population, the population and our economic

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level, our standard of living is geared to a highly industrialized world, not a world

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by the old sturdy yeoman farmer.

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So the farmers tend to die out.

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And what usually happens is that not so much

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of the old Ezra leaves the farm at the age of 60.

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His sons and daughters coming up, growing up,

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leave the farm and go to the big city.

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And that's the usual process by which

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labor migration takes place.

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So you can't freeze this.

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You can't say, oh, we gotta have as many farmers

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as we had in 1910 and all the rest of it.

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However, this has been the farmer's great green,

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to restore the world with old age of parity.

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Well, finally, in 1928, Herbert Hoover, one of the most disastrous of our presidents, was elected and pledged to enact the farm block program, the program of farm price support, which he promptly did.

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The important thing here is that he was enacted before the Depression. Most historians get this little blur and they tend to think that the farm price support program was a response to the Great Depression.

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It wasn't. It was enacted in March or February 29 or April, and the depression came in October. So there was no hint of it.

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This is a boom, but the farmers want it there. They want to restore the good old days.

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So we have the farm price support, which Hoover starts off, especially in wheat and cotton.

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Wheat has always been the big one, and cotton too, because that has the most political clout.

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And so the federal government established grain stabilization corporations and other things.

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is headed by the Federal Farm Board to buy up wheat and cotton and keep it off the market.

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Increasing demand curve artificially for wheat and cotton raises prices.

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That's the theory.

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They raise the demand curve.

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Well, what happened there was, presumably to the desired level, the parity level,

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well, they found out it was a problem.

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Incidentally, who was responsible for this farm block program, farm pie support program,

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for a program has been responsible ever since.

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Two groups at the beginning of the third group, I'll tell you about, one of the large farmers,

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and I'll go back to that in a minute because the small farmers, the thing has always been

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a push of the forms program, has been pushed as a, have to help out the poor farmers, the

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poor farmers are suffering there in Iowa, have to help them out.

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Actually, the poor farmers have nothing to do with this program, get very little out

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of it, it's the large farmers get a lot out of it, number one, and number two, the farm

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Farm Equipment Manufacturers, the manufacturers of combines, tractors, and all the rest of

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it, who, as we'll see, we'll see why they get there, especially subsidized by subsidizing

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a large farmer.

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And the beginning, the origins of the farm block, the farm block program, farm price

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support begins in 1921 with George Peek and General Hugh Johnson, both of whom were chairman

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of the board and president of the Moline Plow Company, the second biggest farm equipment

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manufacturer.

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And then the first head of the Federal Farm Board in 1929 was Alexander Legge, who was the chairman of the board of the International Harvester, which is the major farm equipment manufacturing.

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So it's the farm equipment manufacturers that usually don't get talked about in this connection, plus the large farmers get back to that.

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So anyway, they raise the demand curve for wheat and cotton, they're buying it up like mad, but there's a problem here, the problem is that the market, being fairly intelligent, realizes that they're sitting there, the Federal Farm Board,

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The people sitting there with this enormous amount of wheat and cotton, they're scared they might sell it someday and the whole market will collapse.

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So this sort of damoclase is hanging over the cotton and wheat market.

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As a result, nothing ever happened. The price kept falling. And then the depression comes and the price is falling even more.

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So that didn't work. It began to dawn. I organized farmdom.

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And on the farm block, there's only one way in which the government can raise the price.

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They got to buy the wheat and cotton up and so forth and keep it somewhere off the market

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and they have to start doing something about restricting production.

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In other words, because of the unsold surplus that's piling up, which they realize is piling

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up, they got to do something to cut production, cut the supply curve down, say, to point A.

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While they've been trying that for a long time, ever since, it hasn't really worked.

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First they try the, guess what, voluntary methods.

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This was typical Herbert Hoover flim-flam, Herbert Hoover specialized in doing things

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which were really coercive and on the guise of being voluntary.

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So he sent his people out to stump, his secretary of agriculture said to stump the country,

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telling all the farmers, look, here's the situation, he didn't use these terms, that's

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essentially what he said.

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You've got an inelastic demand curve for wheat, I mean the demand curve for each farmer is

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almost horizontal.

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But for wheat in general, it's inelastic, so all you guys get together and cut production

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by 20% or whatever, and slaughter every fourth pig and that sort of stuff, you will raise

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the price and all of you will benefit, you'll share a much higher income.

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In other words, a classic cartel situation.

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We'll get to cartels later, too, but anyway, it's obvious how that happens.

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There's something in the country telling you, and all the farmers are saying, yeah, yeah,

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great, right, we understand this, that's all coproduction by 20%.

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And then you see what would happen is the old Ezra would go back to his back home after

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The Form Holiday Movement started vigilante activities that were trying to burn the tobacco,

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night riders in tobacco country, going around burning the tobacco of those farmers who were

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fusing along with tobacco cutting, and they dumped the milk, they did that just a few

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years ago, milk strike, where they dump other people's milk.

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In other words, private violence and private criminality, as opposed to the usual government

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Criminality, and that didn't work either. It's a big country and there's a lot of farmers, a lot of tobacco, a lot of milk, so that didn't work. So there's only one thing left, that was the turn of the government to force the farmer to cut production, to enter the New Deal. By this time, Roosevelt enters the picture. But the thing is, by that time, the Hoover administration was willing to go along with this. It was not the Hoover people. It was sort of a logical step. The next logical step, while volunteerism doesn't work, we have to turn to coercion. So FDR, of course, is very willing to turn to coercion, and then we have the next phase.

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This is phase two of the program, the EAA, the Agriculture Adjustment Administration, headed up by essentially by farm equipment manufacturers and people of that sort, the farm block in general, and so they kind of introduced, the fifth buses were piling up, there's always a big problem, first of all it's an embarrassment, right, and here's the depression, people are starving in the cities and out there on the farms, the government's piling up in the warehouses, piling up all this wheat, all this hogs and pork and wheat and cotton,

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that's going, it's rotting away, and what are you going to do with it? It looks bad.

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And so they say, the fact that it's in the extreme left, I think correctly coined the

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term poverty, and it's depleted. In fact, here you have all this, the government piling

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over all this wheat and cotton and meat and all that stuff that's not being used, and

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here the people in cities are starving. There's something wrong with the system. Well, you're

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darn right there was something wrong with the system. It wasn't capitalism, it was the

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government obviously. So, so then they, well the next step was to introduce coercive controls

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on production, limit production. Well the thing is they couldn't exactly, there's too

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many forces, they couldn't say, okay from now on there's only a certain number of bushels

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a week can be produced and you, you and you produce, you know, one percent of that. They

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couldn't, they couldn't introduce production controls on old lesera because they just didn't

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have the manpower to enforce it. I mean, how can you control how many bushels of wheat

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All Ezra is producing. It's almost impossible. You have to have a vast 10 million man gestapo

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going to each farm and checking up. So, the only practical way which they could do it was

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impose acreage controls, because it's easy for the county agricultural agent to go around

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in a car and see how many acres All Ezra has under the plow, how many acres is devoted

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to wheat, how many acres is devoted to fallow and all that. So, the New Deal imposes acreage

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He suffers from a restriction of supply, and the price goes up.

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He suffers as a consumer, and then he suffers as a taxpayer, because the taxpayer has to pay for this.

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The government taxes him in order to get the money to buy the wheat and the cotton

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and the meat and store it somewhere and have it rot.

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So it's a double burden on the average American.

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So who suffers from this program, the average American? Who benefited from it?

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Well, the first place, the small farmer, which was always the person held up as a beneficiary,

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The subsidy the government paid was per pound and per bushel.

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So you had to really be a large wheat farmer, a large cotton farmer or a planter to really

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benefit from this.

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As a matter of fact, with the acreage control coming in and limiting acres, you know, putting

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down the number of acres the farmer could have under elevation, the result of that was,

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what do the farmers do?

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What were the responses?

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Very shrewd.

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Okay, I have a thousand acres and they're making me cut out two hundred, here's what

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I'm going to do.

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I'll take the 200 acres of rocky land, which doesn't produce anything anyway, concentrate all my efforts on the best land, the best 800, and mechanize and put in more fertilizer and stuff, and then raise production anyway, which is what they did.

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So they cut out the land, and they raised production on the... they wound up with more production than they had before, and surplus was piling up.

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This was incidentally helped by the federal government. Here's an interesting example of political science at work.

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The Department of Agriculture, paying farmers not to grow wheat, and paying them handsomely

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to take the wheat and put it in a store, useless warehouses, paying them not to grow wheat.

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At the same time, another wing of the Department of Agriculture, down the horse, paying farmers

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a lot of money to include their fertilizers, to mechanize, to irrigate the dry land, and

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so they can grow more wheat.

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Now you might consider this as irrational.

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So you look at it from the point of view of the consumer,

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but from the point of view of pure logic, it's irrational.

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Because why is it a part of agriculture, on the one hand, paying the farmer to grow more wheat,

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on the other hand, paying them to grow less wheat?

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It seems pretty crazy, right?

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That's not crazy, however, from the point of view of two groups of people.

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One, the bureaucrats on the part of agriculture.

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They're doing great.

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You need two divisions, whether there were no divisions before.

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And secondly, it's not so crazy from the point of view of the farmer.

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He's raking in it and getting paid for more wheat and less wheat.

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So, the farmer, however, who benefits was really the large farmer, because as the farmers

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contracted the acreage and mechanized, they kicked off their land, the sharecroppers, the

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small farmers, the tenant farmers, who now become, you see, a stumbling block, an obstacle

301
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in this drive to concentrate and mechanize.

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So what you had then, the result of this was the famous sharecropping problem in the South,

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particularly Negro sharecroppers, Negro tenants in the South

304
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as a result of which an enormous immigration of Negro, Southern Negro sharecroppers

305
00:29:57.460 --> 00:30:01.960
were now unemployed, disemployed, kicked off the land and coming north to the cities

306
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so a large part of the famous Negro migration in the 30s is directly caused

307
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by the New Deal Farm Program, which is supposed to benefit the small farmers

308
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I actually did just the reverse

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well, eventually, as we get to the 50s

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What the farmers are doing is, okay, we take the land out of wheat and cotton, we'll put it into something else, put it into soybeans, lettuce, whatever it happens to be, corn, and as they do that, the supply curve of lettuce, corn and soybean increases and the price falls.

311
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Another headache, what are we going to do about the soybean price going down?

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So then in the Eisenhower administration, we had the brilliant idea of the so-called soil bank.

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It's a great phrase, the soil bank. It had rings with thrift and all that, and Protestant virtues.

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The government was paying the farmers to take the land out of wheat and keep it out of anything,

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don't grow anything on it, called the soil money.

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So that's what they did.

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They got paid for not producing wheat, they got paid for not producing cotton, and so forth.

318
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Senator Eastland for many years as a large cotton planter in Mississippi,

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reaped a handsome fortune out of the farm price, cotton price support program,

320
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which he was instrumental in keeping on the books.

321
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So, another group of people, incidentally, I mentioned the farm equipment manufacturers

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and large cotton and wheat farmers, another group very interested in the perpetuating

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the farm price support program, a group which is not usually mentioned, are the warehouse

324
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operators.

325
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The government's got all this wheat and cotton they don't know what to do with, they rent

326
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that from private warehouses, and it's a sort of guaranteed demand, I mean, they're forever.

327
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So if you're a warehouse operator, you're in great shape, you have the federal government

328
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always using, always renting out your space, and so the warehouse operator, the grain elevator

329
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men in the case of wheat, are one of the big lobbyists for the continuing of farm price

330
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programs.

331
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Well, as I say, the result of this is, of course, to keep farm prices up, and when we

332
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had the 1971, the phases coming in, the present price control program, we had an interesting

333
00:32:38.040 --> 00:32:45.040
So you can see what's going to happen very quickly to process food as it starts disappearing.

334
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So this was, well, that's basically the farm price support program.

335
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And one of the results of this, and this ties in with a lot of other stuff, is the famous wheat deal with Soviet Russia.

336
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The wheat deal, which is one of the big things, gave a great impetus to the current 1973 food price boom, food price inflation, if you want to call it.

337
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The wheat deal was consummated in the summer of 1972, and the United States sold the Soviet Union, I put soul in quotes,

338
00:33:17.040 --> 00:33:27.040
sold the Soviet Union 440 million bushels of wheat, amounting to 30% of the average annual wheat crop, almost one third.

339
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Well, since Russia didn't have the money to pay for this, presumably, the U.S. taxpayer

340
00:33:32.800 --> 00:33:35.720
kicked in $750 million to pay for this.

341
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Incidentally, this is typical of foreign aid, here you see the essence of the foreign aid

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program.

343
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The essence of the foreign aid program is the American taxpayer gets a lot of money,

344
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the money goes to the American government, the American government takes out a handling

345
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charge for operating the program, bureaucrat salaries, ships the money to some foreign

346
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The foreign government takes the money and uses it on American export products, either

347
00:34:04.680 --> 00:34:09.600
automobiles or computers or wheat or whatever, cotton or whatever, and they of course take

348
00:34:09.600 --> 00:34:14.480
out their handling charge, the foreign government, and the result of all this process is that

349
00:34:14.480 --> 00:34:21.320
the American taxpayer has subsidized the American export industry, with a partial subsidy going

350
00:34:21.320 --> 00:34:26.320
The American government and the foreign government pay for their handling costs.

351
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This is what happens here.

352
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The taxpayer pays for this process.

353
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This kicks off an enormous increase in the price of wheat.

354
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The supply drops by one third.

355
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There's also an enormous increase after that in the price of livestock.

356
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The livestock eat the wheat as part of the feed grain.

357
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The Restriction, the supply curve of livestock pushes to the left and farmers start killing

358
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the cattle at a very young age and that sort of stuff and getting rid of them.

359
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The result of this whole process was a big food price boom.

360
00:34:59.240 --> 00:35:04.840
There were other causes of it, but that was the major one in 1973, but the thing is, the

361
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reason why we did a program to begin with was undoubtedly the wheat surpluses were piling

362
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up and boy oh boy, because you have these surpluses, I'd say they're an embarrassment,

363
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and so the American government's attitude towards surpluses all this time since 1933

364
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Let's get rid of them, someway. How do we get rid of them? We dump them, give it away, or sell it, or get the taxpayers, anything to get the stuff off the warehouse, and get more weed into the warehouse.

365
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There were other causes of the food price boom. That was basically, I think, the major one.

366
00:35:38.640 --> 00:35:49.040
There was other, I'd say, sort of temporary things. There was a sharp decline in the Peruvian fishmeal production just about the same time.

367
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The anchovies left the Peruvian coast for some obscure reason. That's not the far line I was figured at, and so forth.

368
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That also caused a drop in animal feed, but that was the basic.

369
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also another one is something which we'll get to later

370
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the value of the dollar, the famous devaluation of the dollar on the foreign exchange market

371
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leading to

372
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American exports becoming cheaper and therefore stimulating

373
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exports of all sorts of stuff including wheat

374
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uh...

375
00:36:19.180 --> 00:36:23.740
well

376
00:36:23.740 --> 00:36:26.800
okay that's uh... that's sort of that's the sort of the

377
00:36:26.800 --> 00:36:29.120
Minimum Price Control Program

378
00:36:29.120 --> 00:36:35.120
This is also the maximum price control program, which is more beloved. I mean, there are a lot of minimum price control here and there,

379
00:36:35.120 --> 00:36:41.000
but the maximum price control program is the way to really go all out.

380
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Let's say, when it sets up with a shortage, and there are several reactions to the shortage.

381
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First place, if the demand is greater than the supply, it means there's a shortage. How do you allocate whatever shortage is available, whatever

382
00:36:52.640 --> 00:36:55.520
the scarce supply, so to speak, available?

383
00:36:55.520 --> 00:36:59.520
Well, there are various ways of allocating. Usually in the free market, it's allocated by the fight system.

384
00:36:59.520 --> 00:37:02.520
Here are other ways to allocate it. As you can see, it's less produced now.

385
00:37:02.520 --> 00:37:05.520
There's even less than there was in equilibrium.

386
00:37:05.520 --> 00:37:12.520
Various ways come up of doing it. One, there's favoritism, the classic method.

387
00:37:12.520 --> 00:37:16.520
During World War II, and I say which now becomes very relevant, when we had meat rationing,

388
00:37:16.520 --> 00:37:20.520
there was a big meat shortage. There was always a big meat shortage. There was always blame on the war effort.

389
00:37:20.520 --> 00:37:32.520
and the people swallowed this until the war was over and there was still a meat shortage and then it began to get edgy so there was a big price controls on meat were way below the equilibrium in market price

390
00:37:32.520 --> 00:37:48.520
and so favoritism is one way of allocating it, in other words, for example, during the war, during World War II, if you had an old neighborhood butcher, this was of course before the days of the impersonal supermarket, you had neighborhood butchers

391
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You had an old neighborhood butcher and you knew the old neighborhood butcher from the

392
00:37:51.940 --> 00:37:55.240
olden days and you were a good customer of his, then he graciously allowed you, under

393
00:37:55.240 --> 00:37:59.800
the counter, the hot meat, so to speak, I've got a good beef stand here and don't show

394
00:37:59.800 --> 00:38:05.040
it to anybody and for you, Mrs. So-and-so, I'll give you the meat, sell you the meat.

395
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So that's one way, favorite cousin.

396
00:38:07.680 --> 00:38:10.800
If you had a butcher, if you had a brother, a butcher was your brother-in-law, it felt

397
00:38:10.800 --> 00:38:16.440
better and you had an unlimited meat supply, get a hold of that, relatives, friends in

398
00:38:16.440 --> 00:38:19.440
and the butchered business and so forth.

399
00:38:19.440 --> 00:38:25.440
So favoritism is one classic method of allocating scarce resources.

400
00:38:25.440 --> 00:38:29.440
Incidentally, one of the consequences of price control,

401
00:38:29.440 --> 00:38:33.440
we'll see later when we get to rent control, also follows,

402
00:38:33.440 --> 00:38:38.440
one of the consequences of this is racial and religious discrimination is aggravated by price control.

403
00:38:38.440 --> 00:38:42.440
Because what you're doing here, instead of the consumer being king,

404
00:38:42.440 --> 00:38:48.440
So, instead of the seller or supplier courting the consumer, you know, advertising, market research and all the rest of it,

405
00:38:48.440 --> 00:38:52.440
now we see we have a permanent shortage due to the price control.

406
00:38:52.440 --> 00:38:56.440
Now the seller is in the driver's seat, and the consumer has to go begging to the seller,

407
00:38:56.440 --> 00:39:00.440
please sell me some meat, and so forth, and then you see with the seller in the driver's seat,

408
00:39:00.440 --> 00:39:03.440
he doesn't have to court the consumer anymore, he can tell the consumer to go to hell,

409
00:39:03.440 --> 00:39:07.440
and then his favoritism will come in, okay, I'll only sell meat one to my relatives,

410
00:39:07.440 --> 00:39:11.440
two to the racial or religious group whom I'm in favor of, because now he can allocate it.

411
00:39:11.440 --> 00:39:16.440
So, a room for producer control of the situation now comes into the picture.

412
00:39:16.440 --> 00:39:20.440
So, favoritism is one way of rationing.

413
00:39:20.440 --> 00:39:25.440
Another way is queuing up. Another classic method.

414
00:39:25.440 --> 00:39:28.440
Lining up. The line comes into the picture.

415
00:39:28.440 --> 00:39:33.440
And we'll see that as rationing comes. We'll see the lovable line across the syndrome.

416
00:39:33.440 --> 00:39:38.440
You line up, right? During World War II, for example, there was cigarette rationing.

417
00:39:38.440 --> 00:39:44.940
The cigarette showed up, I think, every Tuesday morning or something like that, and everybody was allocated only one pack per person or whatever.

418
00:39:44.940 --> 00:39:51.940
At any rate, the line formed around a block around four in the morning, and then by eight in the morning or something,

419
00:39:51.940 --> 00:39:56.440
and if you happen to be in the first third of the line or whatever, you could buy cigarettes.

420
00:39:56.440 --> 00:40:01.440
So the great institution of the line comes into the picture. One way of rationing.

421
00:40:01.440 --> 00:40:07.440
Well, that means the first guy that gets to the line has the patience, has the energy, has the stamina

422
00:40:07.440 --> 00:40:11.440
to stay there all night and can buy the meat or buy the gasoline and whatever happens to me.

423
00:40:11.440 --> 00:40:13.440
The other people are out of luck.

424
00:40:13.440 --> 00:40:17.440
Little old lady has to hobble up or somebody's on a night shift if it wasn't in great shape,

425
00:40:17.440 --> 00:40:19.440
but others lose out.

426
00:40:19.440 --> 00:40:24.440
Little old lady who can't stand up for a long time can't buy anything in this process.

427
00:40:24.440 --> 00:40:26.440
Little old lady has had it.

428
00:40:26.440 --> 00:40:30.440
So what you have is a different allocation of, instead of allocating by monetary demand,

429
00:40:30.440 --> 00:40:34.440
you now allocate by whoever can get to the head of the line first.

430
00:40:34.440 --> 00:40:43.480
There are processes in the old days, for example, when Metropolitan Opera used to keep their

431
00:40:43.480 --> 00:40:50.680
various reasons, both I think internal and legal ordinances, they used to keep their

432
00:40:50.680 --> 00:40:52.920
price of their ticket way below the free market price.

433
00:40:52.920 --> 00:40:57.240
It was almost impossible to get a ticket, and one of the things I have, there's a person

434
00:40:57.240 --> 00:41:01.520
in this audience tonight who used to spend one of the Saturday nights online waiting

435
00:41:01.520 --> 00:41:11.520
This sort of phenomenon is no longer true because now the price has been up to more or less the free market level.

436
00:41:11.520 --> 00:41:23.520
So this sort of phenomenon, lining up, queuing up, is always a phenomenon, always an attribute of government activity, government price control.

437
00:41:23.520 --> 00:41:26.520
It comes into the picture as a form of rationing.

438
00:41:26.520 --> 00:41:32.520
Allocation, well favoritism also comes in by the way. Allocation, who's going to get this?

439
00:41:32.520 --> 00:41:38.520
The government rationing comes into the picture. Who's going to decide who's going to get it? We'll get back to that. Government favoritism.

440
00:41:38.520 --> 00:41:46.520
Another process is hidden, well, I should say, decline in quality.

441
00:41:46.520 --> 00:41:52.520
Because decline in quality is very, very difficult on the police. It's not too difficult on police of price.

442
00:41:52.520 --> 00:42:02.520
The OPA, the old OPA or the current IRS forces the grocery stores, the supermarkets to post their price, the prices such as that.

443
00:42:02.520 --> 00:42:09.520
But to check up on quality is an extremely difficult task. You need a multi-million man gestapo of experts in the field,

444
00:42:09.520 --> 00:42:13.520
then you have to have a super gestapo to check up on the experts on being bribed.

445
00:42:13.520 --> 00:42:24.020
The implication is fantastic. For example, when phase one came on, the phase one was the famous freeze. Everything was frozen frozen for about three months.

446
00:42:24.020 --> 00:42:28.020
Nothing was supposed to change. It was supposed to be there, sitting on everything.

447
00:42:28.020 --> 00:42:38.520
Well, the first thing that happened, the first people to break the freeze, by decline in quality, were the heroic ice cream manufacturers in New York City.

448
00:42:38.520 --> 00:42:48.520
I put my hat to them. I happen to be a fan of Carmel Almond Crunch ice cream. There are two brands which I shall not name.

449
00:42:48.520 --> 00:42:56.520
Two conspicuous brands who make them. In both cases, about a month after the ice freeze came into the picture and the quality could be adjusted,

450
00:42:56.520 --> 00:43:00.520
suddenly there wasn't any almonds in the Carmel Almond Crunch ice cream. Where's the almonds?

451
00:43:00.520 --> 00:43:07.520
There'd be like one almond per quart to satisfy the technical requirement, but the almonds tend to disappear.

452
00:43:07.520 --> 00:43:12.520
How are you going to have a Gestapo checking up on you? How many almonds have you got there?

453
00:43:12.520 --> 00:43:22.520
The candy bars are going to have more air in them. Those of you who are candy bar fans, where's the baby roof? Where is it?

454
00:43:22.520 --> 00:43:31.520
It's subtly lower the size of the product. False bottoms began to appear in various lotion bottles.

455
00:43:31.520 --> 00:43:36.740
So, we have a new improved lotion bottle, but it turns out it's less ounces because

456
00:43:36.740 --> 00:43:39.920
the framas is another, you know, it's a false bottle.

457
00:43:39.920 --> 00:43:43.920
So all that sort of, and then another group that broke the freeze was the Heroic Repairmen

458
00:43:43.920 --> 00:43:48.480
of New York, the painters and the repairmen.

459
00:43:48.480 --> 00:43:52.760
We began to find, for example, the landlords would call painters in for painter room, and

460
00:43:52.760 --> 00:43:58.280
the painters would charge much more, 10%, 20%, 30% more than they did in July, before

461
00:44:28.280 --> 00:44:58.280
P

462
00:44:58.280 --> 00:45:03.280
And the shifts begin to change from the so-called freeze set up.

463
00:45:03.280 --> 00:45:09.280
And also finally, of course, is the black market.

464
00:45:09.280 --> 00:45:11.280
The black market is the market.

465
00:45:11.280 --> 00:45:14.280
It's the market popping up again.

466
00:45:14.280 --> 00:45:16.280
It's the hot meat.

467
00:45:16.280 --> 00:45:20.280
It's when you say, well, there's a meat shortage.

468
00:45:20.280 --> 00:45:24.280
You can't find meat, but if you're willing to pay, et cetera, you know, certainly more.

469
00:45:24.280 --> 00:45:26.280
Don't tell anybody, here's the meat.

470
00:45:26.280 --> 00:45:29.360
The black market shows up.

471
00:45:29.360 --> 00:45:34.920
There are several things about the black market, even as lovable as it is.

472
00:45:34.920 --> 00:45:41.000
First of all, the sort of people who engage in the black market, the black market entrepreneurs

473
00:45:41.000 --> 00:45:44.920
are not the same people as the free market entrepreneurs, because people are more attuned

474
00:45:44.920 --> 00:45:45.920
to illegal activity.

475
00:45:45.920 --> 00:45:53.080
And so the quality of the product has to be a little shaky sometimes, you can't really

476
00:45:53.080 --> 00:46:00.080
really be sure as you are with the brand name, second of all they can't advertise, they can't

477
00:46:00.080 --> 00:46:07.080
take a full page ad in the Times and say, hot meat available, so they have to go through

478
00:46:07.080 --> 00:46:11.080
some sort of shady channels, it's costly and the consumer can't find out, you have to be

479
00:46:11.080 --> 00:46:16.080
the sort of person who knows where the hot items are located, most of the public don't

480
00:46:16.080 --> 00:46:22.080
know this, they're sort of excluded from the black market, thirdly there's a heavy cost

481
00:46:22.080 --> 00:46:26.080
and the course involved, not only because there's no advertising, but also because they have to pay off the cops.

482
00:46:26.080 --> 00:46:30.080
And payment of the cops, you know, adds on, cuts the supply, raises the price.

483
00:46:30.080 --> 00:46:40.080
So how do you wind up with something like this? If you take a vertical line up from the intersection point of the maximum price control point

484
00:46:40.080 --> 00:46:48.080
and the supply curve and have a vertical line up from it, you'll see more or less what the black market price will be.

485
00:46:48.080 --> 00:46:51.760
The black market price will be hit to the man curve of the black market price, so the

486
00:46:51.760 --> 00:46:55.800
black market price is considerably higher than the free market price, and again, so

487
00:46:55.800 --> 00:47:00.520
the public is misled and they say, wow, gee, we can't eliminate price control because

488
00:47:00.520 --> 00:47:05.920
then the item will go all the way up and skyrocket. Well, it wouldn't skyrocket that much because

489
00:47:05.920 --> 00:47:09.960
the black market price, for these various reasons, is considerably higher than the free

490
00:47:09.960 --> 00:47:10.960
market price.

491
00:47:10.960 --> 00:47:16.000
All right, so you have the black market, and I say the black market only is really patronized

492
00:47:16.000 --> 00:47:38.000
The Consider Black Market Activity During World War II, as patriotic as the war effort was.

493
00:47:38.000 --> 00:47:45.360
One of the things that happens when you have, well, the way price control was finally eliminated

494
00:47:45.360 --> 00:47:50.880
in World War II, it had hundreds of thousands of OPA people enforcing this stuff, enforcing

495
00:47:50.880 --> 00:47:51.880
price control.

496
00:47:51.880 --> 00:47:57.400
Even our beloved president began, got his start on life as a, in the entire rationing

497
00:47:57.400 --> 00:48:07.120
division of OPA, might be certain symbolism there, at any rate, the, so there are hundreds

498
00:48:07.120 --> 00:48:11.120
There's a thousand people working on this thing, enforcing the regulations and so forth.

499
00:48:11.120 --> 00:48:16.120
Even so, as I say, there were lots of blank markets, and after the war was over, they

500
00:48:16.120 --> 00:48:20.320
eliminated some of the price controls, but the, because the climate went up and the shortages

501
00:48:20.320 --> 00:48:23.120
still remained, and then they said, well, you couldn't blame it on the war effort.

502
00:48:23.120 --> 00:48:28.280
Well, there was a particularly meat shortage, a big beef shortage, as there was this year

503
00:48:28.280 --> 00:48:32.600
for a short time, a big meat shortage, I mean, it's just impossible to find meat.

504
00:48:32.600 --> 00:48:36.880
One of the things I should mention here, price controls in general, before I get to that,

505
00:48:36.880 --> 00:48:39.940
is that usually price controls are enforced at the equilibrium point.

506
00:48:39.940 --> 00:48:44.240
The idea is, well, prices are going up too much, we have to freeze them as they are.

507
00:48:44.240 --> 00:48:47.920
This is what happened on August 15th, 1971. You freeze, try to freeze prices.

508
00:48:47.920 --> 00:48:52.080
Well, the thing that happens is that the next day, when people wake up on August 16th,

509
00:48:52.080 --> 00:48:56.140
it seems like nothing has changed. There's no problem with those shortages, all you guys are alarmists,

510
00:48:56.140 --> 00:49:02.980
because the next day, the equilibrium price on August 16th is not much different than the equilibrium price on August 15th.

511
00:49:02.980 --> 00:49:05.580
So for a little while, for a short period of time,

512
00:49:05.580 --> 00:49:11.580
It looks as if the price controls are working. The public has a mistaken sense of euphoria.

513
00:49:11.580 --> 00:49:22.580
Then what begins to happen is as the time goes on, there's an increasing discrepancy between the official price, the fixed price control, and the free market price, which keeps changing.

514
00:49:22.580 --> 00:49:28.580
It can either go up or go down. Usually in an inflationary period, of course, the free market price keeps going up.

515
00:49:28.580 --> 00:49:46.580
Because the demand curve keeps going up as more money is poured into the system by the government and so you have a sort of a secular increase in demand curves and as the demand curve keeps going up over time, the shortage starts developing against worse and worse.

516
00:49:46.580 --> 00:50:02.220
In other words, the more the price control continues in force, the worse things get.

517
00:50:02.220 --> 00:50:06.220
So by the end of World War II, the public had had it, and the excuse of the war was

518
00:50:06.220 --> 00:50:07.220
now over.

519
00:50:07.220 --> 00:50:14.320
And so by 1946, there was a fantastic meat shortage, meat could not be found, to the point

520
00:50:14.320 --> 00:50:22.560
were insulin, mucundi, diabetics, and so forth. So, President Truman, the clamor came out

521
00:50:22.560 --> 00:50:29.840
was to eliminate price controls, including meat controls, and enormous hysteria came

522
00:50:29.840 --> 00:50:35.920
up. For example, the New York Post, I remember very vividly, for those who are not New Yorkers,

523
00:50:35.920 --> 00:50:42.640
a highly liberal paper, was hysterical about, you must not repeal OPA. If you repeal OPA,

524
00:50:42.640 --> 00:50:47.640
Mises will quadruple, quintuple, go up 200 fold, etc.

525
00:50:47.640 --> 00:50:49.640
There's a fantastic fear of freedom developed.

526
00:50:49.640 --> 00:50:50.640
What would happen?

527
00:50:50.640 --> 00:50:51.640
We can't eliminate price control.

528
00:50:51.640 --> 00:50:53.640
It's part of the American heritage.

529
00:50:53.640 --> 00:51:00.640
And then, the gouging entrepreneurs would charge infinite prices and so forth.

530
00:51:00.640 --> 00:51:05.640
Even the local disc jockey at the time, the late Martin Block, who was the preeminent

531
00:51:05.640 --> 00:51:09.640
disc jockey of his period, was never involved in politics at all, suddenly came on the air,

532
00:51:09.640 --> 00:51:18.640
I remember this vividly personally and pleaded with everybody to write letters to the congressman to keep OPA because otherwise prices would go through the roof.

533
00:51:18.640 --> 00:51:23.640
Even disc jockeys were becoming political pundits, economic pundits at the time.

534
00:51:23.640 --> 00:51:29.640
Well, so Truman was faced with the following choice, which he reported to the public.

535
00:51:29.640 --> 00:51:34.640
He said, well, there was no meat to be found. What are you going to do about it?

536
00:51:34.640 --> 00:51:45.640
Well, he said he was faced with a choice of mobilizing the National Guard, drafting and sending the troops, calling the troops out and nationalizing the meat industry, going out into the farms.

537
00:51:45.640 --> 00:51:57.640
He said, well, he thought of confiscating a lot of the meat packers, you know, that would have been easy, but he admitted the meat, that wouldn't make much point, but the meat packers didn't have any meat either.

538
00:51:57.640 --> 00:52:01.640
And Swift and Ormer said they didn't have any meat, they couldn't nationalize them.

539
00:52:01.640 --> 00:52:11.640
He said, well, I would have had to go mobilize the troops and nationalize all the farms and go out there and nationalize the ranches and livestock farms and drag the cattle out.

540
00:52:11.640 --> 00:52:14.640
He said he gave serious thoughts of this.

541
00:52:14.640 --> 00:52:18.640
He said, well, he figured it was impractical.

542
00:52:18.640 --> 00:52:26.640
Fortunately for the American public, fortunately for freedom, it was election year, 1946, congressional election year, the Democrats were in grave trouble.

543
00:52:26.640 --> 00:52:31.640
You can imagine what would happen on the farm vote if suddenly soldiers with fixed bayonets

544
00:52:31.640 --> 00:52:34.000
would come in and seize the cattle.

545
00:52:34.000 --> 00:52:37.800
So with great reluctance, President Truman reported, well, because it was impractical

546
00:52:37.800 --> 00:52:42.520
and probably the public wouldn't like it too much, I hereby, gave up this whole term,

547
00:52:42.520 --> 00:52:46.600
I hereby eliminate price controls on meat and within a week the whole meat shortage

548
00:52:46.600 --> 00:52:53.040
was over, only to reappear for this year when price control came back again.

549
00:52:53.040 --> 00:52:59.320
So one would have thought that was a lesson for the government, for economists, but I

550
00:52:59.320 --> 00:53:04.880
guess memory is fairly short in this whole area.

551
00:53:04.880 --> 00:53:08.880
One of the things about when price control breaks down, when the shortages increase in

552
00:53:08.880 --> 00:53:15.840
their black markets, well the temptation of government, the government is faced, as my

553
00:53:15.840 --> 00:53:19.920
late mentor Professor von Mises would say, all government intervention in the market

554
00:53:19.920 --> 00:53:26.920
creates extra problems. It doesn't solve anything. It finally creates some more problems and then the government has to intervene more or else give up the whole business.

555
00:53:26.920 --> 00:53:42.920
So Truman was faced with this sort of crunch. Either send the troops out and nationalize the farmers, or draft the farmers or something like that, or give the whole thing up, eliminate the whole control regulation, which is what the government hates to do.

556
00:53:42.920 --> 00:54:12.920
So usually the temptation is to escalate enforcement, that penalties are only 10 years in jail and they get 30 years, execute them, kill them, torture them, you think I kid you on this, but in other climes, in other cultures, which did not have the American reluctance to inflict this sort of punishment, all stops were pro-lapped, the famous case for example is the Emperor Diocletian,

557
00:54:12.920 --> 00:54:18.120
The late Roman Empire, who was inflating like mad, I'll get to the causes of inflation later on,

558
00:54:18.120 --> 00:54:23.640
but he was inflating the currency by clipping coins, that was the ancient primitive method of doing it.

559
00:54:23.640 --> 00:54:28.920
And so prices kept going up, but finally Emperor Diocletian issued his decree, freezing everything.

560
00:54:28.920 --> 00:54:34.200
All right, from now on, the so-and-so is the three drachmas and such-and-such is two denarii and all that.

561
00:54:34.200 --> 00:54:39.960
He had a completely very detailed list. He even had things like writing of the first quality, five denarii,

562
00:54:39.960 --> 00:54:45.960
writing of the second quality, Friedanari. Who decided how, you know, the quality of the writing is an interesting point.

563
00:54:45.960 --> 00:54:56.960
At any rate, he has a whole detail list, and he made no bones about it. He wasn't limited by any American Civil Liberties Union or the Fifth Amendment.

564
00:54:56.960 --> 00:55:01.960
He said anybody who disobeys this regulation, death, you know, immediate capital punishment.

565
00:55:01.960 --> 00:55:09.960
and he killed a lot of people but it didn't work even the death penalty could not hold back the tide of black markets

566
00:55:09.960 --> 00:55:15.960
and the price controls finally fell apart and so forth and he had to give it up and he said okay, heck with it

567
00:55:15.960 --> 00:55:22.960
that was the emperor, that was the first big example of price control and unfortunately that was not heated very well either

568
00:55:22.960 --> 00:55:27.960
we all know about the guillotine and the French Revolution when the Jacobins were killing a lot of people, aristocrats

569
00:55:27.960 --> 00:55:28.960
and so on.

570
00:55:28.960 --> 00:55:33.760
But we don't know what isn't focused in on is that probably the majority of these killings

571
00:55:33.760 --> 00:55:38.120
were killing none of the aristocrats and Tories and Bourbons, but poor merchants were violating

572
00:55:38.120 --> 00:55:40.320
the price control regulations.

573
00:55:40.320 --> 00:55:45.300
The government was inflating like mad, this time paper money, the law of the maximum price

574
00:55:45.300 --> 00:55:50.960
control regulations on food, etc. and there was a shortage of food in the cities due to

575
00:55:50.960 --> 00:55:54.760
this and then the regions were starving and rioting and all that, and of course who gets

576
00:55:54.760 --> 00:55:55.760
blamed?

577
00:55:55.760 --> 00:56:02.600
First the mobs loot the stores of the merchants, get rid of all the food, and then what? That's

578
00:56:02.600 --> 00:56:06.880
the next step. Then you shoot the, well, in those days you guillotine the merchants for

579
00:56:06.880 --> 00:56:12.400
violating the price control regulations, engaging in black market activities. So when the Jackabins

580
00:56:12.400 --> 00:56:19.240
tried to guillotine, that didn't work very well either. The more recent example of escalated

581
00:56:19.240 --> 00:56:27.040
Enforcement, the old pal Chiang Kai-shek in China. One of the reasons for the so-called

582
00:56:27.040 --> 00:56:33.200
loss of China is again something which only economists know about. The Chiang Kai-shek

583
00:56:33.200 --> 00:56:39.680
was engaging in very severe inflation of money supply, pumping in money like mad, and prices

584
00:56:39.680 --> 00:56:46.800
were engaged in a runaway escalation upward. And if that were not bad enough, Chiang then

585
00:56:46.800 --> 00:56:50.800
and then imposed very severe price control, no, no, we have to freeze prices at such a level

586
00:56:50.800 --> 00:56:55.800
and then it didn't work and they had black markets and price controls were being disobeyed so he escalated the enforcement

587
00:56:55.800 --> 00:57:01.800
and the result of this was the food didn't get to the urban areas and the urban areas were starving

588
00:57:01.800 --> 00:57:07.800
and the peasants couldn't get manufactured goods and so forth and the whole thing, the economic process was breaking down

589
00:57:07.800 --> 00:57:15.800
and then Chang kept escalating the punishment, finally he decided to shoot the merchants in the public square of Shanghai

590
00:57:15.800 --> 00:57:20.800
The Chinese government is trying to shoot all black marketeers and line them up as a public example.

591
00:57:20.800 --> 00:57:26.800
Well, I mean, that tore it. That was about it, because the merchants, the last support of the Chiang Kai-shek regime,

592
00:57:26.800 --> 00:57:31.800
then figured, well, you know, Communists aren't going to be worse than this guy shooting us.

593
00:57:31.800 --> 00:57:39.800
Also, the Communists were quite shrewd on this, and when they took over an area, they stopped inflating the money supply and the inflation problem was licked.

594
00:57:39.800 --> 00:57:49.800
One of the key reasons for the Chinese loss of confidence and Chang's credibility we call it now, and that was that he had it.

595
00:57:49.800 --> 00:57:58.800
As a matter of fact, using this insight, I think it was, I forget now when it was, about three, four years ago, I think when Marshall Key was then the head of the South Vietnam,

596
00:57:58.800 --> 00:58:05.800
started shooting merchants in the square of Saigon for disobeying the Pice Control Regulation, I figured that was it, he'd had it.

597
00:58:05.800 --> 00:58:13.800
That was the end of the Vietnam paper because he was following almost classically the route that Chiang Kai Shek had followed.

598
00:58:13.800 --> 00:58:24.800
So escalation, so even if we're going to wind up enforcing the gas rationing with immediate death on site, it's not going to help the situation, it's not going to help enforce the situation.

599
00:58:24.800 --> 00:58:52.800
Another interesting story about price control is that Hitler of course had price control during World War II because Hitler wanted to follow the modern economic science and when American forces of occupation came and occupied Germany the American theoreticians, the idea at the time, the so-called Morgensau Plan was to de-industrialize Germany, punish Germany by turning Germany back into a pastoral country.

600
00:58:52.800 --> 00:59:04.800
So, as a method of doing this, as a conscious method of de-industrializing Germany and turning it back to a pastoral society, we impose severe price controls.

601
00:59:04.800 --> 00:59:12.800
It was the same economists and theoreticians who in favor of price controls in the United States in order, quote, to save capitalism, unquote,

602
00:59:12.800 --> 00:59:17.800
were doing the same thing in Germany in order to crush it, to smash Germany forevermore.

603
00:59:17.800 --> 00:59:22.800
So they imposed severe price control. They tried to roll prices back to the 1939 level.

604
00:59:22.800 --> 00:59:28.800
And of course, prices are going way up. The free market price is going way up since then.

605
00:59:28.800 --> 00:59:34.800
The result of this was the following. I guess you all know the stories. I don't know.

606
00:59:34.800 --> 00:59:41.800
Maybe I'm the only one old enough to remember them. The stories about buying girls with candy bars, that sort of stuff, in Germany.

607
00:59:41.800 --> 00:59:46.800
Well, because the Germans were starving. The reason why the Germans were starving is not because the German industrial machine had collapsed.

608
00:59:46.800 --> 00:59:51.800
The reason why the machine had collapsed was because all the stuff that had been produced before the war,

609
00:59:51.800 --> 00:59:56.800
in other words, before 1939, fantastically, the price controllers were way, way below the free market price.

610
00:59:56.800 --> 00:59:59.800
They had to suffer severe financial losses to produce them.

611
00:59:59.800 --> 01:00:07.800
As a result, the Germans didn't produce any food, didn't make any candy bars, didn't make any clothing or any of the necessary.

612
01:00:07.800 --> 01:00:12.800
Instead of that, they only produced, they shifted their resources to producing goods which were new,

613
01:00:12.800 --> 01:00:17.120
and which therefore were not under any price control regulation, because the price control

614
01:00:17.120 --> 01:00:21.720
regulation usually has a historical base. We freeze it as of August 15th or whatever

615
01:00:21.720 --> 01:00:27.200
it is, or freeze it as of 1939. Well, if the new product wasn't around on August 15th or

616
01:00:27.200 --> 01:00:31.520
wasn't around on 1939, how do you set the price for it? As a result, the new products

617
01:00:31.520 --> 01:00:35.520
were free of price control and so the Germans were producing toys like mad, all sorts of

618
01:00:35.520 --> 01:00:41.120
new toys, hula hoops, whatever, instead of producing food, clothing, shelter, etc. So

619
01:00:41.120 --> 01:00:51.360
So in 1948, after two, three years of this horror, finally sanity won out, largely through

620
01:00:51.360 --> 01:00:56.400
the influence of a couple of students, as a matter of fact, and they said, look, the

621
01:00:56.400 --> 01:01:00.480
only way you can ever solve the German economic situation is repeal of price control, which

622
01:01:00.480 --> 01:01:05.240
they did, and very shortly after that, the whole shortage was over, girls were no longer

623
01:01:05.240 --> 01:01:09.440
available for candy bars, and you have the so-called economic miracle of West Germany

624
01:01:09.440 --> 01:01:12.240
following shortly after that.

625
01:01:12.240 --> 01:01:16.400
So once again, the price controls were the villain, but here the interesting sidelight

626
01:01:16.400 --> 01:01:23.760
is that we did it consciously to crush the German economic system.

627
01:01:23.760 --> 01:01:41.800
Okay, when phase one came in, as I said, there was the reaction of the Carmel-Ohlmann crunch

628
01:01:41.800 --> 01:01:44.280
and the servicemen, etc.

629
01:01:44.280 --> 01:01:49.680
The controls, the price controls obviously had not worked very well, to be clear.

630
01:01:49.680 --> 01:01:54.680
Phase one, everybody sort of hailed it, terrific, fantastic, beautiful, strong president, all

631
01:01:54.680 --> 01:01:56.680
the rest of the malarkey.

632
01:01:56.680 --> 01:01:59.680
And then after a while, things began to happen.

633
01:01:59.680 --> 01:02:01.680
So the freeze wasn't working so well.

634
01:02:01.680 --> 01:02:04.680
We went over to phase two, which was sort of a moderate control program.

635
01:02:04.680 --> 01:02:06.680
You allow certain increases.

636
01:02:06.680 --> 01:02:11.680
Again, of course, it was politically allowed.

637
01:02:11.680 --> 01:02:16.680
And then what happened was, for example, in phase two is that you have things like this.

638
01:02:16.680 --> 01:02:21.680
You know, the government would allow a business to raise its price if it was making low profits.

639
01:02:21.680 --> 01:02:24.680
If, on the other hand, it was making high profits, you force them to lower the price.

640
01:02:24.680 --> 01:02:31.680
So what began to happen with phase two is that firms began to look around desperately for ways not to make profits.

641
01:02:31.680 --> 01:02:36.680
It's easy not to make profits. You just sort of let her rip.

642
01:02:36.680 --> 01:02:46.680
Businessweek reported, not for its position, but as a news magazine, for its ideological views.

643
01:02:46.680 --> 01:02:52.680
Businessweek reported, wow, firms would do things like this. First of all, the old expense accounts are rolling back.

644
01:02:52.680 --> 01:03:01.680
Well, live it up, Jim, because we don't want to make too much high profit to go to the Havillon and Hilton, etc.

645
01:03:01.680 --> 01:03:09.040
First Class and Planes, etc. Also, businesses started having their annual meetings in the

646
01:03:09.040 --> 01:03:14.400
Bahamas instead of in New York. As one executive said, well, if we have to be inefficient,

647
01:03:14.400 --> 01:03:18.960
we may as well enjoy it. So that sort of attitude comes in. Of course, this means the system

648
01:03:18.960 --> 01:03:22.800
begins to crack. And phase three then comes in, which was a little bit better, and then

649
01:03:22.800 --> 01:03:27.920
phase four, phase three and a half, freezing everything again with a little control, with

650
01:03:27.920 --> 01:03:35.820
after the inflation of food prices and then the severe freeze coming in in 1973, the time

651
01:03:35.820 --> 01:03:41.160
when the economy was booming as a scarcity anyway, as a result of which we suddenly have

652
01:03:41.160 --> 01:03:45.520
a beef shortage, can't find any beef, suddenly gasoline shortage, and we begin to have, then

653
01:03:45.520 --> 01:03:49.640
we go into phase four which is slightly better than phase three and a half and not as good

654
01:03:49.640 --> 01:03:54.760
as phase three and whatever. So we're still in a situation where there's heavy price controls

655
01:03:54.760 --> 01:04:04.760
throughout the system.

656
01:04:04.760 --> 01:04:08.320
One of the ways in which a shortage, which, as I always say, always appears when the pipe

657
01:04:08.320 --> 01:04:13.200
control is held for a while underneath the equilibrium point, one of the ways of allocating

658
01:04:13.200 --> 01:04:18.240
this scarcity is government rationing, which, of course, we're now beginning to see in gasoline,

659
01:04:18.240 --> 01:04:19.240
etc.

660
01:04:19.240 --> 01:04:25.240
Rationing sets in its own interesting system, which again we saw in World War II.

661
01:04:25.240 --> 01:04:34.240
Rationing is very peculiar, in the first place it means that you have a second money.

662
01:04:34.240 --> 01:04:37.240
It's bizarre just from that point of view.

663
01:04:37.240 --> 01:04:42.240
Instead of just having money, usually if you want to buy something, here's the price, you know what the price is,

664
01:04:42.240 --> 01:04:46.240
if you have the money you buy it, if you're willing to spend the money or if you don't, you don't buy it.

665
01:04:46.240 --> 01:04:49.960
In addition to having the money in there, you also have to have ration tickets, so the ration

666
01:04:49.960 --> 01:04:53.320
ticket becomes sort of a second, a parallel money.

667
01:04:53.320 --> 01:04:59.320
Also, the ration ticket means that the government is allocating the resources by its own favoritism,

668
01:04:59.320 --> 01:05:00.320
by political favoritism.

669
01:05:00.320 --> 01:05:05.880
You, you and you are, for example, during World War II, the big thing was to be an essential

670
01:05:05.880 --> 01:05:06.880
war worker.

671
01:05:06.880 --> 01:05:10.400
If you were an essential war worker, engaged in essential war work, then you get unlimited

672
01:05:10.400 --> 01:05:12.080
amount of, vast amount of ration tickets.

673
01:05:12.080 --> 01:05:16.200
If on the other hand, you were poor schlepper, nothing much to do with the war effort, you

674
01:05:16.200 --> 01:05:26.720
For example, on the gasoline front, there were several kinds of ration tickets. Everybody

675
01:05:26.720 --> 01:05:33.320
was supposed to share equally, suffer equally. That was always the slogan of the rationers.

676
01:05:33.320 --> 01:05:39.640
In World War II, people suffered unequally because there were several degrees of ration

677
01:05:39.640 --> 01:05:44.160
tickets. The average citizen had an A ration ticket, which was titled with very little

678
01:05:44.160 --> 01:05:54.160
and Natural Gasoline. As a matter of fact, by the way, this is a point of mild interest, the government highway thing, the speed limit during World War II was 35 miles an hour.

679
01:05:54.160 --> 01:06:03.160
We might see that again, who knows. At any rate, the A ticket was just a few gallons a week, was allowed to the person.

680
01:06:03.160 --> 01:06:08.160
Then there was the B and the C was the sort of unificent, and the X ticket was unlimited.

681
01:06:08.160 --> 01:06:17.160
In the first place, the congressmen, over 200 congressmen asked for and received from the OPA, the ex-brand, in other words, unlimited gasoline for congressmen.

682
01:06:17.160 --> 01:06:20.160
Absolutely, boy, they were obviously engaged in essential war work.

683
01:06:20.160 --> 01:06:24.160
The top priority.

684
01:06:24.160 --> 01:06:37.160
Second of all, you have things like, the truckers had unlimited amounts, so there's a T-ticket, and the truckers began to sell their excess T-tickets to other people.

685
01:06:37.160 --> 01:06:43.800
You're going to have leakages, this is, Henry Hasen, a great novel, a great economic political

686
01:06:43.800 --> 01:06:48.120
novel called The Great Idea, it's now called Time Will Run Back, has a whole story about,

687
01:06:48.120 --> 01:06:51.720
starts it with a communist system of the future and winds up with a free market by logical

688
01:06:51.720 --> 01:06:53.400
deductions.

689
01:06:53.400 --> 01:06:57.520
And the first thing that happens is some brain in the communist system says, hey, why don't

690
01:06:57.520 --> 01:07:02.200
we allow people to exchange their ration tickets, it's sort of a big new thing, why don't we

691
01:07:02.200 --> 01:07:05.440
allow the people who don't smoke cigarettes to sell their cigarette tickets for the guys

692
01:07:35.440 --> 01:07:39.080
People, the exchange would be the market, the ugly head of the market would suddenly

693
01:07:39.080 --> 01:07:41.760
rise up again, we got to clamp down on it.

694
01:07:41.760 --> 01:07:49.880
So as a result of this, he had truckers illegally selling their surplus T-tickets.

695
01:07:49.880 --> 01:07:54.760
You have things like the C-people, you have things like C-tickets were given to, well

696
01:07:54.760 --> 01:07:59.960
let's say the Sharpies would get the C-ticket, so the average Joe would have a Z-ticket and

697
01:07:59.960 --> 01:08:01.520
they'd only have a few gallons a week.

698
01:08:01.520 --> 01:08:06.880
The Sharpies had their almost munificent seat tickets, and the Times or the News would print

699
01:08:06.880 --> 01:08:11.880
pictures from what signs I have of an aqueduct parking lot filled with seat tickets.

700
01:08:11.880 --> 01:08:19.280
This caused a lot of class envy and resentment.

701
01:08:19.280 --> 01:08:23.760
Then you have things like, then you have things, literally, OPA enforcement agents went out

702
01:08:23.760 --> 01:08:24.760
and checked up.

703
01:08:24.760 --> 01:08:29.280
Everybody was, you weren't supposed to drive, you had a seat ticket, you were only supposed

704
01:08:29.280 --> 01:08:36.280
You're supposed to stop at a gas station. You're only supposed to walk 10 feet beyond the gas station and no more.

705
01:08:36.280 --> 01:08:42.280
And you literally had a spy, an OPA spy, going around checking up on your part near a theater.

706
01:08:42.280 --> 01:08:45.280
That means you're going to the theater. If you have a seat ticket, you're not allowed to go to the theater.

707
01:08:45.280 --> 01:08:52.280
And they clamp down on you, arrest you, take your seat ticket away, tear up your seat ticket in front of you.

708
01:08:52.280 --> 01:08:55.280
And that was literally going on.

709
01:08:55.280 --> 01:09:00.280
There's an interesting book by Richard Lingman called You Know There's a War on, which talks about what was going on.

710
01:09:00.280 --> 01:09:07.280
It's not an analytical book, but I think it tells the story of what actually happened.

711
01:09:07.280 --> 01:09:13.280
Well, one of the things that happened was this ration ticket system.

712
01:09:13.280 --> 01:09:16.280
Well, first of all, I would say just on a ration ticket, I think the whole thing is absolutely monstrous.

713
01:09:16.280 --> 01:09:20.280
It's totalitarian, despotic.

714
01:09:20.280 --> 01:09:24.280
Nobody should have a right to tell anybody else how many things to buy, how many lights to turn on,

715
01:09:24.280 --> 01:09:35.280
and how many lights would turn on, what heat you're supposed to have a room at, and all the rest of it, so it's totalitarian, monstrous, whatever, any value judgment you can think of going along with on that.

716
01:09:35.280 --> 01:09:52.280
But one of the things that happened was a heroic mafia came into the picture in World War II to relieve, leading the people to struggle against gas rationing.

717
01:09:52.280 --> 01:09:57.280
And they counterfeited an enormous number of seat tickets.

718
01:09:57.280 --> 01:10:00.280
It was easy to counterfeit seat tickets.

719
01:10:00.280 --> 01:10:06.280
It was estimated that 15% of all the gasoline sold in Morocco was sold to counterfeit seat tickets.

720
01:10:06.280 --> 01:10:09.280
And 30% in New York.

721
01:10:13.280 --> 01:10:18.280
So these things are things to remember as rationing falls in on us.

722
01:10:22.280 --> 01:10:32.760
There's also the, my wife's sweet old grandma, when she died, it was a source of embarrassment

723
01:10:32.760 --> 01:10:38.920
of the family to find out that she had an enormous amount of sugar, this is the great

724
01:10:38.920 --> 01:10:42.880
people's revolutionary movement, the sugar hoarding during the war, we were told never

725
01:10:42.880 --> 01:10:50.200
buy sugar because somehow our boys rely on you're not buying it.

726
01:10:50.200 --> 01:10:59.200
Well, let's go into the, I think there's time to go into the energy crisis and exactly how

727
01:10:59.200 --> 01:11:03.120
the energy crisis, first of all, if there is an, to the extent that there is an energy

728
01:11:03.120 --> 01:11:07.520
shortage, obviously the solution to it, there will not be a shortage if you allow the price

729
01:11:07.520 --> 01:11:13.840
to go up. If you allow the price to go up, this will ration the existing amount to those

730
01:11:13.840 --> 01:11:19.400
who will ration it voluntarily to those who will willingly want to spend more on it, those

731
01:11:19.400 --> 01:11:22.000
for those who consider it more important and so forth.

732
01:11:22.000 --> 01:11:24.040
So you have a smooth form of voluntary rationing

733
01:11:24.040 --> 01:11:25.880
where, as I say, those who are most interested

734
01:11:25.880 --> 01:11:29.520
in buying the gasoline or the heating oil will buy it.

735
01:11:29.520 --> 01:11:32.280
But secondly, by allowing the price to go up,

736
01:11:32.280 --> 01:11:36.320
you'll stimulate more supply after a while.

737
01:11:36.320 --> 01:11:38.680
More marginal wells will come in,

738
01:11:38.680 --> 01:11:41.640
oil wells will come into production.

739
01:11:41.640 --> 01:11:44.640
Distribution will be speeded up, et cetera.

740
01:11:49.400 --> 01:12:02.400
So, by allowing the price to rise, even if there's a scarce supply, the supply curve is going to the left. By allowing a free pricing system, by allowing the price to go up, it will do two things.

741
01:12:02.400 --> 01:12:06.800
will voluntarily ration, so the consumer, in accordance with who is most interested

742
01:12:06.800 --> 01:12:14.840
in most important use, to buy the material for most important use, will voluntarily ration

743
01:12:14.840 --> 01:12:17.960
themselves in accordance with the higher price, and all of those will stimulate an increase

744
01:12:17.960 --> 01:12:18.960
in supply.

745
01:12:18.960 --> 01:12:22.880
So the lease you will allow, there won't be any more shortages, there won't be any more

746
01:12:22.880 --> 01:12:26.680
black markets, there won't be any more need for rationing and so forth, that's the first

747
01:12:26.680 --> 01:12:27.680
thing to do.

748
01:12:27.680 --> 01:12:31.800
The second thing to remember also, going in the energy crisis, the government by various

749
01:12:31.800 --> 01:12:37.560
methods has created it, has restricted supply and increased demand artificially and so the

750
01:12:37.560 --> 01:12:41.200
thing to do of course is to eliminate that.

751
01:12:41.200 --> 01:12:50.840
Well, on the oil caper, it starts with the oil proration laws.

752
01:12:50.840 --> 01:13:00.480
Oil proration laws began in America in approximately 1931-32 when enormous oil fields were discovered

753
01:13:00.480 --> 01:13:05.200
Vast and super abundant oilfields are discovered in Texas and Oklahoma, the Great Texas-Oklahoma

754
01:13:05.200 --> 01:13:10.440
Find, as a result of which the price of crude oil plummeted straight down.

755
01:13:10.440 --> 01:13:16.400
The oil industry got rather historical about this and called upon the state for bail them

756
01:13:16.400 --> 01:13:17.400
out.

757
01:13:17.400 --> 01:13:21.480
This is known as a partnership now of government and industry.

758
01:13:21.480 --> 01:13:25.360
Not all oil men, but enough oil men to count.

759
01:13:25.360 --> 01:13:29.360
The classic cartel situation comes into practice.

760
01:13:29.360 --> 01:13:34.360
The first thing the government did is they outlawed all further production of oil until we can straighten the whole thing out.

761
01:13:34.360 --> 01:13:36.360
They called it an oil moratorium.

762
01:13:36.360 --> 01:13:44.360
And to enforce the moratorium, the governors of Texas and Oklahoma declared martial law and set the troops out into the oil fields.

763
01:13:44.360 --> 01:13:51.360
Especially because at night, you see a lot of the guys were wildcatting, drilling their own oil and taking the hot oil out.

764
01:13:51.360 --> 01:14:02.360
And so they came in with fixed bayonets and guns at the ready to shoot oil, any wildcat oil driller who was drilling his own oil, getting it out of the ground and shipping it out.

765
01:14:02.360 --> 01:14:10.360
They did shoot some people. The governor of Oklahoma, the colorful did this, the colorful Alfalfa Bill Murray, wild Bill Alfalfa Bill Murray.

766
01:14:10.360 --> 01:14:15.360
So there was an oil moratorium that straightened it and stopped production. First thing they did was stop that.

767
01:14:15.360 --> 01:14:20.360
And then the states and the federal government collaborating set up oil proration laws.

768
01:14:20.360 --> 01:14:34.360
The Oil Proliferation Law works something as follows. In Texas, for example, which is the largest oil state, there's an old geezer, usually a retired general, who's the head of something called the Texas Railroad Commission.

769
01:14:34.360 --> 01:14:39.360
As far as I know, it has nothing to do with railroads. It's only involved in setting oil, maximum oil quotas.

770
01:14:39.360 --> 01:14:44.240
So, every month the old geezer decides how much oil is allowed to be produced next month

771
01:14:44.240 --> 01:14:49.120
and he said, okay, from now on, next month you can only produce whatever, you know, million

772
01:14:49.120 --> 01:14:51.260
barrels of crude oil.

773
01:14:51.260 --> 01:14:56.760
And then each oil well in Texas has a quota, like, you know, you're 0.005% of the oil

774
01:14:56.760 --> 01:14:59.560
well in Texas and then you're restricted to that.

775
01:14:59.560 --> 01:15:04.200
So, in other words, the supply curve of oil pushed drastically to the left, the price

776
01:15:04.200 --> 01:15:05.440
of crude oil is raised.

777
01:15:05.440 --> 01:15:12.440
This of course pushes the supply of gasoline and heating and all the stuff that comes out of crude to the left and raises their price.

778
01:15:12.440 --> 01:15:18.440
This has been going on since 1932, and every month, the old geezer puts out this maximum quota.

779
01:15:18.440 --> 01:15:23.440
And the excuse for this, for an economist, the excuse for this is laughable.

780
01:15:23.440 --> 01:15:28.440
I'll say, well, we need the Texas Railroad Commission to do this, because they have to adjust supply to demand.

781
01:15:28.440 --> 01:15:32.440
I mean, that's what the market's supposed to be doing, adjusting supply to demand.

782
01:15:32.440 --> 01:15:39.440
No, no, they need this because otherwise, otherwise what? Otherwise too much will be produced and the price of crude oil will fall and we can't have any of that.

783
01:15:39.440 --> 01:15:46.440
So that's the first, that's the first chronic thing, a very basic chronic thing that raises the price of crude oil and limits the production.

784
01:15:46.440 --> 01:15:51.440
Now this has been done in the name of conservation. I'll get to that, I'll say conservation caper later on.

785
01:15:51.440 --> 01:15:57.440
But it's done in the name of conservation. Well, we want less to be produced because then the future generations will have it and all that jazz.

786
01:15:57.440 --> 01:16:27.440
However, along with the oil production, operation laws, came oil import restrictions. Keep foreign oil out. If you're really interested in conserving American oil, keeping oil out of oil in Texas, then you want to encourage the importation of foreign oil like mad, right? However, they did not. They kept out foreign oil, thereby shifting the supply curve well to the left, starting with tariffs, winding up with oil import quotas. So in order to import oil, you have to buy somebody else's quota right.

787
01:16:27.440 --> 01:16:33.440
In other words, if Shell Oil had 10% of the imports in 1950-something, whenever the thing came in,

788
01:16:33.440 --> 01:16:37.440
if you're a new oil importer, you can't import oil, you haven't got the right.

789
01:16:37.440 --> 01:16:42.440
It's illegal. You have to buy the 10% or the 2% from Shell at a high price.

790
01:16:42.440 --> 01:16:48.440
This, of course, keeps out competitors and keeps out the oil imports from coming in.

791
01:16:48.440 --> 01:16:54.440
This, I think, has been repealed about a year ago, but the point is, this has been the basic policy for quite a while.

792
01:16:54.440 --> 01:17:08.440
So this, that's the restriction on domestic and foreign oil, and then in addition to that, the government has sitting, the federal government of the United States is sitting on an enormous amount of oil, enormous!

793
01:17:08.440 --> 01:17:17.440
They've been sitting on it for 50 years now, and nothing has been done with it, it's called conservation or something, it's called withholding from the market, thereby raising the price.

794
01:17:17.440 --> 01:17:23.440
There's the Elk Hills Reserve, I think in California, which has god knows how many billions and billions of barrels.

795
01:17:23.440 --> 01:17:27.440
and there's a teapot dome which of course is a famous place in American history

796
01:17:27.440 --> 01:17:30.440
where the poor guy was crucified because he wanted to at least get the oil out

797
01:17:30.440 --> 01:17:33.440
so he might have been a crook but at least he was trying to produce some oil

798
01:17:33.440 --> 01:17:38.440
or finally President Nixon's latest speech he's going to start producing a little bit from the Elk Hills Reserve

799
01:17:38.440 --> 01:17:43.440
but the point is it's been kept off the market all this time thereby raising the price of crude oil

800
01:17:43.440 --> 01:17:47.440
and the price of gasoline and the whole business and restricting the supply

801
01:17:47.440 --> 01:18:01.440
Then in addition to this, and this goes for all the shortages, I haven't got time to go to the other products yet,

802
01:18:01.440 --> 01:18:07.440
there are the environmentalists, the environmentalist crazies as I like to call them,

803
01:18:07.440 --> 01:18:15.920
who have now stopped, have stopped with absolute determination and will, have tried to plug

804
01:18:15.920 --> 01:18:19.120
the gap, have tried to restrict production anywhere they can find there and get their

805
01:18:19.120 --> 01:18:20.120
hands on.

806
01:18:20.120 --> 01:18:25.080
So, as a result of this, oil refineries can't be produced for several years because God

807
01:18:25.080 --> 01:18:26.080
knows why.

808
01:18:26.080 --> 01:18:33.800
They pollute the air or they deface the landscape, whatever, so this is cut down on the production

809
01:18:33.800 --> 01:18:34.800
of oil refineries.

810
01:18:34.800 --> 01:18:40.300
Also, of course, the Alaskan Pipeline, which would supply about two million barrels a day, which is pretty hefty,

811
01:18:40.300 --> 01:18:46.300
has been held up for many years because of the environmentalists finally getting going, but it's been held up for many, many years.

812
01:18:46.300 --> 01:18:52.300
As far as I can make out in the Alaskan caper, I've done some reading in the Alaskan question,

813
01:18:52.300 --> 01:19:02.300
the environmentalist problem seems to be twofold. One is the deface of landscape. In other words, a beautiful, unmarked, unmarked by man, that is,

814
01:19:02.300 --> 01:19:06.300
Plato and steps and whatever they got out there in Alaska would be

815
01:19:06.300 --> 01:19:10.300
defaced by the fact that there would be a pipeline running through it. It's really tough.

816
01:19:10.300 --> 01:19:14.300
And I noticed the logical implication of this. If the conservation of the

817
01:19:14.300 --> 01:19:18.300
environmentalists had been in control in 1776, we'd never have anything beyond a little

818
01:19:18.300 --> 01:19:22.300
fort here on the tip of Manhattan, because you couldn't chop down a tree, you couldn't do

819
01:19:22.300 --> 01:19:26.300
anything. So that's one problem. There's a scenic

820
01:19:26.300 --> 01:19:30.300
problem, which is something, I do not find a grabber, I'll put it that way.

821
01:19:30.300 --> 01:19:39.060
The second problem was the caribou. The caribou liked to walk across the pundra. If you have

822
01:19:39.060 --> 01:19:44.100
a pipeline which has to be dug down deep because there's a thermal, whatever, heating it in

823
01:19:44.100 --> 01:19:48.260
the soil, then the poor caribou wouldn't be able to walk across and be confused. They

824
01:19:48.260 --> 01:19:55.100
die out. I swear. Then the oil company said, okay, we'll build a ramp. We'll build bridges

825
01:19:55.100 --> 01:19:59.060
across the pipeline so the caribou can walk. But then they said, well, yeah, but the environmental

826
01:19:59.060 --> 01:20:16.700
The Alaskans themselves are rather annoyed at this whole thing.

827
01:20:16.700 --> 01:20:20.540
The editor of Anchorage Daily Times wrote a letter and said that of the 300,000 people

828
01:20:20.540 --> 01:20:28.340
in Alaska, at least 299,000 are very bitter about this holding up the Alaskan pipeline.

829
01:20:28.340 --> 01:20:32.140
The other people, he said, the other thousand, quote, feel a kinship with all the kooks who

830
01:20:32.140 --> 01:20:34.580
want to lock up Alaska with some sort of permanent wilderness.

831
01:20:34.580 --> 01:20:46.140
It's pretty clear the people in Alaska don't want to live in a permanent pundra.

832
01:20:46.140 --> 01:20:53.780
Okay so that's the oil caper, then a very related sort of thing is for example the crippling

833
01:20:53.780 --> 01:21:04.780
of Natural Gas and Coal. Natural gas is a substitute for oil and heating, et cetera.

834
01:21:04.780 --> 01:21:11.020
Well, natural gas for the last 25 years, for obscure reason, at least I'm sure to me, has

835
01:21:11.020 --> 01:21:14.540
been regulated, the price of which has been regulated at the wellhead and interstate commerce

836
01:21:14.540 --> 01:21:19.180
by the Federal Power Commission way, way below the free market level. Of course, as inflation

837
01:21:19.180 --> 01:21:23.180
proceeds it's even further below. Now, why it's been done that way, whether it's been

838
01:21:23.180 --> 01:21:40.180
The reason this has been done for ideological reasons is because the gas buyers on it, I don't know, or a combination, at any rate, this has created an increasing shortage over the years of natural gas, especially in interstate commerce, plenty of natural gas in Texas itself, in Oklahoma, because there's no price control intrastate.

839
01:21:40.180 --> 01:21:51.180
As a result of this, there's lots of natural gas reserves. Everybody knows there's lots of natural gas on the ground, but nobody's looking for it, because it doesn't pay anybody to look for it, because the prices are held way below the free market.

840
01:21:51.180 --> 01:22:09.180
As a result of an increasing natural gas shortage, as a natural gas shortage, people turn to oil, so you have a cut in the supply of natural gas, an increase in the price of oil, an increase in demand for oil, artificially, which adds to the oil problem.

841
01:22:09.180 --> 01:22:20.740
And it created a fuel oil, a heating oil shortage, as you say, for last year and it will continue.

842
01:22:20.740 --> 01:22:21.740
So natural gas is crippled.

843
01:22:21.740 --> 01:22:25.220
When natural gas is artificially crippled by the government, this raises the demand

844
01:22:25.220 --> 01:22:28.420
for oil and this adds to the oil shortage.

845
01:22:28.420 --> 01:22:31.420
Same thing happened to coal.

846
01:22:31.420 --> 01:22:32.580
Coal has been crippled in many ways.

847
01:22:32.580 --> 01:22:33.940
There's lots of coal around too.

848
01:22:33.940 --> 01:22:34.940
Lots of coal.

849
01:22:34.940 --> 01:22:36.540
Coal has been crippled in several directions.

850
01:22:36.540 --> 01:22:42.660
First place, John L. Lewis, the beloved leader of the coal union for many years, was a very

851
01:22:42.660 --> 01:22:43.660
good economist.

852
01:22:43.660 --> 01:22:44.660
He understood exactly what was going on.

853
01:22:44.660 --> 01:22:47.660
He knew that if unions pushed out wage rights, it would cause unemployment.

854
01:22:47.660 --> 01:22:48.660
He knew that very well.

855
01:22:48.660 --> 01:22:49.660
He was a brilliant economist.

856
01:22:49.660 --> 01:22:55.700
On the other hand, he was in favor of it, since he was in the union and his comrades

857
01:22:55.700 --> 01:23:01.460
were union members for a long time, he said, okay, we'll just employ them.

858
01:23:01.460 --> 01:23:02.460
I said, how about them?

859
01:23:02.460 --> 01:23:03.460
They're not union members.

860
01:23:03.460 --> 01:23:04.460
They're apprentices or whatever.

861
01:23:04.460 --> 01:23:08.540
As a result of which you have a, and he did this in collaboration with a lot of the large

862
01:23:08.540 --> 01:23:12.900
mine owners and one of the disemployed are smaller competitors, as a result of which you

863
01:23:12.900 --> 01:23:17.860
have a deliberate policy of a mine workers union for many years, since the 30s, to cripple

864
01:23:17.860 --> 01:23:22.100
the coal industry, to shift the supply curve to the left, to raise the wage rates for those

865
01:23:22.100 --> 01:23:25.340
remaining, those old citizens that stole the coal, but everybody else is in Appalachia

866
01:23:25.340 --> 01:23:29.340
living in hillbillies or dropouts, forced dropouts in Appalachia.

867
01:23:29.340 --> 01:23:33.900
Well, this cuts with a lot of the coal supplies, one factor.

868
01:23:33.900 --> 01:23:38.900
The main factor is that the environmental is crazy back again in two directions.

869
01:23:38.900 --> 01:23:43.900
One is the story over strip mining. Strip mining is quite cheap.

870
01:23:43.900 --> 01:23:48.900
It's this 40% of the methodical mine of strip mining.

871
01:23:48.900 --> 01:23:56.900
There is a problem with private property of the farmer down the hill on strip mining, but the basic charge seems to be aesthetic.

872
01:23:56.900 --> 01:24:02.900
The strip mining causes an ugly landscape. The hill is grooved forever, or whatever it is.

873
01:24:02.900 --> 01:24:13.900
Again, this is not the sort of thing I find a problem. I find a grabber. I think it's more important to have coal and fuel for the cities and factories than just to worry about the Kentucky hillside.

874
01:24:13.900 --> 01:24:21.900
At any rate, the strip mining hysteria causes losses of law to be passed to restrict strip mining, cripple it, and so forth.

875
01:24:21.900 --> 01:24:29.900
and the second environmentalist thrust there was the air pollution, the dirty coal is a dirty fuel, sulfur is poured into the air and so forth

876
01:24:29.900 --> 01:24:36.900
and the Clean Air Act of 1970, the Federal Clean Air Act, drastically lowered the supply of coal

877
01:24:36.900 --> 01:24:42.900
which means people have to shift the oil for heat, which raises an after oil and again you have to intensify the oil shortage

878
01:24:42.900 --> 01:24:50.900
I'm not really in favor of air pollution, I don't know much about it, I think the public media has really been

879
01:24:50.900 --> 01:25:09.900
One side of the fact that we've only heard the environmentalist side of the story, the anti-environmentalists claim that the sulfur really disappears pretty quickly and doesn't really harm anybody, but at any rate, certainly the restrictions came on awfully fast, let's put it that way, and awfully suddenly, and awfully severely, and again causing these effects.

880
01:25:09.900 --> 01:25:29.900
So coal has been crippled, natural gas has been crippled by government action, and also electric power. Electric power has been crippled. First of all, utilities can't build nuclear power plants because people are worried about nuclear radiation, although experts claim it's no real problem.

881
01:25:29.900 --> 01:25:34.900
Secondly, the camp for example, Con Edison, has been trying to build a Storm King plan

882
01:25:34.900 --> 01:25:36.900
for god knows how many years up the Hudson.

883
01:25:36.900 --> 01:25:40.900
The environmentalists have stopped it because it ruins the Hudson.

884
01:25:40.900 --> 01:25:43.900
The Storm King mountain view is spoiled.

885
01:25:43.900 --> 01:25:48.900
Again, it's not something I, it's not an argument to which I feel I can do full judgment.

886
01:25:48.900 --> 01:25:53.900
So this has stopped the Storm King plan for many years, presumably to finally get it,

887
01:25:53.900 --> 01:25:58.900
but it's held the thing up a lot, cuts down supply of electricity, raises the price, etc.

888
01:25:58.900 --> 01:26:28.900
and finally there's the whole problem of electrical utilities anyway, electric utilities are compulsory monopolies, you can't compete with Connet, Connet has a monopoly, each electrical industry firm in its area has a monopoly granted to it by the government of its area, you can't go into competition, you have a compulsory monopoly and secondly you have a fixed rate of profit guaranteed by the government, so the rate is set by the government action,

889
01:26:28.900 --> 01:26:34.900
The rate of profit is set, it's not very high, on the other hand it's guaranteed, it makes a big difference.

890
01:26:34.900 --> 01:26:46.900
So Mises has no competition in the electrical industry, Mises' research and development and all sorts of technological improvements in the electrical industry is cut out, is eliminated, is restricted.

891
01:26:46.900 --> 01:26:54.900
And also the way the rate is set is, there's a fixed rate of return of capital, in other words, let's say 6%.

892
01:26:54.900 --> 01:27:00.900
This means that if the rate is set in such a way, you've got a certain profit per amount of capital.

893
01:27:00.900 --> 01:27:05.900
This means the higher your capital, the better off you are, regardless of whether capital is any good or not.

894
01:27:05.900 --> 01:27:11.900
As a result of this, the electrical industry hardly ever depreciates its equipment.

895
01:27:11.900 --> 01:27:14.900
It depreciates equipment very, very slowly.

896
01:27:14.900 --> 01:27:19.900
Because why do it if you have your $10,000 machine which is half-dead, so to speak,

897
01:27:19.900 --> 01:27:25.900
doesn't make any difference. It's worth $8,000 on the books and you can get your profit rate determined on that basis.

898
01:27:25.900 --> 01:27:32.900
While IBM, for example, a very progressive company, depreciates its equipment very fast, say in 10 years,

899
01:27:32.900 --> 01:27:36.900
AT&T and ConEd depreciate their equipment over 50 years.

900
01:27:36.900 --> 01:27:41.900
Hang on to obsolete equipment until the last possible ounce of squeeze out of it,

901
01:27:41.900 --> 01:27:46.900
thereby again repressing and restricting and crippling technological developments and improvements

902
01:27:46.900 --> 01:27:56.900
Well, that of course adds to the energy shortage.

903
01:27:56.900 --> 01:28:10.620
Well, as we have political rationing, as I say, we'll see congressmen voting themselves

904
01:28:10.620 --> 01:28:15.740
the unlimited supply of gasoline and so forth, but we'll also see, we'll also already see

905
01:28:15.740 --> 01:28:16.740
and Human Action.

906
01:28:16.740 --> 01:28:19.740
We're actually in an airline flight, which is a beautiful cartel arrangement where the

907
01:28:19.740 --> 01:28:24.500
government and the CAB Civil Aeronautics Board tells the airlines, you've got to cut out

908
01:28:24.500 --> 01:28:26.500
your airline flights.

909
01:28:26.500 --> 01:28:32.140
The airlines, of course, receive this red information with enormous enthusiasm, because they've

910
01:28:32.140 --> 01:28:36.500
been competing, even though their competition is fairly limited, as we'll get to later

911
01:28:36.500 --> 01:28:42.340
on, by the existence of the CAB, still they were competing and they found out that not

912
01:28:42.340 --> 01:28:45.700
Every flight was like a cattle car and there was even some empty seats.

913
01:28:45.700 --> 01:28:49.380
And so we're now, boy oh boy, we're patriarchically going along, we're cutting out half our flights

914
01:28:49.380 --> 01:28:51.460
and every car, every plane will be packed.

915
01:28:51.460 --> 01:28:57.980
So once again you have the government of cartelists restricting airlines' competition, service,

916
01:28:57.980 --> 01:28:58.980
etc.

917
01:28:58.980 --> 01:29:02.980
But we'll get more to the airlines and the cartel thing later.

918
01:29:02.980 --> 01:29:09.220
I'd like to wind up this homily on price control and rationing.

919
01:29:09.220 --> 01:29:26.420
from a column of a journalist who is not distinguished as an analyst or the knowledgeable on the

920
01:29:26.420 --> 01:29:29.700
market, but he's got a great spirit, especially in relation to the government.

921
01:29:29.700 --> 01:29:35.500
This is a Pete Hammel's column on Monday, New York Post, there's a few lines from it.

922
01:29:35.500 --> 01:29:41.060
He's reacting viscerally, instinctively, I think correctly, to the government blackout

923
01:29:41.060 --> 01:29:42.900
and the energy, the gas rationing and all the rest of it.

924
01:29:42.900 --> 01:29:44.900
He says, now they've even taken away our skyline.

925
01:29:44.900 --> 01:29:49.980
It had been hours since that day, 1945, when we all raced to the rooftops of Brooklyn to

926
01:29:49.980 --> 01:29:55.500
see those minion lights blink on again, dazzling, joyous, triumphant and unbelievably beautiful,

927
01:29:55.500 --> 01:29:57.940
signaling to us that the war was over.

928
01:29:57.940 --> 01:30:01.100
I remember a woman crying on the rooftop that time, knowing that the long night of the Second

929
01:30:01.100 --> 01:30:05.100
World War was finished, that New York was blazing again with its electric beauty, the

930
01:30:05.100 --> 01:30:13.100
Blackouts and dim-outs were behind us as the troop ships would soon be home, the New York skyline hours forever, and now it's gone again.

931
01:30:13.100 --> 01:30:17.100
Moving along the city's highways, there's a doorless sense of defeat and loss in the town.

932
01:30:17.100 --> 01:30:29.100
It's as if the malignant hand of Richard Nixon had reached out from the bunker in Camp David and pulled a light switch on all of us, spreading his personal darkness.

933
01:30:29.100 --> 01:30:59.100
The Empire State Building is a blinking red lighter than dark, a great pile of downtown buildings, Truman Caputi's Diamond Iceberg is a hole in the night sky, and by the end of this thing he says we are overdue for a rebellion against the corrupt criminal government in Washington, and now we have one opportunity to make that rebellion overt, turn on all your lights, drive 65 miles an hour, wear Rockefeller water airstrikes on the freeway to stop us, refuse to turn down thermostats, let Washington know we've made them again for liars and let's get back

934
01:30:59.100 --> 01:31:09.100
There's a lot of shortages instead of just the energy shortage.

935
01:31:09.100 --> 01:31:15.100
Incidentally, on the energy shortage, the latest thing is that they're planning to outlaw,

936
01:31:15.100 --> 01:31:20.100
not just have gasoline rationing, but they're planning to outlaw Sunday pleasure driving.

937
01:31:20.100 --> 01:31:24.100
And we're getting back to the World War II thing, the horror stories I was telling you last week

938
01:31:24.100 --> 01:31:32.100
about OPA spies checking up and see if you're parked near a movie, which would imply that you were on a pleasure trip.

939
01:31:32.100 --> 01:31:34.100
Well, it's the same sort of thing. How are they going to enforce this?

940
01:31:34.100 --> 01:31:38.100
If they decide to enforce outlawing pleasure driving, it's going to be a vast gestapo,

941
01:31:38.100 --> 01:31:44.100
wandering around, making sure every car on Sunday is really going to the back and forth of a hospital,

942
01:31:44.100 --> 01:31:48.100
and everything else is going to be clamped down on.

943
01:31:48.100 --> 01:31:52.100
And then they figure, well, maybe it would be easier to enforce it

944
01:31:52.100 --> 01:31:57.100
And by just simply closing out all the filling stations, you won't be able to get gas on Sunday.

945
01:31:57.100 --> 01:32:00.100
So I suppose it's a cute trick. On the other hand, what happens with the so-called essential driving?

946
01:32:00.100 --> 01:32:06.100
You're traveling a hundred miles to the hospital in an emergency. You run out of gas and gasoline isn't outlawed.

947
01:32:06.100 --> 01:32:15.100
Well, I guess it's just too bad, instead of allowing the price system to ration the so-called scarce material.

948
01:32:15.100 --> 01:32:18.100
So we're getting more and more into that sort of situation.

949
01:32:18.100 --> 01:32:23.100
There are other shortages, too. There are several particular shortages I might mention now.

950
01:32:23.100 --> 01:32:31.100
There's steel. Steel was surplus. Only a few years ago, there was a big surplus of steel.

951
01:32:31.100 --> 01:32:34.100
A few years before that, there was a so-called shortage.

952
01:32:34.100 --> 01:32:38.100
Things happened obviously very rapidly in the steel business.

953
01:32:38.100 --> 01:32:43.100
What happened with the steel industry is that there were severe Phase 4 price dealings.

954
01:32:43.100 --> 01:32:46.580
The current, let's look at the current price dealings. There have been severe price

955
01:32:47.140 --> 01:32:49.260
phase two and three and a half also.

956
01:32:50.300 --> 01:32:52.500
The result of all of which was that the

957
01:32:54.580 --> 01:33:00.020
price of steel was held, has been held way below the free market price and as a result you have a steel shortage.

958
01:33:00.260 --> 01:33:04.860
Of course the Living Council, for example, in its wisdom refused to grant a price increase

959
01:33:05.700 --> 01:33:12.660
because the excuse was, you see, the profits were high. If you look at the profit ratio and you say, hey, the profits are pretty high,

960
01:33:13.100 --> 01:33:18.100
Especially compared to 1959-70 when there was a recession, the profits had increased quite a bit.

961
01:33:18.100 --> 01:33:24.100
Then you'd say, well, we don't allow the price increase. Not realizing, of course, that the whole point of prices moving up and down

962
01:33:24.100 --> 01:33:30.100
is not to allow a rate of profit, but to allocate supply and demand in accordance with all market clearing.

963
01:33:30.100 --> 01:33:33.100
No shortage, no surplus setup.

964
01:33:33.100 --> 01:33:39.100
As a matter of fact, the thing that just happened today, November the 20th,

965
01:33:39.100 --> 01:33:47.100
Today, the latest issue of Human Events has come out, a long report of a speech by Steve

966
01:33:47.100 --> 01:33:56.100
Jackson Grayson, who only a short couple of years ago was the head of August's price control

967
01:33:56.100 --> 01:33:57.100
program.

968
01:33:57.100 --> 01:34:00.900
He's come out on a blistering attack on all price and wage controls, saying it won't work

969
01:34:00.900 --> 01:34:07.100
because of shortages, because of hidden upgrading of workers, all the sort of stuff I've been

970
01:34:07.100 --> 01:34:08.100
telling you here.

971
01:34:08.100 --> 01:34:13.100
So, unfortunately, all these guys get great when they're out of power.

972
01:34:13.100 --> 01:34:16.100
When they're in power, they're so hot.

973
01:34:16.100 --> 01:34:19.100
The same thing happened some years ago.

974
01:34:19.100 --> 01:34:21.100
Only the oldest citizens here will remember this.

975
01:34:21.100 --> 01:34:27.100
There was a gentleman who was the head of the IRS, the Internal Revenue Service, named T. Coleman Andrews from Virginia.

976
01:34:27.100 --> 01:34:32.100
After he retired from the IRS, he stumped the country from then on, attacking income tax.

977
01:34:32.100 --> 01:34:36.100
This went to the repeal of the income tax amendment.

978
01:34:36.100 --> 01:34:42.100
So, let's say out of power, I guess they learn from experience or something.

979
01:34:42.100 --> 01:34:51.420
So, there's also a great statement that I found from the executive vice president of

980
01:34:51.420 --> 01:34:55.860
American Standard Incorporated, a certain Bryce Durant, who said, quote, as long as

981
01:34:55.860 --> 01:35:01.780
we have price control, it's hard to assess the true price and availability of alternative

982
01:35:01.780 --> 01:35:02.780
materials.

983
01:35:02.780 --> 01:35:14.780
It's like playing with cards when you can't read the numbers on them, the summation of what happens when there's no price system, no freely fluctuating price system to allocate resources.

984
01:35:14.780 --> 01:35:23.780
So that was the steel problem. Also, of course, there's a big, big shortage in paper, really big, big.

985
01:35:23.780 --> 01:35:30.780
My brother-in-law happens to be a printer in the South, and he has enough paper only because he's stored up a lot of paper.

986
01:35:30.780 --> 01:35:41.180
The problem why is there a paper shortage, well for several reasons, one of the biggest

987
01:35:41.180 --> 01:35:43.700
factors is again price controls.

988
01:35:43.700 --> 01:35:48.900
What happens again, you see, when the phase 1, 2, 3 and a half, etc. came in at a time

989
01:35:48.900 --> 01:35:58.580
during a recession when profits were low and so forth, and then the prices were then frozen

990
01:35:58.580 --> 01:36:04.460
We've been in a very low profit margin and then profits go up and the government says

991
01:36:04.460 --> 01:36:05.460
that's a terrible thing.

992
01:36:05.460 --> 01:36:06.460
Profits are now increased.

993
01:36:06.460 --> 01:36:10.860
We won't allow you to increase prices and so we're stuck with a paper price way below

994
01:36:10.860 --> 01:36:18.220
the free market and this generates the famous paper shortage.

995
01:36:18.220 --> 01:36:23.620
There's no shortage by the way in lumber and plywood, only in the paper part of the industry.

996
01:36:23.620 --> 01:36:30.020
What happened at Lumber of Plywood was a healthy falling off of residential mortgages because

997
01:36:30.020 --> 01:36:35.340
of the building crunch in 1973, so that's the interest rate going up.

998
01:36:35.340 --> 01:36:40.340
So the shortages are a function, again, of the price control setup, again, not exactly

999
01:36:40.340 --> 01:36:46.340
creating a shortage but causing paper to be much less plentiful supply, declining supply.

1000
01:36:46.340 --> 01:36:50.420
Again, we have very, very heavily in the picture the environmental crazies, whom I mentioned

1001
01:36:50.420 --> 01:37:17.420
in the last week, who, because paper is probably the most polluting of all industries, so there was a massive closing up of paper mills, all the old paper mills in Wisconsin and other areas, New England, etc. were shut down, and of course that led to a dropping off, a shift to the left of the supply curve of paper, which of course created more of a shortage if you have, because the free market price then became even higher.

1002
01:37:17.420 --> 01:37:39.420
I thought of a bone mower speech I gave this week, last week on price controls, which I may as well use here also, which is explaining the difference between scarcity and shortage, between the shift of the supply curve to the left and a shortage which means you can't get anything at the existing price.

1003
01:37:39.420 --> 01:37:44.420
Rembrandts, for example, are very, very scarce. Nobody ever talks about a Rembrandt shortage.

1004
01:37:44.420 --> 01:37:50.720
If you want to buy a Rembrandt, they're always available for the $2 million or whatever you want to kick in for it.

1005
01:37:50.720 --> 01:37:57.820
The point is, even though they're very, very scarce and not likely to increase in supply,

1006
01:37:57.820 --> 01:38:06.120
nobody worries. There's no griping about a Rembrandt shortage because you pay the free market price, which balances supply and demand.

1007
01:38:06.120 --> 01:38:11.120
Also, there's a cement shortage, which again, there are two things involved.

1008
01:38:11.120 --> 01:38:41.120
and again we have almost a litany here, you know what the two things are, one is price control, imposed during a period of recession, locked in with a very low rate of return and so forth and preventing new plants from being built and cement plants, and second the environmentalists who are worrying about the pollution caused by cement plants, leading to a closing down of a lot of the old cement plants and decreasing the supply.

1009
01:38:41.120 --> 01:38:50.120
The other thing is the final icing on the cake is that cement factories tend to use a lot of natural gas as fuel and there's a big natural gas shortage caused by the government's price regulations.

1010
01:38:50.120 --> 01:38:56.120
So one thing about the market is everything impinges and everything else.

1011
01:38:56.120 --> 01:38:58.120
All right.

1012
01:38:58.120 --> 01:39:09.120
I come now to a couple of special areas of price control which, apart from the current disaster,

1013
01:39:09.120 --> 01:39:22.120
There are certain areas of price control which have been going on for many years and where we have shortages almost as a permanent fact of life in America and almost accepted as such because the people who have really gotten to this point don't know any better.

1014
01:39:22.120 --> 01:39:33.120
There is, for example, in New York City we have a special, it leaves a path, a special permanent shortage which most of the public doesn't know about in America and that's an apartment shortage.

1015
01:39:33.120 --> 01:39:40.920
You can't find apartments very easily, if at all.

1016
01:39:40.920 --> 01:39:48.120
The apartment shortage in Manhattan, the chronic apartment shortage, this is going on for approximately 1940,

1017
01:39:48.120 --> 01:39:54.120
came in, not coincidentally, with the rent control law, which was passed at the same time.

1018
01:39:54.120 --> 01:39:57.120
New York City is one of the few cities in America that has rent control.

1019
01:39:57.120 --> 01:40:02.120
I think there are a few others that, in a benighted fashion, just put it in again last year.

1020
01:40:02.120 --> 01:40:08.680
And all the other cities in the country have removed it at the end of World War II. We kept it, we kept it, continued on with it.

1021
01:40:08.680 --> 01:40:18.200
The result of the, the result of rent control, again, is during an inflationary period, so the demand curve keeps going up, and the free market rents keep going up.

1022
01:40:18.200 --> 01:40:23.320
The government then decrees the rents should remain the same, let's say, as it has been before.

1023
01:40:23.320 --> 01:40:31.400
This means over the years, as the demand curve keeps going up because of inflation, and the rent is frozen at the old rate,

1024
01:40:31.400 --> 01:40:45.400
The gap between the man and supply keeps increasing. The apartment shortage, in other words, the shortage of apartment space, which is what has been so long in the market, keeps increasing and being aggravated.

1025
01:40:45.400 --> 01:40:53.400
Well, what happened was that before, I like to tell a story, this is a story which I tell my kids and I'm sure it's not going to be repeated in our lifetime.

1026
01:40:53.400 --> 01:41:00.400
I told my students the story about the queuing up behind the butcher shop and I'm pretty sure this is going to be repeated.

1027
01:41:00.400 --> 01:41:02.800
The other story, I'm afraid, is not going to be repeated.

1028
01:41:02.800 --> 01:41:08.640
That's the story of New York City in the Golden Age, before 1940, when everybody moved every year.

1029
01:41:08.640 --> 01:41:14.800
It was an incredible situation. Every year, there was a one-year lease, and October the 1st, for some reason, the lease was up.

1030
01:41:14.800 --> 01:41:20.400
And, Ma, where are we moving this year? Well, I think we'll move, you know, three blocks down and two blocks over.

1031
01:41:20.400 --> 01:41:24.080
And it was a magnificent and beautiful thing. There were vacancies all over the place,

1032
01:41:24.080 --> 01:41:29.280
and every income level and every size of apartment. It was just great, just terrific.

1033
01:41:29.280 --> 01:41:39.280
And people moved every October 1st, the moving vans, the whole streets were clogged with moving vans, moving from one department to the other.

1034
01:41:39.280 --> 01:41:46.280
Immediately bingo comes to record for a long time, bingo, the disappearance of the great October 1st moving fest.

1035
01:41:46.280 --> 01:41:51.280
Nobody moves anymore, it's a very rare event.

1036
01:41:51.280 --> 01:41:58.280
And the knowledge of this has disappeared from New York life.

1037
01:41:58.280 --> 01:42:05.280
And of course the excuse given by the establishment was, well of course there's a form of shortage because population is going up.

1038
01:42:05.280 --> 01:42:11.280
Well first place population not suddenly go up on November 1st, 1940 or whatever the date was passed.

1039
01:42:11.280 --> 01:42:17.280
Second place, population of New York City is not going up.

1040
01:42:17.280 --> 01:42:24.280
It's remained about the same for about 20 or 30 years, the same 7.x million, whatever it is.

1041
01:42:24.280 --> 01:42:27.280
It really remains remarkably constant.

1042
01:42:27.280 --> 01:42:32.280
So, again, we see the old control devil at work.

1043
01:42:32.280 --> 01:42:39.280
What happened was that after it comes about 1947, I think it was,

1044
01:42:39.280 --> 01:42:44.280
and there are other people much more expert in this area than I am here tonight,

1045
01:42:44.280 --> 01:42:50.280
what happens is that the politicians, they have wisdom, look around and they find out

1046
01:42:50.280 --> 01:42:53.280
there's no new houses being built, no new apartment houses.

1047
01:42:53.280 --> 01:42:58.080
Hey, this is kind of a peculiar thing. During the 20s and 30s, lots of apartment houses are being built.

1048
01:42:58.080 --> 01:43:03.080
How come, here we are in a big post-World War II boom, there ain't no houses being built?

1049
01:43:03.080 --> 01:43:08.380
It's dawned on them that maybe there's some relationship between heavy rent control

1050
01:43:08.380 --> 01:43:14.480
and the big short, the big holding rents below the free market rate, and the fact that no new houses are being built.

1051
01:43:14.480 --> 01:43:17.880
It is, by the way, much easier to get across to the public.

1052
01:43:17.880 --> 01:43:22.980
The idea that control, that price control will cause a drop of future supply.

1053
01:43:22.980 --> 01:43:32.980
Not too difficult to get over. The really difficult thing to get over is that even given the supply, price control below the market price causes shortages and misallocation.

1054
01:43:32.980 --> 01:43:39.980
So that's much more difficult to get over. But the idea that no new stuff will be built is fairly easy to comprehend, apparently.

1055
01:43:39.980 --> 01:43:45.980
So what happened is the administration at the time decided, aha, here's what we'll do.

1056
01:43:45.980 --> 01:43:51.980
We'll induce new housing to come in by having a free market of new houses, no rent control for new housing.

1057
01:43:51.980 --> 01:43:56.540
of Housing. Of course there's no rent control at all for office buildings either. That's

1058
01:43:56.540 --> 01:44:00.540
causing one of the biggest office building boom probably in the history of the world

1059
01:44:00.540 --> 01:44:08.340
the last 20 years that everybody should turn into this 40 story monster. And so okay we'll

1060
01:44:08.340 --> 01:44:13.100
have a new, we'll have free market for new apartment houses to keep the old rent control

1061
01:44:13.100 --> 01:44:18.980
in the old apartment house. But all of a sudden the New York City housing market was split

1062
01:44:18.980 --> 01:44:24.660
1902, it was bifurcated, markets are usually interconnected, now we had the old housing

1063
01:44:24.660 --> 01:44:29.020
market, we still have the big shortage, going bigger and bigger, for old apartment buildings,

1064
01:44:29.020 --> 01:44:34.300
these old apartment buildings were built before 1947, the new apartment buildings were free

1065
01:44:34.300 --> 01:44:35.300
market.

1066
01:44:35.300 --> 01:44:40.540
The result of this was, since the people couldn't find the old apartments, this increase in

1067
01:44:40.540 --> 01:44:44.900
demand curve is like substitutes, we now have two markets, this increase in demand curve

1068
01:44:44.900 --> 01:44:51.500
Man-Curve for New Housing, a new apartment, just like shutting off natural gas by putting

1069
01:44:51.500 --> 01:44:55.700
a maximum price control on that, increase in the man-curve for heating oil.

1070
01:44:55.700 --> 01:45:00.220
So this means there's an increase in the man-curve for new apartments, and this increase, the

1071
01:45:00.220 --> 01:45:04.740
method of free market rent for the new apartments was much higher than it would have been without

1072
01:45:04.740 --> 01:45:06.900
the rent control system.

1073
01:45:06.900 --> 01:45:07.900
You have this huge gap.

1074
01:45:07.900 --> 01:45:13.180
You have a situation where, for example, an old eight-room apartment on West End Avenue

1075
01:45:13.180 --> 01:45:18.980
It was very sturdily built, built like a fortress, with large rooms and so forth, would be going

1076
01:45:18.980 --> 01:45:20.940
in something like $125 a month.

1077
01:45:20.940 --> 01:45:26.260
On the other hand, a new building built up, built in a rather jerry-built fashion on First

1078
01:45:26.260 --> 01:45:31.500
Avenue or something, a three-room apartment, where you can hear the person down the hall

1079
01:45:31.500 --> 01:45:37.180
turn the light switch, this goes for $500 a month, something like that.

1080
01:45:37.180 --> 01:45:48.180
We have this enormous and crazy disparity between rents, because the demand was forced in, was channeled into these new apartments.

1081
01:45:48.180 --> 01:45:57.180
And, of course, then people think that, well, if we eliminate rent control in the old apartments, then the rents will skyrocket up to what it is in the new apartments, First Avenue Center.

1082
01:45:57.180 --> 01:46:03.180
It's not true. What would happen would be a rise in the rents in the old apartments and a fall in rents in the new apartments.

1083
01:46:03.180 --> 01:46:08.300
and Equalization Tendency, so it was going back to the old one-housing market, interconnected

1084
01:46:08.300 --> 01:46:11.300
market, before the split.

1085
01:46:11.300 --> 01:46:19.900
Wow, what happened is, so this continued on, pegged along, more or less in this fashion.

1086
01:46:19.900 --> 01:46:23.660
Oh, by the way, one of the things that happened, one of the ways in which the housing shortages

1087
01:46:23.660 --> 01:46:29.340
have manifested, apartment shortage, is that you have things like queuing up, the equivalence

1088
01:46:29.340 --> 01:46:37.340
of Queuing Up, favoritism, black market, all these things show up in New York City apartments.

1089
01:46:37.340 --> 01:46:42.780
For example, queuing up, you're on the waiting list, for example, in the building in which

1090
01:46:42.780 --> 01:46:48.260
I live, which happens to be one of these old-wall buildings or old-wall building type.

1091
01:46:48.260 --> 01:46:52.820
If you want to move to a seven-room apartment, let's say you have a long waiting list, three-year

1092
01:46:52.820 --> 01:46:56.380
waiting list or something like that, the point is what moves you up to the head of the waiting

1093
01:46:56.380 --> 01:46:57.380
list?

1094
01:46:57.380 --> 01:47:20.380
The Lord knows, for the laugh of the gods, if however, you happen to be a brother-in-law of a landlord, or a friend of a landlord, or if a certain amount of money changes hands, either with the super or the landlord, the super never comes to land, sort of his own, he begins to allocate the property, then you go up, you shoot up on the waiting list, it often tends to happen.

1095
01:47:20.380 --> 01:47:32.380
You also have a situation where, well for example, and this happened in France, the famous juvenile study, the same sort of thing is happening here to a lesser extent.

1096
01:47:32.380 --> 01:47:40.380
In France everything is much more aggravated. You begin to haunt the funeral parlors, people turn into ghouls in other words.

1097
01:47:40.380 --> 01:47:49.380
For example, just as an instance of this, a friend of mine, who, as she would say, is sort of lacking in good taste and refinement anyway,

1098
01:47:49.380 --> 01:47:57.380
called me up very excitedly one day, I think it was a Saturday afternoon or something like that, and said,

1099
01:47:57.380 --> 01:48:02.380
hey, it's a fantastic thing, this old opera singer has died in an eight-room apartment on Broadway,

1100
01:48:02.380 --> 01:48:07.380
because there was an article about her on the Times, and apparently she died, and she lives in an eight-room apartment,

1101
01:48:07.380 --> 01:48:08.380
and so on.

1102
01:48:08.380 --> 01:48:09.380
He wasn't married or anything.

1103
01:48:09.380 --> 01:48:10.380
Nobody else was living there.

1104
01:48:10.380 --> 01:48:13.420
And he's going to rush over in an hour and grab the apartment, buy the apartment from

1105
01:48:13.420 --> 01:48:17.860
the super or whatever the transaction is going to be.

1106
01:48:17.860 --> 01:48:24.980
So he rushed over there, as I say, not hampered by refinement.

1107
01:48:24.980 --> 01:48:26.940
Rushed over there.

1108
01:48:26.940 --> 01:48:28.980
He found out about five couples were ahead of him.

1109
01:48:28.980 --> 01:48:31.300
He was way, way down the list.

1110
01:48:31.300 --> 01:48:33.660
So ghoulishness comes to the fore.

1111
01:48:33.660 --> 01:48:34.660
You haunt the...

1112
01:48:34.660 --> 01:48:36.140
Who died an hour ago?

1113
01:48:36.140 --> 01:48:39.140
What apartment they have, and you rush over.

1114
01:48:39.140 --> 01:48:45.140
And Paris apparently has the regular systematic kind of thing where you put,

1115
01:48:45.140 --> 01:48:50.140
you not only put a super or a landlord on a retainer, you put the funeral parlors on retainers.

1116
01:48:50.140 --> 01:48:54.140
So the funeral director has the coffin that comes in or the corpse comes in,

1117
01:48:54.140 --> 01:48:57.140
check up, you pull you up, give you the quick call, tell you about the apartment.

1118
01:48:57.140 --> 01:48:59.140
It just opened up.

1119
01:48:59.140 --> 01:49:05.140
So this sort of unhealthy, I think we all agree, kind of system

1120
01:49:05.140 --> 01:49:08.580
system is generated by the rent control process.

1121
01:49:08.580 --> 01:49:13.940
There's also, I say, the black market and one of the common customers on the west side

1122
01:49:13.940 --> 01:49:19.660
of Manhattan, which is sort of the key, probably the most biggest gap in the country between

1123
01:49:19.660 --> 01:49:23.820
the pre-market price and the rent control price, you put the super on a retainer, you

1124
01:49:23.820 --> 01:49:26.980
go on various billings, you put the super on a retainer and say, call me up and stuff.

1125
01:49:26.980 --> 01:49:28.980
That's sort of very common practice.

1126
01:49:28.980 --> 01:49:34.500
One of the things that happens is that people get locked in.

1127
01:49:34.500 --> 01:49:40.020
If you happen to be in this rent control apartment and the gap keeps increasing because of inflation,

1128
01:49:40.020 --> 01:49:41.020
here you are.

1129
01:49:41.020 --> 01:49:42.500
You're sort of locked in at something like serfdom.

1130
01:49:42.500 --> 01:49:45.740
So what you have, typically on the west side of Manhattan, you have the following kind

1131
01:49:45.740 --> 01:49:48.140
of scenario, as I say.

1132
01:49:48.140 --> 01:49:52.100
A couple moving with two or three kids moves into an eight-room apartment in Central Park

1133
01:49:52.100 --> 01:49:58.340
West, West End Avenue in the 1930s when the apartment was, I don't know, $85 a month.

1134
01:49:58.340 --> 01:50:03.420
And then it's, well, what happens is they decided to complete this story.

1135
01:50:03.420 --> 01:50:08.780
They decided to, the city decided, well, we can't leave the rents exactly at 1940 levels,

1136
01:50:08.780 --> 01:50:10.860
it's a little too much, a little too blatant.

1137
01:50:10.860 --> 01:50:15.180
So it will allow a 15% increase every time somebody moves out, and some other family

1138
01:50:15.180 --> 01:50:16.180
moves in.

1139
01:50:16.180 --> 01:50:19.020
You can imagine what happens then, the economic analysis of that.

1140
01:50:19.020 --> 01:50:23.020
Then you have a fantastic class struggle, this initiative between the landlords trying

1141
01:50:23.020 --> 01:50:27.460
to get the tenant out and another tenant in, because 15% rise every time you do that, and

1142
01:50:27.460 --> 01:50:28.700
the tenant tries to stay in.

1143
01:50:28.700 --> 01:50:33.300
So this, instead of the landlord courting the tenant and trying to get more tenants in or

1144
01:50:33.300 --> 01:50:39.860
The Landlord is trying to keep the tenant there when he is in and painting and improving the amenities of the place.

1145
01:50:39.860 --> 01:50:48.700
The landlord is trying to get the old tenant out, improve the amenities of the new tenant, then get the new tenant out and touch and reshuffle, so he can get somewhere up to the free market price.

1146
01:50:48.700 --> 01:50:59.300
Anyway, in the situation of the couple with the two, three, three kids, moving in the 1930s at $85 a month, so the rent goes up a little bit, but the couple stays in, they are locked in.

1147
01:50:59.300 --> 01:51:04.660
Since the children grow up and move away, the husband dies and you have a little old widow,

1148
01:51:04.660 --> 01:51:09.860
an eight-room apartment paying $120 a month. The free market rate is something like $500.

1149
01:51:10.900 --> 01:51:16.980
So the thing is the widow can't move because if she moved any other apartment in a new building,

1150
01:51:16.980 --> 01:51:21.220
available apartment would be like one room for $300 a month, something like that. So the little

1151
01:51:21.220 --> 01:51:25.620
old lady is locked in and you have this fantastic what's known as space hoarding, so to speak.

1152
01:51:25.620 --> 01:51:28.620
Certainly not her fault. I mean, I think that's the situation.

1153
01:51:28.620 --> 01:51:33.620
Whereas younger couples getting married, or new people coming in from out of town,

1154
01:51:33.620 --> 01:51:38.620
have to go to the Park Avenue or the First Avenue apartment and pay the $400 to the two rooms.

1155
01:51:38.620 --> 01:51:44.620
You have this tremendous misallocation of, for a new family, just because they're new,

1156
01:51:44.620 --> 01:51:46.620
just because they're newly arrived on the scene, you're penalized.

1157
01:51:46.620 --> 01:51:48.620
Whereas an old family, sort of, it's like surgery.

1158
01:51:48.620 --> 01:51:52.620
An old family, you've got the seniority, and you're there forever.

1159
01:51:52.620 --> 01:52:01.620
The other thing that happens, another peculiar and bizarre thing here is that what the rent is purely depends on how many times people have moved in and out.

1160
01:52:01.620 --> 01:52:11.620
So you can have on the same house, the floor above and the floor below, you can have the same apartment, one going for $85 a month and the other going for $400, depending on how many times people have moved out.

1161
01:52:41.620 --> 01:52:45.620
The government, in its wisdom, passed a new improved zoning law.

1162
01:52:45.620 --> 01:52:50.620
The zoning law is always designed to help the public give fresh air and grass and everything

1163
01:52:50.620 --> 01:52:55.620
all that sort of nonsense to the smeltering New York City masses.

1164
01:52:55.620 --> 01:53:00.620
And each time, of course, they do that, they impose drastic restrictions on how much can be built.

1165
01:53:00.620 --> 01:53:02.620
There have to be setbacks every few feet.

1166
01:53:02.620 --> 01:53:05.620
As a result, this cuts down the supply of new houses.

1167
01:53:05.620 --> 01:53:09.620
This, of course, is not taken into consideration, presumably by the city planners.

1168
01:53:09.620 --> 01:53:15.060
So, because you might, if you could only build a building with, you know, with almost all

1169
01:53:15.060 --> 01:53:20.740
the lot, a very expensive lot taken up with grass or something, you might have beautifully

1170
01:53:20.740 --> 01:53:21.740
grassy buildings.

1171
01:53:21.740 --> 01:53:26.220
The other hand, you might not have too many buildings at all as a result of this imposition.

1172
01:53:26.220 --> 01:53:31.980
But anyway, so the real estate business was given several years grace and several years

1173
01:53:31.980 --> 01:53:34.380
warning that zoning law was going to go into effect in a few years.

1174
01:53:34.380 --> 01:53:40.100
And so, of course, it was a fantastic rush to build buildings quickly, build new apartment

1175
01:53:40.100 --> 01:53:44.500
buildings, to get in before the crazy zoning law comes in, when the whole housing market

1176
01:53:44.500 --> 01:53:45.500
will be covered forevermore.

1177
01:53:45.500 --> 01:53:51.780
So there was this big bulge, a sort of a sudden bulge in the mid-60s, a supply curve to the

1178
01:53:51.780 --> 01:53:59.140
right, in new houses, new apartments, as a result, for the first and probably last time

1179
01:53:59.140 --> 01:54:02.980
in history in New York City, we had a fall in rents in new buildings.

1180
01:54:02.980 --> 01:54:10.980
Almost back to the golden age of the 1930s, not quite, but it was sort of a trailing cloud of glory from the past.

1181
01:54:10.980 --> 01:54:17.980
For example, during the 1930s, the way you cut rents, you don't start off by cutting rents, but that's pretty drastic.

1182
01:54:17.980 --> 01:54:25.980
What you do is you offer concessions, otherwise you offer one month or two months or three months free rent for the person to move in and sign a two or three year lease.

1183
01:54:25.980 --> 01:54:33.680
This is a form of rent cut, but it's not an official form, you can retract the concession much more easily, you can jack the price up again.

1184
01:54:33.680 --> 01:54:41.180
So they started offering new buildings, they were offering concessions, rental concessions for the first time since the 1930s, it was a beautiful thing to watch.

1185
01:54:41.180 --> 01:54:50.180
There were actually vacancies and signs, vacancy signs instead of the old table bribes, that sort of stuff.

1186
01:54:50.180 --> 01:55:02.940
Well, of course this was only a temporary bonanza, because then comes the zoning law, and bingo, the supply of new houses forced to almost zero,

1187
01:55:02.940 --> 01:55:12.040
and that means the supply curve of new houses shifts to the left, and it race suddenly, and it's in other words a result of this zoning law kind of situation.

1188
01:55:12.040 --> 01:55:29.040
So the result of this is that when the leases come up, two, three-year leases, come up for the post-1947 housing, all of a sudden, the free market price is going way up because of this bulge and then bulge the other way after the zoning law went into effect.

1189
01:55:29.040 --> 01:55:39.040
As a result, the new tenants, the new building tenants were asked for a very hefty rent increase on the landlords, 50% in some cases, 30% or whatever.

1190
01:55:39.040 --> 01:55:43.960
So hysteria then hit. Of course the free market was blamed for this. See, if you have a free

1191
01:55:43.960 --> 01:55:47.560
market in houses, the landlords will gouge you and raise the rents infinitely and all

1192
01:55:47.560 --> 01:55:53.960
that sort of thing. It was all nonsense. You can't trust the market and the new building

1193
01:55:53.960 --> 01:56:00.880
tenants, many of whom were quite wealthy, of course. I mean, there's a sort of a knee-jerk

1194
01:56:00.880 --> 01:56:04.520
response of tenants are always poor and landlords are always wealthy. That's a lot of nonsense.

1195
01:56:04.520 --> 01:56:10.520
There are lots of little old ladies who have like one apartment building with two families.

1196
01:56:10.520 --> 01:56:12.520
They'll get small income out of it.

1197
01:56:12.520 --> 01:56:15.520
There are lots of very, very wealthy tenants.

1198
01:56:15.520 --> 01:56:20.520
Nelson Rockefeller used to be a tenant before the Park Avenue building went co-op.

1199
01:56:20.520 --> 01:56:25.520
So you don't have to really bleed for the tenant, per se.

1200
01:56:25.520 --> 01:56:32.520
So the tenants put enormous pressure on the city government to do something about this.

1201
01:56:32.520 --> 01:56:39.520
and the city government put on rent control on new buildings for the first time since 1947.

1202
01:56:39.520 --> 01:56:47.520
And now we have two different types of rent control. We have the old-law rent control, the pre-47, the really rugged one,

1203
01:56:47.520 --> 01:56:51.520
and you have a peculiar thing called rent stabilization for the new buildings,

1204
01:56:51.520 --> 01:56:55.520
where you're allowed a maximum of 15% increase per year or something like that.

1205
01:56:55.520 --> 01:57:00.520
So, of course, the result of this was a totally clobber new residential building.

1206
01:57:00.520 --> 01:57:15.520
And who emblazes, if you're in the building construction business, who would build a residential building in oral now when you can just as easily build an office building and know that you're going to be free from right-control forevermore, in contrast.

1207
01:57:15.520 --> 01:57:23.920
Well, finally, in 1971, a little bit of sanity hit the housing situation when the famous

1208
01:57:23.920 --> 01:57:29.760
Urstadt report was issued, the New York State Housing Commissioner, Charles Urstadt, who

1209
01:57:29.760 --> 01:57:35.320
said, well, really the whole problem of poor maturities in New York City is the rent control.

1210
01:57:35.320 --> 01:57:38.400
And he, I guess he would have likely gotten rid of rent control altogether, that was politically

1211
01:57:38.400 --> 01:57:39.400
impossible.

1212
01:57:39.400 --> 01:57:50.400
So he pushed through the legislature the so-called vacancy control law, which decontrols apartments as soon as they become empty.

1213
01:57:50.400 --> 01:58:00.400
Of course, and continues the old 15% or whatever, some other formula, continues the old severe rent control if your tenant stays in there.

1214
01:58:00.400 --> 01:58:05.400
Of course, this sets up a fantastic class struggle, because that means if you're able to kick the tenant out,

1215
01:58:05.400 --> 01:58:11.400
When you get a tenant out, the whole thing, you go up to the free market rent, and the tenant claims in there for dear life.

1216
01:58:11.400 --> 01:58:14.400
He stays there, he or she stays there, or 40% or 50% below.

1217
01:58:14.400 --> 01:58:18.400
So as a result, they passed all sorts of laws.

1218
01:58:18.400 --> 01:58:24.400
Special Hotline Housing Bureaus would stay open 24 hours a day or something,

1219
01:58:24.400 --> 01:58:28.400
and make sure you know, call up whenever the landlord dumps garbage in your window, whatever it is.

1220
01:58:28.400 --> 01:58:34.400
So, well what happened, this has not really been tested very well,

1221
01:58:34.400 --> 01:58:37.920
Because as soon as, the thing, the law is only into effect, the legacy decontrol law

1222
01:58:37.920 --> 01:58:43.160
is only in effect for about two months when President Nixon passes his freeze, and then

1223
01:58:43.160 --> 01:58:46.960
federal rent controls came in, and then everything got messed up.

1224
01:58:46.960 --> 01:58:48.280
I'm not really sure what's going on.

1225
01:58:48.280 --> 01:58:53.960
I think now for the last six months or years now, the state legacy decontrol law has been

1226
01:58:53.960 --> 01:58:54.960
in use in practice.

1227
01:58:54.960 --> 01:58:59.200
I don't know the effect of it, except a lot of us barely have eliminated it altogether

1228
01:58:59.200 --> 01:59:04.320
and go back to the old rent control, which is essentially the current situation.

1229
01:59:04.320 --> 01:59:08.880
So anyway, we've managed to have a 30, because of wartime, the shortage of, the rent shortage

1230
01:59:08.880 --> 01:59:12.120
of course was blamed on wartime as well as population.

1231
01:59:12.120 --> 01:59:17.200
The war has been over now, World War II has been over for, what is it, almost 30 years,

1232
01:59:17.200 --> 01:59:22.280
and the emergency rent control still remains in force, and of course the shortage remains

1233
01:59:22.280 --> 01:59:23.280
in force.

1234
01:59:23.280 --> 01:59:29.960
All right, there are other areas where, well I should mention, I mentioned France also

1235
01:59:29.960 --> 01:59:34.760
and also in passing, Bertrand de Juvenal wrote an excellent little pamphlet on rent control

1236
01:59:34.760 --> 01:59:39.680
in France, particularly in Paris, and he wrote it in 1948, and apparently the situation is

1237
01:59:39.680 --> 01:59:45.040
more or less the same now, and he got the same sort of situation, except more severe,

1238
01:59:45.040 --> 01:59:50.720
where rents have remained not too much higher than they were in 1914, and prices are astronomically

1239
01:59:50.720 --> 01:59:54.880
higher, and so people, a wealthy person, for example, might pay one percent of their income

1240
01:59:54.880 --> 01:59:59.680
in rent, or one dollar a month or something like that for rent, I mean the whole thing

1241
01:59:59.680 --> 02:00:05.840
As a result of this, you can't rent any apartment at all. You buy an apartment, which is happening

1242
02:00:05.840 --> 02:00:10.960
on the west side of Manhattan also, where the building goes co-op, in quotes, so that

1243
02:00:10.960 --> 02:00:15.360
instead of renting an apartment, you have to buy it. The result of this gets completely

1244
02:00:15.360 --> 02:00:20.600
out from under the rent control law. There's no price control on co-ops, on buying the

1245
02:00:20.600 --> 02:00:24.320
whole apartment. That means there's plenty of apartments available if you have the money

1246
02:00:24.320 --> 02:00:29.600
to buy it. Here, rent control originally is supposed to come in to help poor tenants.

1247
02:00:29.600 --> 02:00:38.600
help out the poor tenant. Now we're getting more and more in a situation where the only time you can be a tenant, so to speak, is when you're not a tenant, when you have to scratch to buy the whole apartment.

1248
02:00:38.600 --> 02:00:42.600
There's a lot of peculiar kind of reverse effect.

1249
02:00:42.600 --> 02:00:56.600
At any rate, coming on to, I should say also that in Europe, rent control is very severe in Scandinavian countries, in France, Israel and so forth,

1250
02:00:56.600 --> 02:01:03.600
the result of which is an apartment shortage is very severe, correspondingly severe.

1251
02:01:03.600 --> 02:01:11.600
There are other areas where it's not quite as obvious, where price control does its work in causing shortages.

1252
02:01:11.600 --> 02:01:17.400
For example, we've had a problem for quite a few years of airport congestion, particularly

1253
02:01:17.400 --> 02:01:20.400
at peak hours.

1254
02:01:20.400 --> 02:01:25.440
And here I commend your attention to an excellent pamphlet on airports, called Airports and

1255
02:01:25.440 --> 02:01:31.200
Congestion, something like that, by Ross Eckerts, put out by the American Enterprise Institute.

1256
02:01:31.200 --> 02:01:37.840
What happens is, so what you have is a shortage of airspace there on the airport, all right?

1257
02:01:37.840 --> 02:01:38.840
So what's going on here?

1258
02:01:38.840 --> 02:01:39.840
Why is there a shortage?

1259
02:01:39.840 --> 02:01:41.840
Again, of course, we always look for government.

1260
02:01:41.840 --> 02:01:48.840
In the case of airports, airports are universally owned by municipal government.

1261
02:01:48.840 --> 02:01:54.840
Currently, it's become part of the American heritage that you can't have a private commercial airport.

1262
02:01:54.840 --> 02:02:03.840
I understand that Pan Am, a friend of mine who works for Pan Am, Pan Am several years ago tried to get permission from New York City to build its own airport in the New York area,

1263
02:02:03.840 --> 02:02:11.840
in the New York area, which would have relieved congestion, which would have referred to its own planes as being denied, as being evil, immoral, whatever.

1264
02:02:11.840 --> 02:02:15.840
So the tradition is you have to have government-controlled airports.

1265
02:02:15.840 --> 02:02:24.840
The government, as we'll see later as we get the government in general, as we see what keeps sniping away at government throughout, as we get them all integrated more and more,

1266
02:02:24.840 --> 02:02:29.840
government has no particular reason for maximizing profits.

1267
02:02:29.840 --> 02:02:35.280
We're operating efficiently or anything of that sort.

1268
02:02:35.280 --> 02:02:40.720
Their pricing is, they price them whatever way they want to for political reasons because

1269
02:02:40.720 --> 02:02:46.360
whatever happens, the taxpayer is going to pick up the tab after any deficit and of course

1270
02:02:46.360 --> 02:02:47.480
there's no competition.

1271
02:02:47.480 --> 02:02:56.200
So what happens is the airports have priced their services in a really bizarre way, which

1272
02:02:56.200 --> 02:02:58.320
no private airport would ever do.

1273
02:02:58.320 --> 02:03:05.180
The problem comes in the fact that the big shortage is in the runways, and the problem

1274
02:03:05.180 --> 02:03:08.600
comes in the fact that the price of the runway, that was the landing fee and the take-off

1275
02:03:08.600 --> 02:03:14.280
fee, is extraordinarily low, something like $5 for a landing, and it's equal for every

1276
02:03:14.280 --> 02:03:19.600
plane that comes in, whether it's a 300 passenger airliner or a private plane zooming in with

1277
02:03:19.600 --> 02:03:23.200
one person in it, and it's equal for the time of day, it doesn't matter whether it's rush

1278
02:03:53.200 --> 02:04:06.200
Cueing up, in this case. So, cueing up, of course, in the airlines, is stacking up. See, the Pan Am circles for an hour, so the two private planes, they happen to get there first. It's like a line. You can't reserve your space.

1279
02:04:06.200 --> 02:04:17.200
Pan Am can't say, I'll reserve runway 5 of Kennedy Airport at 5 o'clock. No, no, you take your chances. If you get there, there happens to be two private planes zooming in ahead of you, which is tough luck.

1280
02:04:17.200 --> 02:04:24.520
So this sort of, so this, here we have a system of congestion being a shortage of space, brought

1281
02:04:24.520 --> 02:04:29.600
about by this crazy pricing policy of pushing, keeping the airport on its way below the market

1282
02:04:29.600 --> 02:04:35.960
price. The Eckerd Pamphlet goes into a whole discussion of what happens, what happens for

1283
02:04:35.960 --> 02:04:41.680
example when Kennedy Airport I think raised its price for, its landing fee from something

1284
02:04:41.680 --> 02:04:47.160
like $5 to something like $25, and really $25 is pretty small too, but yet just this

1285
02:05:17.160 --> 02:05:23.560
to Spend Five Dollars of Land in Westchester, and that was hardly a market-clearing price

1286
02:05:23.560 --> 02:05:26.760
increase, but that itself was a point of the way.

1287
02:05:26.760 --> 02:05:33.640
Also, of course, the idea of charging passengers, for example, higher fares and rush hours than

1288
02:05:33.640 --> 02:05:38.920
an off-hours, the intelligence thing, would help the problem too.

1289
02:05:38.920 --> 02:05:47.120
However, the really guts of the thing is the runway caper, which is still way below the

1290
02:05:47.120 --> 02:05:54.320
free market level, and as I say, what happens is that since Pan Am is much more willing to pay,

1291
02:05:54.320 --> 02:06:00.640
say, a hundred dollars even than a single person, the pleasure of flying on Sunday or any other time,

1292
02:06:03.280 --> 02:06:08.720
the pleasure of flying off to Westchester and then take longer to come into the city.

1293
02:06:11.200 --> 02:06:15.360
Meantime, while they're doing this, the airports also have another peculiar pricing system.

1294
02:06:15.360 --> 02:06:19.360
They give monopoly concessions to all the concessionaires.

1295
02:06:19.360 --> 02:06:22.360
The concessionaires then charge monopoly prices.

1296
02:06:22.360 --> 02:06:28.360
So the whole study has been done, for example, the price of a sandwich at an airport restaurant,

1297
02:06:28.360 --> 02:06:32.360
a comfortable restaurant very close by, if you get sort of a...

1298
02:06:32.360 --> 02:06:42.360
And the airport sandwich is a much higher price, probably also poor in quality, although it's difficult for a scholar to gauge.

1299
02:06:42.360 --> 02:06:49.040
But, so the point is, you have this monopoly, you have the monopoly concession, the concessionaire

1300
02:06:49.040 --> 02:06:53.840
charges the monopoly price and the concessionaire shares the monopoly gain with the airport.

1301
02:06:53.840 --> 02:06:58.920
In other words, the airport is sort of like a kickback to the airport itself.

1302
02:06:58.920 --> 02:07:03.960
And then, the airport expects to get most of its money to recoup, to break even or make

1303
02:07:03.960 --> 02:07:09.680
money on, from the concessionaires and whatever it doesn't, whatever it fails to, whatever

1304
02:07:09.680 --> 02:07:14.680
and the number of deficits it has in the concessionaire business, that's what it charges for the runways.

1305
02:07:14.680 --> 02:07:19.680
Instead of charging a market clearing price for the runways, it simply charges as little as it can,

1306
02:07:19.680 --> 02:07:25.680
what the customers have left over after they've been stocked for the crummy sandwiches.

1307
02:07:25.680 --> 02:07:33.680
And the insurance, and there are all sorts of concessions in airports which design the charge monopoly prices.

1308
02:07:33.680 --> 02:07:39.680
So, again, if we have private airports and there's no reason why we can't have private airports,

1309
02:07:39.680 --> 02:07:43.680
this sort of pricing system would not be going on.

1310
02:07:43.680 --> 02:07:51.680
There's another, of course, very prominent form of shortage and congestion, even more

1311
02:07:51.680 --> 02:07:57.680
prominent than the airports, and that's traffic congestion in big cities.

1312
02:07:57.680 --> 02:08:02.680
rush hour, New York City is getting to the point where any hour Manhattan is congested.

1313
02:08:02.680 --> 02:08:07.680
What you have again is a shortage of traffic, a shortage of street space.

1314
02:08:07.680 --> 02:08:11.680
And of course this is not unrelated to the fact that the owners of the streets,

1315
02:08:11.680 --> 02:08:15.680
invariably and everywhere, are government.

1316
02:08:15.680 --> 02:08:19.680
How does government price the streets? Well, they price them in a very irrational manner,

1317
02:08:19.680 --> 02:08:24.680
not in a market clearing manner. If they did, there wouldn't be any, there wouldn't be a custom congestion.

1318
02:08:24.680 --> 02:08:34.520
The government's excuse is that they're pricing by the user tax on gasoline, so the tax you

1319
02:08:34.520 --> 02:08:38.600
pay per gallon of gasoline goes for the highways and all that sort of stuff, so it all balances

1320
02:08:38.600 --> 02:08:39.600
out.

1321
02:08:39.600 --> 02:08:43.760
In the first place, it doesn't really balance out, but aside from that, the point is you're

1322
02:08:43.760 --> 02:08:53.080
spending as much money then, to drive across you, as much to drive around Upper Westchester

1323
02:08:53.080 --> 02:08:58.080
at 3 a.m. as it does to drive around midtown Manhattan at 5 p.m.

1324
02:08:58.080 --> 02:09:01.440
So the fact that you're spending money per gallon doesn't really mean a darn thing.

1325
02:09:01.440 --> 02:09:04.560
It doesn't, it's not a market clearing kind of price.

1326
02:09:04.560 --> 02:09:09.040
No private street owner in his right mind would ever price in that manner.

1327
02:09:09.040 --> 02:09:10.280
So what kind of pricing would they be?

1328
02:09:10.280 --> 02:09:14.640
Well, obviously they'd be, you can't predict in detail how the market would operate, but

1329
02:09:14.640 --> 02:09:20.480
obviously it'd be in a way to charge more money for congested streets than for non-congested

1330
02:09:20.480 --> 02:09:23.040
streets, for outlying areas.

1331
02:09:23.040 --> 02:09:34.040
There can be all sorts of devices to do this. There's various economists, by the way, even non-market economists have got an interest in this area as sort of an intellectual game of how could this operate, come up with interesting suggestions.

1332
02:09:34.040 --> 02:09:47.040
One way is to have a special sticker, like a license. So instead of having just the regular license, you have the sticker on the window or whatever, which you have to pay for either per week or per month or per day, whatever can be always adjusted,

1333
02:10:17.040 --> 02:10:18.040
shortage.

1334
02:10:18.040 --> 02:10:26.520
Plus the fact they're priced a lot peculiar way, so that very often they're priced such

1335
02:10:26.520 --> 02:10:29.960
a way that you're subsidized for spending more time there.

1336
02:10:29.960 --> 02:10:33.440
In other words, if you park for four hours, of course you're less per hour if you park

1337
02:10:33.440 --> 02:10:34.440
for a half hour.

1338
02:10:34.440 --> 02:10:39.480
Of course, if you want to get, if you want to have a high turnover and clear the market

1339
02:10:39.480 --> 02:10:41.040
for parking, you should do just the opposite.

1340
02:10:41.040 --> 02:10:45.920
You charge more for a longer period and try to induce the guy to get out, the new car

1341
02:10:45.920 --> 02:10:46.920
can come in.

1342
02:10:46.920 --> 02:10:48.920
The governments almost never do that.

1343
02:10:48.920 --> 02:10:53.920
So what you would have, and the thing is what the government does, and this is typical government activity,

1344
02:10:53.920 --> 02:11:00.920
either they subsidize parking so the price is zero in effect, almost virtually zero for street space.

1345
02:11:00.920 --> 02:11:02.920
So you have tremendous congestion.

1346
02:11:02.920 --> 02:11:09.920
Or they say, well what we have to do, there's no getting around, we have to ban all cars from Midtown Manhattan, prohibit them.

1347
02:11:09.920 --> 02:11:13.920
Stop them, shoot anybody who comes in the 42nd Street.

1348
02:11:13.920 --> 02:11:15.920
It's a typical government kind of activity.

1349
02:11:15.920 --> 02:11:20.920
Where either something is free or you subsidize it until it's completely free or else you're prohibited altogether.

1350
02:11:20.920 --> 02:11:30.920
Obviously what the market would do, if the market were allowed in this situation, is to gauge this thing and price it, and set the price in such a way as to clear the market.

1351
02:11:30.920 --> 02:11:39.920
Everybody would be happy, there would be no shortage of parking space, it would be fairly expensive perhaps, but that's the way it should be, since that would be allocating the scarce space for the intense demand.

1352
02:11:39.920 --> 02:11:47.920
I don't know what the price of course would be, but it would be somewhere, you know, it would be somewhere in between zero and being prohibited.

1353
02:11:47.920 --> 02:11:54.920
So someday if we ever get this kind of market pricing, if we ever get private streets, we will get market pricing.

1354
02:11:54.920 --> 02:11:58.920
The funny thing is most people think of the onus, if somebody advocates privately owned streets,

1355
02:11:58.920 --> 02:12:08.920
that the assumption is that the government is operating a street so beautifully that the onus on proving that the market can handle it is on the person who advocates the market alternative.

1356
02:12:08.920 --> 02:12:24.920
It seems to me it should be just the opposite. Certainly in New York City, the streets are miserable, dirty, and littered, and congested, and it's difficult to see how any private street company can do any worse, just on empirical grounds, one would think they would try it.

1357
02:12:24.920 --> 02:12:32.040
So, we should tend to look then at things, not just sort of obvious things like nails

1358
02:12:32.040 --> 02:12:36.480
and cement, where shortages can be caused by price control, also in these sort of hidden

1359
02:12:36.480 --> 02:12:44.240
areas where people don't think in terms of prices, such as airport space, such as traffic

1360
02:12:44.240 --> 02:12:45.720
space and so forth.

1361
02:12:45.720 --> 02:12:51.760
We'll get, later on, we'll get on to questions of conservation and go back to the whole thing

1362
02:12:51.760 --> 02:13:14.760
And also, the whole question of private property in general in different hidden areas, so to speak, we'll get to later on, the whole things of private property areas where nobody thinks in terms of private property, such as radio, TV channels, we'll get to that later on.