WEBVTT

NOTE Price Controls: Case Studies

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This afternoon's lecture is on case studies and price controls.

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Dr. Klein touched on price controls this morning, but I'm going to go into more detail about them.

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Let's start with what's called a price ceiling, which is a legal maximum on the price at which a good can be exchanged.

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The general effects, Dr. Klein went over, but I will just refresh your memories here.

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The immediate effect of any attempt to set the price of a good below the equilibrium price,

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the price at which supply and demand intersect, is, as you can see, a shortage.

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So in this case, we use milk as the example here.

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If the government with the best of intentions, okay, and I'm just assuming that for argument's sake,

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the best of intentions puts a price ceiling on milk in order to allow a lower-income families and their children to enjoy milk.

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What occurs is, despite these good intentions, an immediate shortage, okay.

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As the price falls, the law of demand kicks in and the amount quantity demanded increases from 13 million gallons.

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Let's say per per month to 25 million gallons while on the other hand

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Okay, at least for the time being we have a vertical supply curve and we have 13 million gallons on the market

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So there's an immediate shortage of 12 million gallons. Okay. There are people out there

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Who are willing to pay the the $2 price?

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But yet are frustrated in their search for a gallon of milk. So one of the

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One of the advantages of an equilibrium price is that everybody who wants to buy a unit or more of a good can always find a willing seller.

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And every willing seller or every seller that wishes to sell at the equilibrium price can always find a buyer.

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That includes the labor market, as Peter Klein pointed out.

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But once we begin to manipulate prices politically, we find that that is no longer the case.

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So, who winds up with the 13 million gallons of milk that are on the market?

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Well, there are different ways of rationing.

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Okay, we have a first-come, first-served, it's the most obvious.

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But, for example, during World War II, it was very difficult to find meat, okay?

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And what the butchers would do, they would put the meat away, or a part of it, okay?

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The meat they knew was in short supply and they could easily sell out.

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And they would keep it for family members, neighbors, and particularly good customers.

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So you were out of luck if you went shopping, so to speak, for beef during World War II, outside your own neighborhood.

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There was no way you could find it.

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There's also racial, ethnic, or religious discrimination that comes into play.

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If you know there's a big waiting list out there, then you can pick and choose the people that you wish to deal with.

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It's no longer those people who have the highest valuation for the good in terms of money that you sell to, okay?

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So if you don't like redheads, which is Murray Rothbard's favorite example, you say, no, I'm sorry, we're all out, okay?

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Knowing full well that during the course of the rest of the week or the rest of the day, you can easily sell whatever you have at the control price.

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We'll talk more about this when it comes to rent controls.

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It's particularly important there.

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Then there's political rationing schemes according to bureaucratic determined needs.

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Okay, so the bureaucrats determine how much gas each person can consume.

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So not only must you have the money to pay for it, but you must also have ration coupons and so on.

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If you recall in 1973 and 1979 when we had the shortage of gasoline in the US,

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there was a rationing scheme according to which certain people with odd numbers could come on Monday, Wednesday and Friday to fill up their gas tanks.

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Other people could come on Tuesdays, Thursdays and Saturdays, and everybody could buy gas on Sundays.

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So it was according to some arbitrary criterion, that is, what was the last number on your license plate?

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Was it odd or even? So you see how arbitrary it all gets.

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Of course, then, black markets are organized, and in the case of milk, even something like milk,

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You'll find organized crime beginning to get involved because now it's very, very risky to provide the milk.

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And so those people who are willing to provide the milk at the higher prices and undertake the risk for the high prices

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tend to be those elements in society that are least law-abiding, okay?

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So you'll see people hanging around schools, guys with long trench coats saying,

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If you're a kid, you want a pint of chocolate milk, and you'd sell it to the kid for not $2, but if you go up to maybe $8 or something like that,

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because over time, as we'll see at the lower price, as costs keep rising for the production of milk, the long-run supply curve becomes relevant and we have an exacerbation of the shortage.

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So the shortage now goes from 12 million gallons, the difference between 13 million and 25 million, all the way to 20 million gallons.

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So price controls discourage production right in the middle of a shortage, and it makes the shortage worse.

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And then generally what happens is that Congress either repeals the price ceiling on milk or imposes further price ceilings, that is, on the cost of the inputs.

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as they see the shortage getting bigger and they realize that the profit margins have disappeared for the producers

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they then begin to impose price controls on cattle feed, dairy cows, milking machines

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that causes shortage of these things and then the

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price controls radiate out to control more and more inputs until the whole economy

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becomes socialized

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or approaches full socialization

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now that's the general

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effects of a price ceiling. Let's go into some specific examples.

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Let's go into rent controls.

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Okay, we do have, as we point out, a shortage of apartments, and I'll just show you a quick

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diagram here of rent controls.

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This is a small city in which...

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Can this be...

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Can this be magnified, Chad? Zoom, I see.

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Oh, there we go. Just hold it. Okay.

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Okay. So that the equilibrium rent in a small city is $900.

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At some point in the past, it was at a fair rent, $600, let's say.

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and at that rent, there was no shortage.

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And then as inflation has continued or as population has increased,

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the demand has gone up in money terms and what has happened is that now we have $900.

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So let's assume then that the city council steps in, passes an ordinance that rolls back the rent to the old price of $600.

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So initially we have 700 apartment units available, that's the fixed stock, the short run or immediate run vertical supply curve, intersecting with the demand curve D1, but now it no longer intersects at $600.

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We have 300 more people and households who wish to live in this city in a rental unit than are available.

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So there's 1,000 people desiring to rent and only 700 units available.

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So we have an immediate shortage.

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Now the reason why we have this shortage is because people are using space wastefully.

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In other words, despite the popular view and the view of left-wingers that, well, if you allow the price to rise back to $900,

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If you take off rent controls in New York City, people will be living out in the streets.

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Well, that's simply not true.

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People are very ingenious in finding arrangements by which they can conserve on living space.

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So, for example, college students living in New York City, if you live in a two-bedroom apartment and you have one roommate,

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you would take on two more roommates, which would allow you then to pay the rent, the higher rent.

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and at the same time you'd be economizing on space.

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Multifamily arrangements would occur, this certainly occurred with immigrants from southern and eastern Europe in the 1870s and 1920s.

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You had more than one family living in an apartment.

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If you have a widow whose husband has passed away, obviously, and her children are gone, living in a three-bedroom apartment,

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She may very well then at the higher rent begin to rent to other seniors to conserve on space and to save money.

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It doesn't mean people are going to be thrown out and living in the streets.

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People are very ingenious. They don't need bureaucrats to tell them what kind of living arrangements to make.

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In New York City, there's no controls on luxury apartments, quote unquote,

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but these are just tiny small apartments that have been built in the 1990s and so on

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aren't subject to price controls and yet there arose a phenomenon called mingles, okay, where single people would live together, even a male or female, but not in a romantic relationship, it was just another social adjustment to the higher price or higher rent, okay, so you would in the short run then, if you allowed, took off the rent control, find that through alternative arrangements and so on, people would adjust, that is, the quantity demand

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The standard of apartment units would decrease, okay?

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Other people would move out to the suburbs and undertake a more costly commute at the higher rent,

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so there is elasticity in the supply curve.

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People think that there's a fixed amount of houses, a fixed amount of people,

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and if there's more people demanding at the lower rent than there is supply of houses,

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then you're going to get some people living in the streets.

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Of course, that's not true, as I've just shown.

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Now, what are the supply side effects? These are very interesting.

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The supply side effects are such that in the long run, not only are you going to freeze the shortage,

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but the shortage is going to get worse. That is, over time, the owners of apartment buildings will adjust.

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That is, you'll move down your supply curve. They'll take some of the units off the market.

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Now, the units will come off the market in a number of ways.

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First way is what we called in the New York metropolitan area, back in the 80s and 90s, condomania.

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Remember, the price for this property of the landlord is only controlled on the rental market.

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Now, if New York City, for some reason, put a control on the, let's say, salaries of accountants in New York City,

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in order to make business more attractive by lowering costs and so on.

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What would occur?

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Well, since the accountant's

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salary is controlled in one market,

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he would be able, or she would be able, to move to other markets. They would move geographically

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to other, Baltimore, Boston, or wherever,

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on the one hand,

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over time, or they would move out of accounting.

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Well, the same thing is true in the rental market.

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There's no control on what you can sell condos for,

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or what you can sell co-ops for, so many of these rental units will be taken off the market and transformed into co-ops and condos.

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So you get a shrinkage of the rental market, and the shortage will grow from 300 to, in this particular case, 600 units.

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The shortage will grow worse, but that's not the worst of it on the supply side.

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What will occur is that you'll find that, almost immediately, as costs continue to rise, utilities, taxes, the costs of maintenance labor for the buildings,

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as those costs continue to rise, they're not controlled, the profit margins will be squeezed, so the owners of the rental units,

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If they're not going to turn them into condos and so on, we'll begin to cut down on costs.

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And the way to cut down on costs in the market for apartments is to cut down on maintenance.

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Now that's not a big deal if you live in a middle income or upper income apartment.

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All right, they fire the doorman. They don't paint the common areas as frequently.

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They don't, their response time to problems in the apartments become, instead of two days, maybe a week or two weeks.

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The apartment doesn't become unlivable.

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But in a low-income apartment, which is by definition no frills, you begin to get a deterioration of the physical building itself.

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The heating system goes out in the middle of the winter and it's not fixed for a week or two weeks, or at all.

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lights in the common areas, if the bulbs burn out or the fixture is smashed, they're not replaced, so the hallways become havens for junkies and so on.

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Broken windows in the halls aren't replaced, so you begin to get a deterioration into slums.

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So the result then is a further, in the long run, deterioration, not only deterioration of the housing stock, but further reduction in the quantity supply, as after a while, the taxes and utilities, the costs are higher than the rents that they're getting.

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So that the landlords literally walk away from the buildings.

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And then the city takes over and the city is the worst possible landlord, as many tenants can attest.

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And the tenants get almost no services.

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And there's a very interesting article which I would like to read you by a former landlord.

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This was written a while ago in the 1970s.

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And it was entitled, I Was a Slumlord.

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It's very very revealing because it gives you specific statistics and data about what resulted from the price controls or rent controls in New York City.

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It starts off, I was a slumlord, here's how I came to be one. I was born 69 years ago. I learned the craft of cabinet making in my native land, Hungary.

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This would have been my 50th year of working actively creating in wood many things of lasting beauty. My name is well known and well respected in the trade.

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In the trade about 20 years ago. I bought a small factory building in the East in East Harlem

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Where I worked together with my team of 10 to 12 men with changes improvements and additional construction the factory cost me about

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$65,000 few years after I bought the building the adjoining building number 510 was offered to me at a bargain price because it was in poor repair

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With the idea of expanding my workshop into it or using the lot for parking

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I bought it. For $12,500 in cash, I became the owner of a four-family house.

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So remember, he is talking about, it's 1972 when this is written, and so these are 1952 prices.

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The four families living in the house are all decent working people. To my knowledge, they do not need and never ask for charity, public assistance or help.

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Yet this law forces me to give them shelter and heat at lower prices than my own cost.

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So he points out that for several years his cash expenses have exceeded his income by about 25 percent.

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Those are his out-of-pocket cash expenses for utilities and taxes, okay?

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And this without interest or amortization on the mortgage.

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So he's not even covering the mortgage, okay?

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Or paying a penny towards it.

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The building was in poor repair when I bought it.

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By now it is the favorite hunting ground of every city inspector.

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The building needs a new roof, new walls, new ceilings, new plumbing, new wiring, new doors and a new heating system.

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It needs about $15,000 worth of repairs.

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The building now has a gross income of $2,600 a year.

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So he's getting $2,600 a year in gross rents,

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of which I am paying for taxes and heat about $3,000.

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So every year he's losing $400.

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Why didn't I apply for a hardship rent increase?

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My accountant told me there would be a blizzard of paperwork

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and any increase that he could get, his fee would more than eat up.

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At least the first two years of the increase would go to the fee for the accountant.

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So far, I've been fined four times for failure to comply with orders to correct building violations.

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I was summoned to court again only a few weeks ago, explained my predicament to the judge,

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assured me of his sympathy, and then fined him $40 and promised that the next fine would be much more burdensome.

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Okay, I did not go home from the court.

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I went straight to the offices of the local Roman Catholic Church and asked them to accept the building as a free gift.

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They didn't. Of course, they're not. They're not economically ignorant. I mean, they're holy, but they're not stupid.

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An hour later, I made the same offer to the Protestants. Obviously, the Protestants are no dumber than the Catholics. Again, the answer was no.

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Next, I offered the building free, without any money, to the four tenants. They didn't want it.

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Of course, they didn't. They'd have to come up with the extra $400 at least.

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Okay, I will abandon the building, was my next thought. I will stop collecting rents. Will not pay taxes or heat. I will let the city take over.

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This sounds like an easy way out, but my lawyer tells me it cannot be done without my being legally, financially responsible.

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So here I am with a building assessed by the city at $21,000 that you can't give away. So it's basically garbage.

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Yet they're assessing it for tax purposes at $21,000.

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That I cannot give away, I cannot sell, and I cannot abandon. I am forced by law to operate.

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He's sort of a serf to his own building, okay, so he can't get away from it.

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That is, I was, I am not any longer. I have sold the building for $30,000.

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Okay, now how do you do that? As an extra inducement, I threw into the bargain my factory building.

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So he gives up his business, okay, which cost me close to $70,000 for nothing.

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So he threw in the factory building for nothing, and he got $30,000 for the whole.

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In economic terms, he really sold both buildings for $30,000.

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In other words, I sold real estate that cost me $80,000 about 15 years ago for $30,000 to be paid without interest in six years.

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So it's much less than $30,000.

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With the $50,000 that I lost in the deal, which is a major part of my life savings, I bought freedom.

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At 69, I am too old to start a revolution or to fight City Hall.

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On the other hand, I do not like to be summoned to appear on criminal court.

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My only crime is that I dare to own a building in New York.

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I'll badly miss my shop where I spent 49 happy years, but I'm no longer a slumlord.

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Well, think about this happening on a vast scale in New York City.

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And what do you get? You get abandoned buildings, even though it's against the law.

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This guy was law-abiding. The landlords just walk away from these buildings.

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And you get the spectacle of the South Bronx.

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Now, economists have said, and it may have come from Milton Friedman and George Stigler

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and their famous critique of rent controls written in the early 1950s called roofs or ceilings.

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That if you have price ceilings, you're not going to have roofs, you're not going to have new housing built or housing maintained.

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And they said, the statement they made was that the easiest way to destroy a city besides bombing it is to impose rent controls.

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So what we have here is a series of pictures of bombing, of cities that were bombed out during World War II,

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and some pictures of photos of what the South Bronx looked like, I guess in the 1980s or so.

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So let me just show you some of these.

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Okay. Is that bomb damage or rent control? I have the answers on the back.

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Okay. That's bomb damage. Right. That is Aachen, Germany.

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I think one of those was Hans Hoppe's house.

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Bomb damage or rent control? Yeah, that's rent control.

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That is, that is the south, that's the Bronx.

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It's hard to tell, but that looks like what? That looks, I'll tell you what it is. It's, I think that's the bomb damage. Yeah, that's Hiroshima.

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It is. Okay.

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No, that's Nagasaki.

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That's out of focus.

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Yeah, that's out of focus, if that is. Let me get that in focus for you.

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There we go.

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That's also Hiroshima.

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That, I believe, is rent control. Yes, it is. That's the Bronx.

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That's rent control again.

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Focus. It's hard to tell. I would venture bomb damage. Yeah, that's Nagasaki again.

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yeah that's rent control and last but not least yeah that's rent control also

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okay that's a South Bronx okay yeah okay so you get a deterioration of the

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housing stock and a shrinkage of the housing stock from from conversions and

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and from abandonments, okay.

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You also get a spillover of demand, okay, to the condominium markets, price of condominiums go up, houses in surrounding areas,

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the price of houses in New Jersey and Connecticut that are within commuting distance, they're forced up, so you do get that diversion of demand, okay.

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But you also get a number of other effects. You get tenant immobility, which is an interesting phenomenon.

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That is, you might have in a neighborhood, let's say, an older woman living in a four-bedroom house

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who had been there for years, okay, since rent control was, let's say, imposed in 1946.

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or maybe she inherited from someone who lived there when rent control was imposed.

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And yet, you might have a family of six living around the block from her in a two-bedroom apartment.

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People don't move. No rent control is a natural flow, right?

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Because the four-bedroom apartment, a lot of things, is more expensive than the two-bedroom apartment.

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But under rent control, the longer you've been there, because it's generally what we call vacancy decontrol, which I'll get into in a moment,

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The lower the price you're paying, so you don't get this natural flow that you would get on the free market where a single woman would, to cut her costs, move into a building with one bedroom, okay?

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In fact, if she leaves her apartment, she has to wait on that long line that we showed, okay?

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There's a long waiting list for apartments. That's how that shortage manifests itself.

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And number two, even if she gets an apartment, the apartment prices have risen in the meantime.

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They're allowed to rise in New York City. There's partial vacancy decontrol by 15% every time a new tenant moves in.

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So she'd be paying a higher price, okay, in many cases.

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So you get a massive misallocation of resources.

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We have one family, maybe two families jammed into a two-bedroom apartment and a single person, you know, in a three or four-bedroom apartment.

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That does not occur on the free market, obviously, because the pricing reflects the differences in the amount of space.

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You also get what we call non-price rationing, where landlords can now indulge their personal preferences and prejudices.

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You get allocation by race, lifestyle, pets, children.

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People of races that are not as well liked by the landlord will be turned away because he knows there's this huge shortage

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and that someone he likes will show up, okay?

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In other words, what we might call the opportunity cost of discrimination falls, okay?

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Also, people with children and pets, since pets and children cause noise that annoy other tenants and also raise maintenance costs,

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they are not a desirable family to rent with families with these, so they turn them away.

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Even though it's against the law, they have ways of turning these people away.

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In fact, I give my undergraduates my example of what I call the lecherous landlord.

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Let's say he'll only rent to females between 18 and 25 years of age.

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Okay, turn everyone else away.

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And let's assume that he has an apartment.

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Now, on a free market, he has to pay for that, in a sense of foregone rents,

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because he'll have a greater vacancy rate.

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Okay, and I want to show you some figures I have here.

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Let's see what it is. Yeah.

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Yeah, here we go.

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Let's assume for a moment that he has, he charges $1,000 a month on a free market, let's say the rent is $1,000 a month, he has 20 units, okay, and that he can rent them, you know, his vacancy rate maybe is, you know, one unit at any given time is not rented out on the free market, okay.

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Now there's suddenly a rent control and now he's limited to, let's say, $500 a month.

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Now what he can do, or actually before we do that, let's say he discriminates on the free market.

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If he discriminates on the free market, let's say his vacancy rate then goes up to five.

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$1000 a month, which is the equilibrium rent. He has 20 units to rent out. On a free market, he may have vacancy of five if he keeps turning away people that don't meet his criterion, which is young, female, 18 to 25.

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So it's going to cost him the five vacant units, which on average is what he has, times $1,000 a month, times 12 months.

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It's going to cost him $60,000 a year to indulge his prejudice, or in this case his positive preference for a certain type of person.

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Now, what happens if suddenly you have rent controls and the price is $750?

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okay well he knows that there are many people out there so if he turns there's

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a huge shortage so if he turns one person away it's very likely someone else will

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show up what happens is that that's $60,000 a year falls possibly to zero

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okay he has almost no vacancies because of the massive shortage he can find the

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people that he likes because they've been they're not able to find

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departments so obviously according to law of demand a person will will indulge

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And then all crazy things that are in the lease are actually enforced because with vacancy decontrol, you want your tenants to leave because the next tenant will bring you 15% more as it works in New York City.

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So, for example, if you ever live in an apartment and you're ready to lease, basically you can't do anything after 10 o'clock except breathe.

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You can't have one related to people staying overnight, can't play the television set, if you live in garden apartments, as I have done, you can't wash your car in a parking lot, you can't have any pets, and all of these crazy...

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But they don't enforce them necessarily. They only are there to protect the landlord and the other tenants against someone who's very, very noisy or someone who is disruptive.

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So it's legally easier to get them out, to evict them.

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So what happened when we had, under Nixon's wage and price controls, a lot of small towns, New York has had rent controls the longest, by the way, from 1946 onward.

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But after World War II, rent controls were taken off in most of the rest of the country.

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They were reinstated in the early 1970s with the wage price freeze that was imposed by Nixon.

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And from my own personal experience, I lived in southern New Jersey where most of the towns did not at the time impose wage and price controls.

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So when I moved in there, I noted that it said no pets, and we had a cat, and so I asked one of the neighbors, I said, you know, do we have to hide our pets or what?

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She said no, they never enforce it, okay.

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And also I noted that people were washing their cars in open daylight, out in the parking lot, and so on, which in the least said you weren't allowed to do it.

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And I moved to North Jersey, Northern New Jersey, where they did impose rent controls.

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And those rent controls stayed on even after Nixon's wage and price controls ended.

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They stayed on throughout the 70s in many places.

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And so I figured, you know, it's the same thing.

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They're not going to enforce these.

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So my neighbor comes running over as I was moving in and she saw the cat.

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She says, you better hide that cat.

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I said, why?

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And she says, well, the landlord hires kids, like a Gestapo group of kids that goes around during the day

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When you're at work, he looks in the windows to see if anybody has pets, and then he sends you an eviction notice, because he can charge the next tenant more.

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And also I noted people at night with flashlights washing their car at midnight, because they're hiding from the lamp.

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So all of these sort of fascistic clauses in the rental agreement, the lease agreement, are now enforced.

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because they don't, if one tenant leaves, well, you know what?

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We have other tenants out there waiting to come in, okay, would-be tenants, prospective tenants, all right?

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And I personally know of a landlord, I mean, it goes beyond now just neglecting the building, okay?

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Landlords become the enemy of tenants, and so there's sort of a class warfare between,

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especially in New York City, if you ever see it, tenants are always picketing landlords,

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landlords are always bad-mouthing tenants, they hate one another, okay?

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And the reason being that the landlord would love to have a tenant out of there.

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And so he makes conditions as unpleasant as possible for the tenant.

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And I personally know of a landlord that allowed a band to practice until all hours of the

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night in a vacant apartment to drive the other tenants out.

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So you get that type of malicious behavior by landlords.

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Now, do you hate the person who you buy an automobile from?

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Do you hate the guy you rent the hotel room from?

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Of course not.

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But if there was similar types of controls,

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and it was in the interest of those people

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to allow these products that you're buying

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and services to deteriorate,

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then there would be an abiding hatred

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as there is in New York City.

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I was shocked when I went to Houston in the mid-1980s

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during the oil bust, and tenants and landlords

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said hello to one another.

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I stayed at a friend's apartment and not only that, there were advertisements all over free six months rent, first six months rent free, free microwave ovens were being given away.

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There was a lot of competition, there were no rent controls, there was continual building going on, they had overbuilt because of the oil bubble that had occurred and so there was competition and that kept the rents low.

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Okay, a few other points I want to make about rent control, one of the most interesting, let's say, unintended consequences of rent control occurred in France, okay, after World War II, France has had rent control for a long time, okay, on and off from the end of World War or the beginning of World War I,

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And what happened in that case was that the only way you could find an apartment was through the black market.

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In New York you have these black market arrangements. You have people going and bribing the janitor or the superintendent to be placed higher on the list.

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or they would charge key money, they would charge you $2,000 for your key.

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And that was a way of getting around the rent controls.

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But in France, it went much further than that.

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There was absolutely no way of getting an apartment.

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Young couples, soldiers that returned, had to live with, when they got married,

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they had to live with their in-laws, which is not a great thing to do,

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especially when you're first married.

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And so the wife's full-time job was to go around to the parks in Paris

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and find the most sickly-looking older person.

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I'm serious.

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I mean, there's an article by an economist about this,

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just describing this phenomenon.

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Follow them home and then find out their address

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and then go immediately to the superintendent

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or what they call, for instance, a concierge and pay them a big bribe.

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Okay? I think it's $1,500 a room or something to be the first one notified.

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So then you would immediately move your furniture in, as soon as the person, you know, was being carried, before they were even cold.

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So instead of being carried out, you'd get the call and you'd rush over there.

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By the way, rents, this was after World War II, rents after World War II were between $1 and $1.50.

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Okay? $1 for a single person, for a family, was about $1.50.

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It's about between 6 and 11 packs of American cigarettes at the time.

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which were circulating also as sort of a quasi-money in France, all right?

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So, you know, I'm sure the government's intent was not to turn the Parisians into a city full of ghouls,

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you know, that sort of followed old people around waiting for them to die, and it's absurd, but it happened, I mean, okay.

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I recommend that article, it's called No Vacancies by Bertrand de Juvenel, a political economist, actually,

356
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and wrote on political philosophy as well as on economics.

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There's a key question we want to ask here and that is, as Murray Rothbard always say,

358
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Cui Bono, meaning, in Latin, who benefits from rent controls?

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Well, we can think of it in the following way.

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According to popular belief,

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Well, it's the small group of greedy landlords that are hurt by rent controls, and it's the large group of poorer tenants that benefit from rent controls.

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So the large, less wealthy group is benefiting at the expense of these small, greedy, rapacious landlords.

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Now, that view is completely wrong, of course.

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In many cases, especially with middle and upper income apartments, the landlord might very well be less wealthy than his or her tenants.

365
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But there's something else that we have to really point out here.

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The people that benefit are the existing tenants, tenants that have the apartments under rent control.

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Those people who, on the diagram, are the 400 lucky enough in this town to have those apartments, okay?

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And now, so the existing tenants benefit, but there's another group of tenants. They're prospective tenants.

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They're the people that have just, let's say, gotten married and want to stay in that neighborhood, but cannot find an apartment.

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They're the people who have their jobs shifted into that city and would like to live in the city near their jobs but can't find an apartment and therefore must undertake longer commutes into the city.

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The landlords certainly are hurt, but so are these prospective tenants.

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Now, of course, who else benefits? The politicians and rent control board. They benefit.

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They get re-elected, they appear on the one hand as friends of the poor,

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but on the other hand of course, the poor people are another one of the victims of rent control.

375
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The lower income tenants are living in buildings with very poor or no services,

376
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buildings that may have very well been abandoned, they're still living there.

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So we got a list of victims, the landlords, prospective tenants and lower income tenants,

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whose buildings have turned into slums.

379
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The beneficiaries are the existing tenants

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who tend to be middle and upper class,

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middle and upper income tenants.

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Politicians and the rent control board,

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people get jobs and enforce all these regulations.

384
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Why then do these things get passed?

385
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Well, this is a political economy question.

386
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They get passed because who votes in large numbers?

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Do the lower income people tend to vote in as great proportion as the higher income and middle? Of course not.

388
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So it's the middle, it's the existing tenants who vote, first of all, and it tends to be the middle and upper income tenants who contribute to campaigns and vote.

389
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And they are the ones who are vitally interested in maintaining rent controls.

390
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The prospective tenants, they can't get apportionments in the city, so they don't vote.

391
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So you don't have to worry about them, you don't have to worry about the lower income tenants, they don't vote or contribute, or they don't vote in as great numbers.

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And you can appeal to the ones that do vote by saying that you're keeping the prices low for them, okay?

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So what you get then is basically rent controls being a government welfare program for middle and upper class tenants.

394
00:40:31.520 --> 00:40:39.520
And there's a great article, part of which I'll read to you in the Wall Street Journal, pointing out just two benefits from rent controls.

395
00:40:39.520 --> 00:40:50.520
And, of course, it's not who you would think benefited, and not who the news media tell you benefits.

396
00:41:09.520 --> 00:41:23.520
Rank controls are very, very complicated in New York City. There's different classes of categories of apartments and so on.

397
00:41:23.520 --> 00:41:36.520
But it's clear that today who benefits, and that, as we'll see from this article, is certainly people of upper and middle income.

398
00:41:36.520 --> 00:41:56.520
People from all walks of life have lucked into rent regulated New York apartments. Actresses Mia Farrow and Cicely Tyson, the Baroness Ingrid Thyssen, Sydney Biddle-Barrows, who was a so-called Mayflower Madam, State Senate Democratic Leader at the time, Manfred Orenstein, Leveraged Buyout Specialist Tom Goodwin and so on.

399
00:41:56.520 --> 00:42:02.520
Let me give you some idea of the extent to which they benefit.

400
00:42:02.520 --> 00:42:08.520
He pays about $1,900 a month for a seven-room apartment on Fifth Avenue.

401
00:42:08.520 --> 00:42:12.520
The market rate would be about $6,000 per month.

402
00:42:12.520 --> 00:42:23.520
So he's being subsidized to the tune of $4,000 per month or $48,000 per year by these lower rents.

403
00:42:23.520 --> 00:42:31.520
Jack Futterman was the chairman of Pathmark Stores, pays $1,336 a month for an apartment on Central Park South.

404
00:42:31.520 --> 00:42:40.520
That's about half the free market rent. So he's getting $1,300 per month benefit.

405
00:42:40.520 --> 00:42:47.520
Some other people that benefit.

406
00:42:47.520 --> 00:42:59.400
Alastair Cooke, the late Alastair Cooke, the late writer, the former host of Public Broadcast Masterpiece Theatre lives in an eight-room apartment on Fifth Avenue overlooking Central Park.

407
00:42:59.400 --> 00:43:11.200
The rent is about $1,500 according to the landlord and in fact would be much, much higher than that amount on the free market.

408
00:43:11.200 --> 00:43:18.400
Some inherit their apartments, so if your relative has lived there from, say, 1946, your mother and grandmother,

409
00:43:18.400 --> 00:43:25.400
you can inherit the apartment at the same extremely low rent that was enforced then.

410
00:43:25.400 --> 00:43:32.500
Mia Farrow pays about $2,900 a month for 10 rooms on Central Park West, a fraction of the market value.

411
00:43:32.500 --> 00:43:37.000
The actress grew up in the apartment, which was the setting for one of her movies.

412
00:43:37.000 --> 00:43:43.000
Her mother, Maureen O'Sullivan, was the one who had rented it.

413
00:43:43.000 --> 00:43:51.360
Entertainment lawyer, Alan J. Grubman, who has done deals for the likes of Billy Joel, Madonna, Michael Jackson, David Geffen.

414
00:43:51.360 --> 00:43:55.720
He pays about $9,000 a month for his rent-stabilized apartment.

415
00:43:55.720 --> 00:43:58.240
Now, it's astronomical, some $9,000.

416
00:43:58.240 --> 00:44:04.920
But Mr. Grubman gets the entire 17th floor of an old Park Avenue building that spans half of a city block.

417
00:44:04.920 --> 00:44:10.220
His landlord says it's the size of four large two-bedroom apartments,

418
00:44:10.220 --> 00:44:13.920
and real estate agents say they could rent it for $20,000 a month.

419
00:44:13.920 --> 00:44:18.620
So he's getting subsidized to the extent of $11,000 a month.

420
00:44:18.620 --> 00:44:20.320
And that's why rent controls aren't changed.

421
00:44:20.320 --> 00:44:23.120
These people have a lot of political influence.

422
00:44:23.120 --> 00:44:25.820
Economists have long pointed out, and I'm not necessarily in favor of this,

423
00:44:25.820 --> 00:44:31.720
that if you really want to target the poor, if they cannot afford a free market rent,

424
00:44:31.720 --> 00:44:40.220
and let's say $900, but only $600, then the way to do that is to send them simply a rent voucher of $300 per month, okay?

425
00:44:40.220 --> 00:44:46.320
Then you would not have any controls, there would still be a market price and supply would equal the demand,

426
00:44:46.320 --> 00:44:51.220
there would be no shortage, there would be no deterioration of the buildings and so on, okay?

427
00:44:51.220 --> 00:44:57.320
Now, I think even better than that is, for example, some of these southern cities policies,

428
00:44:57.320 --> 00:45:07.320
These are the Houston's policy of not having much zoning laws and allowing building, which that increase in supply naturally keeps the prices lower, okay?

429
00:45:07.320 --> 00:45:22.320
So that's the story with rent controls. Let me talk a little bit about another form of price ceiling, and that is the market for organs, okay?

430
00:45:22.320 --> 00:45:33.320
In effect, and in law, people are not allowed to sell their organs.

431
00:45:33.320 --> 00:45:40.320
They can donate them at a zero price, but they cannot sell them at a positive price.

432
00:45:40.320 --> 00:45:45.320
There was something called the Transplant Act of 1984, which made it a felony to buy or sell organs.

433
00:45:45.320 --> 00:45:48.320
This was in the US.

434
00:45:48.320 --> 00:46:04.320
So what is in effect happening, and I can show you the diagram for this, but also give you an idea of the numbers, okay, the actual numbers.

435
00:46:04.320 --> 00:46:34.320
This here. Okay. This is in 1995, I believe. Yes. In 1995, I don't know if you can see those figures there, the demand for kidneys, okay, people waiting for, or the people that demand the kidneys, there were 40,000 people that were eligible for, or that were

436
00:46:34.320 --> 00:46:45.320
medically qualify for kidney transplants, and there were 10,000 kidneys donated, so the price control was set at a zero price.

437
00:46:45.320 --> 00:46:53.320
So there were 10,000 people, many of whom were relatives of the recipients of the kidneys, who donated these kidneys.

438
00:46:53.320 --> 00:46:57.320
But there was a shortage of 30,000 kidneys in the U.S. in that year.

439
00:46:57.320 --> 00:47:07.320
The same thing with hearts. There were 6,400 people on a waiting list for new hearts, and there were only 2,400 donated at the zero price.

440
00:47:07.320 --> 00:47:15.320
Not necessarily all, but yeah, right. They were cadaveric, as we say. They were from cadavers, right.

441
00:47:15.320 --> 00:47:25.320
So basically, in 1995, US doctors performed 2,400 heart transplants operations while 4,000 patients waited for hearts.

442
00:47:25.320 --> 00:47:52.320
for Hearts, 731 of which died waiting. Situation was worse for kidneys, 10,000 kidney transplants were performed, 30,000 patients waited and 1,375 died waiting for kidney donation. For lung and liver transplants, 290 and 674 patients respectively died waiting for organs during that year.

443
00:47:52.320 --> 00:47:57.320
Now, what is the argument against paying for organs?

444
00:47:57.320 --> 00:48:05.320
Well, the argument is that somehow it's immoral to sell organs.

445
00:48:05.320 --> 00:48:08.320
Of course, they focus only on the person receiving the money.

446
00:48:08.320 --> 00:48:18.320
How dare someone benefit monetarily at the expense of someone who is in such dire need of a medical procedure.

447
00:48:18.320 --> 00:48:38.320
But of course what these physicians and these so-called medical ethicists don't tell you is that the surgeons get paid, hospital gets paid, the nurses and so on, the staff get paid, everyone gets paid except the donor.

448
00:48:38.320 --> 00:48:45.320
So, should we say then that these people are also benefiting monetarily?

449
00:48:45.320 --> 00:48:52.320
I mean, heart surgeons and people who perform kidney transplants are making a good part of their living doing this.

450
00:48:52.320 --> 00:48:55.320
So they're not only getting paid, they're making a living doing it.

451
00:48:55.320 --> 00:49:03.320
So these organs are no different than any other sort of commodity on the market.

452
00:49:03.320 --> 00:49:07.320
The government makes them different in a sense by keeping the price at zero.

453
00:49:07.320 --> 00:49:11.800
price at zero but again we can see from economic reasoning that that's simply a

454
00:49:11.800 --> 00:49:21.320
price control okay prohibiting the sale of this now there's a reason why people

455
00:49:21.320 --> 00:49:26.680
are reluctant to be organ donors okay that is cadaveric organ donors we're

456
00:49:26.680 --> 00:49:30.480
talking about you know after they pass away why won't people sign organ cards

457
00:49:30.480 --> 00:49:34.120
well people reluctant to designate themselves legally as organ donors a

458
00:49:34.120 --> 00:49:40.620
Part of that can be contributed to procrastination, but partly to anxiety,

459
00:49:40.620 --> 00:49:45.620
harbored by some potential donors that, in the event of an accident,

460
00:49:45.620 --> 00:49:50.120
emergency room medical treatment might be less aggressive for accident victims

461
00:49:50.120 --> 00:49:53.620
whose driver's license are stamped organ donors.

462
00:49:53.620 --> 00:50:00.620
So in matters of one's own life, most people tend to be quite reluctant to take risks for free.

463
00:50:00.620 --> 00:50:09.920
Now, would that all change if the price of signing a card, a donor's card, was $50,000 or $60,000?

464
00:50:09.920 --> 00:50:14.720
Most certainly would. People would overcome that reluctance.

465
00:50:14.720 --> 00:50:18.120
Whatever you think of the morality of it, we know one thing.

466
00:50:18.120 --> 00:50:24.720
Fewer people will die on waiting lists. More people will get the transplants that they need.

467
00:50:24.720 --> 00:50:34.720
The quantity supplied and demanded will be greater at the equilibrium price than the quantity supplied at the zero price.

468
00:50:34.720 --> 00:50:37.720
That's an ironclad law of economics.

469
00:50:37.720 --> 00:50:46.720
We cannot make any value judgments to say it's a good thing to get rid of these laws that prohibit sales of organs.

470
00:50:46.720 --> 00:51:01.720
But we can say positively what the effects will be, and that is more successful transplants.

471
00:51:01.720 --> 00:51:05.720
Now some doctors are beginning to change their tune about this.

472
00:51:05.720 --> 00:51:07.720
They still want to control it though.

473
00:51:07.720 --> 00:51:12.720
They think that America's medical policy makers, they're now ready to consider relaxing the laws

474
00:51:12.720 --> 00:51:21.720
to allow some form of financial incentives for organ donors, but they're unwilling to allow the market to operate.

475
00:51:21.720 --> 00:51:31.720
Well, let's look at the other side of the market. Yes, it's true, organ donors will benefit, but then again, so will those people who receive the organs.

476
00:51:31.720 --> 00:51:35.720
Remember, let's go back to the simple analysis of exchange. It's mutually beneficial.

477
00:51:35.720 --> 00:51:38.720
The people getting the money aren't the only ones benefiting.

478
00:51:38.720 --> 00:51:42.720
That's a discredited 17th century mercantilist view of exchange.

479
00:51:42.720 --> 00:51:46.720
It's ridiculous.

480
00:51:46.720 --> 00:51:50.720
And there's been some movements in the illegal kidney trade.

481
00:51:50.720 --> 00:51:55.720
A very interesting article of a few years back, 2001,

482
00:51:55.720 --> 00:52:02.720
on the lengths that the people on the waiting list will go to to get organs.

483
00:52:02.720 --> 00:52:19.720
There's certainly a black market. We've heard of an Arab or a Saudi sheikh who donated two million dollars for the new wing of a hospital in St. Louis, suddenly being pumped up on the waiting list.

484
00:52:19.720 --> 00:52:26.720
And Mickey Mantle got his liver transplant pretty quickly after it was determined he needed one.

485
00:52:26.720 --> 00:52:29.120
Again, I don't know the details of that.

486
00:52:29.120 --> 00:52:32.760
So there is a black market going on in that sense.

487
00:52:32.760 --> 00:52:37.400
But there's even a more widespread black market.

488
00:52:37.400 --> 00:52:44.800
And this article, I think, really gives you a good feel for it.

489
00:52:44.800 --> 00:52:46.440
He was desperate for a kidney transplant.

490
00:52:46.440 --> 00:52:49.080
But getting a donated kidney, he was told, would take 10 years.

491
00:52:49.080 --> 00:52:50.600
That's how long the line was.

492
00:52:50.600 --> 00:52:57.900
That's when Tati decided to pay a broker $145,000 to buy a kidney, okay?

493
00:52:57.900 --> 00:53:01.000
There are nearly 49,000 people in the United States waiting for kidneys.

494
00:53:01.000 --> 00:53:06.800
Now that, this is in 2001, that was in 1995.

495
00:53:06.800 --> 00:53:14.500
And some of that has to do with the fact that they're coming up all the time with better technology for suppressing the rejection of the organs, okay?

496
00:53:14.500 --> 00:53:19.200
So more and more people are becoming eligible for these transplants.

497
00:53:19.200 --> 00:53:29.800
So it says, these numbers, along with desperate economic conditions in the third world, have given rise to a secret underground industry that is also fueling an expansive, explosive, ethical debate.

498
00:53:29.800 --> 00:53:37.800
Within days of paying $145,000, Tati got a call from the broker late at night telling him to come to Israel's Ben Gurion Airport.

499
00:53:37.800 --> 00:53:43.600
He and three other kidney patients were whisked onto a private plane joined by a surgical team.

500
00:53:43.600 --> 00:53:46.900
They arrived at the Turkish city of Adana two hours later.

501
00:53:46.900 --> 00:53:51.620
The operations took place in a private hospital. The patients were brought in the back door.

502
00:53:51.620 --> 00:53:54.180
Tati only glimpsed the man who sold him the kidney.

503
00:53:54.180 --> 00:53:59.060
He was an Iraqi soldier, they told me, who had defected and needed money.

504
00:53:59.060 --> 00:54:02.900
Buying and selling organs is prohibited in almost every country, and yet it's happening almost everywhere.

505
00:54:02.900 --> 00:54:06.340
Most of the people who sell their kidneys are from poor countries.

506
00:54:06.340 --> 00:54:11.660
In the former Soviet Republic of Moldova, one woman told ABC News

507
00:54:11.660 --> 00:54:17.260
She sold one of her kidneys for just $1,500 to get food for her children, okay?

508
00:54:17.260 --> 00:54:19.860
In Israel, doctors can lose their licenses for doing operations,

509
00:54:19.860 --> 00:54:24.960
but there is no law preventing brokers from arranging these deals.

510
00:54:24.960 --> 00:54:30.260
Now, there's the ethical debate, of course, by people who don't need the organs, of course.

511
00:54:30.260 --> 00:54:32.660
These are the medical ethicists.

512
00:54:32.660 --> 00:54:37.860
The idea that organs can be bought and sold used to appall Dr. Michael Friedlander,

513
00:54:37.860 --> 00:54:42.180
But then some of his patients started to get into the market.

514
00:54:42.180 --> 00:54:44.820
I'm seeing patients who were in dialysis treatment, says Friedlander.

515
00:54:44.820 --> 00:54:49.620
Some of them were in very bad condition and suddenly two or three weeks later coming back well transplanted,

516
00:54:49.620 --> 00:54:53.060
very happy and in a completely different state of health.

517
00:54:53.060 --> 00:54:57.420
Most physicians in medical ethics say that buying and selling kidneys is wrong, period.

518
00:54:57.420 --> 00:54:59.020
According to whom?

519
00:54:59.020 --> 00:55:01.900
And what is their argument?

520
00:55:01.900 --> 00:55:05.860
It seems to me a violation of the very nature of what medicine is about,

521
00:55:05.860 --> 00:55:11.860
explains Dr. Nancy Shepper-Hughes. I'm always suspicious of people with hyphenated names.

522
00:55:11.860 --> 00:55:17.860
It's sort of an upper class disdain for the rest of us.

523
00:55:17.860 --> 00:55:23.860
So to suggest that the poor should be allowed to dismantle themselves bit by bit with the help of the medical profession.

524
00:55:23.860 --> 00:55:29.860
So she's condescending, the poor people don't know their best interests.

525
00:55:29.860 --> 00:55:33.860
They're going to dismantle themselves. What are they going to sell each arm and leg?

526
00:55:33.860 --> 00:55:40.620
I mean it's just an appeal to a blatant appeal to a motion, okay, so there are

527
00:55:40.620 --> 00:55:45.180
fortunately the market is responding it's a black market to this shortage and

528
00:55:45.180 --> 00:55:51.860
is helping some of these poor souls get their transplants, okay, all right let me

529
00:55:51.860 --> 00:56:02.420
get now to the case of price, let's see, yeah we have the price floors which tend

530
00:56:02.420 --> 00:56:11.420
tend to exist in agricultural markets in the US and elsewhere, in Europe in particular.

531
00:56:11.420 --> 00:56:25.420
Once again, Peter Klein did go over price floors and I want to just sort of give you a little refresher.

532
00:56:25.420 --> 00:56:28.620
Somehow, these notes got all mixed up.

533
00:56:28.620 --> 00:56:36.020
Here we go, the price floor.

534
00:56:36.020 --> 00:56:40.920
In this case, the price floor is in the milk market.

535
00:56:40.920 --> 00:56:48.220
Let's say you want to keep a higher price of milk in order for farmers to have stable incomes.

536
00:56:48.220 --> 00:56:54.020
The argument is usually, look, if the price of milk suddenly falls, let's say, to one dollar a gallon,

537
00:56:54.020 --> 00:57:03.020
Let's say the equilibrium price is $5 a gallon or it was $8 and then the supply increases due to technological improvements and so on.

538
00:57:03.020 --> 00:57:11.020
Price falls to $5. Well, then what happens is many of the farms go out of business and supply the next year is much smaller

539
00:57:11.020 --> 00:57:23.020
so that the price of milk might be $15 a gallon and poor people suddenly can't afford milk and you have babies screaming for their milk and it's not available.

540
00:57:23.020 --> 00:57:40.020
And then at the high price of $15 a gallon, farmers robotically then re-enter the market and everybody tries to produce a lot of milk and the price goes down to $1 the next year, bankrupting almost everybody according to the price of milk to go up to $20 and then on and on.

541
00:57:40.020 --> 00:57:48.020
So we have too much milk one year and not enough milk the next year and you have starving babies when there's not enough milk.

542
00:57:48.020 --> 00:57:52.420
okay so all the government wants to do that is to stabilize the price okay so

543
00:57:52.420 --> 00:57:55.900
they set a price for making illegal to sell milk for less than let's say eight

544
00:57:55.900 --> 00:57:59.700
dollars per gallon okay well because there's a couple of things that happen

545
00:57:59.700 --> 00:58:05.620
right off the bat one is a surplus as we noticed farmers want to sell 22 million

546
00:58:05.620 --> 00:58:09.660
gallons of milk or in the short run we have a fixed stock they want to sell

547
00:58:09.660 --> 00:58:15.660
13 million and people cut back at the higher price of eight dollars they only

548
00:58:15.660 --> 00:58:25.160
Now we want to purchase 7 million instead of the full 13 million as they did before and there's suddenly a surplus of 6 million gallons of milk per month.

549
00:58:25.160 --> 00:58:31.920
Now once that occurs, there's this problem of the surplus, okay?

550
00:58:31.920 --> 00:58:44.140
But in the longer run there's another problem and that problem is that farmers will begin to invest in more dairy cattle, more milking machines and so on because of the higher price.

551
00:58:44.140 --> 00:58:50.140
So the surplus will grow larger and larger, the quantity supply will respond positively to the higher price.

552
00:58:50.140 --> 00:58:58.140
And what we'll get then is an even larger surplus, but not only that, very interestingly what's going to happen is that

553
00:58:58.140 --> 00:59:06.140
they're going to bid up the price of land and machinery and other farm implements, capital goods that are used in the farm and electricity

554
00:59:06.140 --> 00:59:10.140
and they're going to make it more expensive, the cost of production in farming is going to rise

555
00:59:10.140 --> 00:59:19.940
and farmers in other markets producing other crops will now have to, crops are producing, if this is wheat now, let's for a moment assume it's wheat,

556
00:59:19.940 --> 00:59:25.140
producing other types of crops, those farmers will now reduce the amount they're producing.

557
00:59:25.140 --> 00:59:34.240
So we'll have too much milk and surpluses in the one hand and high prices and the high prices will now spill over into other farm markets

558
00:59:34.240 --> 00:59:43.240
As the costs of production go up, as the farmers respond to the higher price by buying more inputs and driving their prices up.

559
00:59:48.240 --> 00:59:54.240
The first problem is this. How does the government deal with that? The farmers have all this extra milk now.

560
00:59:54.240 --> 00:59:57.240
They have something like 15 million gallons a month that they can't sell.

561
00:59:57.240 --> 01:00:00.240
They're going to begin to undercut the price and the whole thing will collapse.

562
01:00:00.240 --> 01:00:10.240
So the government has to do something to rid the market of the surplus, of what they call the overhang of excess milk or excess wheat or sugar, whatever it may be.

563
01:00:10.240 --> 01:00:25.240
What they do then is they then tax you and I as taxpayers. We pay higher prices as consumers, and now we're also taxed as taxpayers, and that milk is bought up and turned into cheese, in the case of milk it's turned into cheese and butter, and it's frozen.

564
01:00:25.240 --> 01:00:36.240
In the case of wheat in the 1950s and 60s, the government had an ingenious but short-run solution to the whole thing.

565
01:00:36.240 --> 01:00:45.240
They bought it up and they stored it on mothballed World War II battleships that were in the Hudson River.

566
01:00:45.240 --> 01:00:51.240
And, of course, they just let the wheat rot there. And after a while this became scandalous.

567
01:00:51.240 --> 01:01:06.240
Scandalous, you know, there are people in the US that were hungry, remember the book came out by Michael Harrington about, I forget the name of it, but it was a famous book about how there's poor people in Appalachia and so on, other parts of the United States, what was the name of it?

568
01:01:06.240 --> 01:01:09.240
The Other America, that was it, that was it.

569
01:01:09.240 --> 01:01:12.240
And here you have the government allowing wheat to rot.

570
01:01:12.240 --> 01:01:21.240
There's also a famous case where the Canadian government forced egg farmers to destroy 28 million eggs, so as to get rid of the surplus.

571
01:01:21.240 --> 01:01:27.240
So once that's found out, then the U.S. government gets bad publicity and so must do something.

572
01:01:27.240 --> 01:01:39.240
In 1954, they passed the Public Law 480, which was basically a foreign aid giveaway of US food.

573
01:01:39.240 --> 01:01:46.240
So, they gave it away to India for a number of years and that was true.

574
01:01:46.240 --> 01:01:48.240
But of course, what does that do?

575
01:01:48.240 --> 01:02:04.240
Over time, the local Indian rice producers, or the producers of other crops, since the Indian consumer is not irrational, he's getting free food, he's going to cut back on his demand for products of the local farmers, and it's caused them to go bankrupt.

576
01:02:04.240 --> 01:02:14.240
So after a while, this direct aid in kind was rejected, because local producers were facing lower prices, some of them going bankrupt.

577
01:02:14.240 --> 01:02:25.240
Free school lunches came into play in the 1960s under Lyndon Johnson and breakfast programs by the government.

578
01:02:25.240 --> 01:02:34.240
But of course, poor people also demand food. That's a big part of their budget. And food stamps also.

579
01:02:34.240 --> 01:02:40.240
So if they're getting free food, what do they do? The demand for food shifts to the left and the surplus gets even worse.

580
01:02:40.240 --> 01:03:08.240
So that's not a long-term solution. So the government turned to restricting supply, or there's another solution, that is to sell it, to have the government sell it on foreign markets and then put tariffs on the wheat so it can't be exported back at a lower price to the U.S.

581
01:03:08.240 --> 01:03:15.800
But then what happens is that the world price falls below the U.S. price and then foreign countries like Australia that grow wheat in Canada say that we're dumping wheat.

582
01:03:15.800 --> 01:03:18.720
Okay, so that's not a viable solution.

583
01:03:18.720 --> 01:03:31.120
So they come up with restricting supply, forcibly pushing the supply curve to the left so that it intersects with the demand curve at the fixed price.

584
01:03:31.120 --> 01:03:35.720
Oh, let me mention one other thing here very quickly, going back to the Indian case.

585
01:03:35.720 --> 01:03:42.320
Sometimes we have bad crops so that the supply curve does shift back of its own and the surplus disappears.

586
01:03:42.320 --> 01:03:46.440
Now, when the surplus disappears, what happens to the amount of food we send to India?

587
01:03:46.440 --> 01:03:48.920
It goes down and they suffer famine.

588
01:03:48.920 --> 01:03:52.520
That's another reason why they reject our largesse in kind.

589
01:03:52.520 --> 01:03:59.920
They'll take our money. They don't want our food and so on.

590
01:03:59.920 --> 01:04:02.220
Okay, so restrict supply, force it back.

591
01:04:02.220 --> 01:04:04.720
Well, there's acreage allotments.

592
01:04:04.720 --> 01:04:12.520
It's one way of doing it. That is to say, tell farmers that they can only produce on a maximum amount of acreage,

593
01:04:12.520 --> 01:04:19.320
or even pay them to leave some acres without any crop on it.

594
01:04:19.320 --> 01:04:27.820
But of course, what happens? Once that happens, let's say they cut back by 20% and they're only producing 80% of their acres.

595
01:04:27.820 --> 01:04:33.720
But of course, you can always produce more by farming more intensively.

596
01:04:33.720 --> 01:04:40.720
So they buy more fertilizer and so on and the remaining has become more productive and you still haven't gotten rid of the surplus.

597
01:04:40.720 --> 01:04:50.720
Market quotas, all right, there what you can do is you can tell each farmer no matter how much you produce you can only market a certain amount, okay.

598
01:04:50.720 --> 01:04:57.720
And that sort of works to push back supply but of course all the while consumers are paying higher prices.

599
01:04:57.720 --> 01:05:02.720
Then there's soil bank programs where you directly pay farmers not to grow, okay.

600
01:05:02.720 --> 01:05:10.620
And then, very interestingly, what happened for a while there,

601
01:05:10.620 --> 01:05:16.220
government was running out of ideas on how to restrict, get rid of the surpluses.

602
01:05:16.220 --> 01:05:21.120
They actually had government scientists using wheat,

603
01:05:21.120 --> 01:05:26.520
experimenting on using wheat in place of gravel to mix asphalt, just to get rid of it.

604
01:05:26.520 --> 01:05:31.520
Anyway, you know, but of course that, that, you know, that bomb that didn't work at all, okay.

605
01:05:33.220 --> 01:05:39.220
So this is what, what this is is really a reverse welfare program, okay.

606
01:05:40.420 --> 01:05:48.820
Because if you think about it, when you keep prices higher than equilibrium, okay, first of all, who benefits?

607
01:05:49.220 --> 01:05:55.420
Let's say you have a farmer, let's say the price of weed is $4 per bushel.

608
01:05:56.520 --> 01:06:20.520
That's the free market price, so P sub e, the equilibrium price, and the control price, let's say, is $5, so control price is $5 per bushel.

609
01:06:20.520 --> 01:06:36.520
Let's take a small farmer that produces 10,000 bushels a year, and a large farmer that may produce, let's say, 500,000 bushels.

610
01:06:36.520 --> 01:06:42.520
They both get the higher price, but of course, whose income is supplemented more?

611
01:06:42.520 --> 01:06:51.320
Yeah, because times one, okay, so the small family farm has his income supplemented by 10,000.

612
01:06:51.320 --> 01:06:57.920
The large farmer has his income supplemented by $500,000.

613
01:06:57.920 --> 01:07:02.720
Now, what's interesting is there are also direct payments to farmers to keep their incomes up, just direct payments.

614
01:07:02.720 --> 01:07:10.120
And those are limited to only $50,000, direct payments from the agricultural department.

615
01:07:10.120 --> 01:07:14.720
A while ago, they were limited to $50,000 per year, per farm.

616
01:07:14.720 --> 01:07:21.720
And what, of course, what many people did was to sort of break up the farms, at least in name,

617
01:07:21.720 --> 01:07:25.020
and give them to each relative, so each one could get $50,000.

618
01:07:25.020 --> 01:07:31.720
So larger farmers still were benefiting, but the key is that they ignore the fact that just pushing the price up

619
01:07:31.720 --> 01:07:39.720
by that $1 benefits, so that's times one, benefits agribusiness, okay?

620
01:07:39.720 --> 01:07:48.220
Let me just give you an example of why this, well, actually let me backtrack one moment.

621
01:07:48.220 --> 01:07:51.820
Who benefits? Again, we asked the question, kui bono, who benefits?

622
01:07:51.820 --> 01:07:58.420
Obviously, the primary beneficiaries are the largest forms.

623
01:07:58.420 --> 01:08:01.420
Who's hurt the most by it? Well, consumers are hurt in their capacity,

624
01:08:01.420 --> 01:08:06.920
or others are hurt in their capacity as consumers of the product and of taxpayers.

625
01:08:06.920 --> 01:08:14.520
But which class of consumers pays the greatest part of their income or the greatest portion of their income for food?

626
01:08:14.520 --> 01:08:19.720
The poor. The man for food is very income and elastic as well as price and elastic.

627
01:08:19.720 --> 01:08:23.720
So the poor pay the largest part of their income for food.

628
01:08:23.720 --> 01:08:28.920
So it's in a sense a regressive tax and it's a reverse welfare program in reverse.

629
01:08:28.920 --> 01:08:39.720
That is, you're redistributing wealth and income from poorest members of society to wealthy farmers.

630
01:08:39.720 --> 01:08:44.720
Now, why is it then that, since farmers are a very small part of the population,

631
01:08:44.720 --> 01:08:47.220
I don't know if they're 1%, Peter, do you know?

632
01:08:47.220 --> 01:08:50.320
They're 2%, yeah, they're about 2% of the population.

633
01:08:50.320 --> 01:08:55.320
How in heaven's name are they able to get these programs passed?

634
01:08:55.320 --> 01:08:58.520
And well, let's take the case of sugar.

635
01:08:58.520 --> 01:09:04.920
There's about 1,200 sugar farmers in the U.S. It's very uneconomical to grow sugar in the U.S.

636
01:09:04.920 --> 01:09:11.920
U.S. citizens pay three or four times the world price, U.S. residents, three or four times the world price for sugar.

637
01:09:11.920 --> 01:09:18.620
So if sugar is, you know, five cents or six cents per pound, we pay 20 cents per pound.

638
01:09:18.620 --> 01:09:25.720
Not only directly in the form of sugar, of course, but the price of corn syrup then goes up because people shift, companies shift the corn syrup.

639
01:09:25.720 --> 01:09:38.720
A number of years ago, Coke, Coca-Cola, which claimed that it would never change its secret recipe for making Coca-Cola, substituted the sugar with corn syrup.

640
01:09:38.720 --> 01:09:41.720
If you look at your favorite candy bars, they all have corn syrup.

641
01:09:41.720 --> 01:09:52.720
So the corn syrup farmers now also are lobbying for price supports for sugar, even though sugar farmers compete with them because of the substitution effect in economics.

642
01:09:52.720 --> 01:09:57.720
That is, the higher the price of the substitute, the greater the demand for your product, the greater the demand for the corn syrup.

643
01:09:57.720 --> 01:10:04.720
So when there's any talk about repealing subsidies for sugar and tariffs on sugar and so on,

644
01:10:04.720 --> 01:10:13.720
you'll find that not only the sugar farmers, but the corn syrup producers also go down to Washington to lobby against removing that.

645
01:10:13.720 --> 01:10:20.720
But in any case, I have figures here for sugars.

646
01:10:20.720 --> 01:10:28.720
Okay, in, now there's two types of sugar production, sugar beets which I think is in the northwest,

647
01:10:28.720 --> 01:10:34.720
I think in Idaho, whatever, that's extremely high cost production, all those farmers, about 1200 of them would go out of business.

648
01:10:34.720 --> 01:10:37.720
There's also sugar produced in Florida, sugar cane, okay?

649
01:10:37.720 --> 01:10:40.720
This just deals with the sugar cane producers in Florida.

650
01:10:40.720 --> 01:10:45.720
They gain about five million dollars per grower, okay?

651
01:10:45.720 --> 01:10:49.720
That was in the late 1990s I believe.

652
01:10:49.720 --> 01:10:59.720
You and I, so they're a small group and they, if you gain five million dollars a year in income from a government program, are you going to spend maybe even a million dollars?

653
01:10:59.720 --> 01:11:03.720
Are you going to contribute that to your lobbyists? Certainly.

654
01:11:03.720 --> 01:11:18.720
U.S. consumers of sweeteners in that year paid five dollars and sixty cents each, so for a family of four that would be twenty-two dollars, in higher sweetener costs, higher costs for sugar and corn syrup.

655
01:11:18.720 --> 01:11:29.720
So, in other words, it's a classic case of extremely concentrated benefits and widely dispersed costs.

656
01:11:29.720 --> 01:11:41.720
I tell my students, my graduates, my MBA students, I say, what if graduate students were all told that their student fee would go up by one dollar?

657
01:11:41.720 --> 01:11:53.720
And it would go to the Joe Salerno Teaching Development Fund, which would allow me to go to conferences in Hawaii and Cancun and so on to learn how to be a better teacher.

658
01:11:53.720 --> 01:12:00.720
So it would be, we have, let's see how many graduate students, we must have two or three thousand graduate students.

659
01:12:00.720 --> 01:12:03.720
So that would supplement my income by two or three thousand dollars.

660
01:12:03.720 --> 01:12:08.720
I asked them, would you look into this fund because you're losing a dollar a semester?

661
01:12:08.720 --> 01:12:14.320
and you know they all say no no no you know but so the point is that the more

662
01:12:14.320 --> 01:12:18.080
concentrated the interests are the easier it is to get these things passed

663
01:12:18.080 --> 01:12:22.760
okay because then will I take out the student government the graduate student

664
01:12:22.760 --> 01:12:27.760
government officials what would I take them to you know buy them wine wine and

665
01:12:27.760 --> 01:12:30.560
dine them yeah certainly I would you know I'd spend a couple hundred dollars

666
01:12:30.560 --> 01:12:34.000
doing that out of the possible three thousand dollars more per semester of

667
01:12:34.000 --> 01:12:38.900
Of course I would. Same thing with the sugar producers.

668
01:12:38.900 --> 01:12:43.300
Also, I just took a look at the budgetary outlays to the U.S. Department of Agriculture.

669
01:12:43.300 --> 01:12:50.000
First, for all agricultural programs, and that includes much more than just price support.

670
01:12:50.000 --> 01:12:58.600
Now, I think they're in the form of loans, price support loans, where the money is loaned to the farmers.

671
01:12:58.600 --> 01:13:02.100
Rather than an outright, it's a little more complicated.

672
01:13:02.100 --> 01:13:09.000
called non-recourse loans and if the prices change they can default on the loans, but it comes out to be a price support.

673
01:13:09.000 --> 01:13:21.600
But in any case, the Agricultural Department spent 68.9 billion dollars on farm programs in 2002 and in 2000 was 75.7 billion dollars.

674
01:13:21.600 --> 01:13:32.000
That does not account, that's just the taxpayer cost that does not take, which is also billions and billions of dollars, okay, as a result of the higher prices.

675
01:13:32.000 --> 01:13:41.000
Now, in stabilization of farm prices and incomes, the direct budgetary costs were $19 billion in 2002.

676
01:13:41.000 --> 01:13:51.000
But again, that grossly understates the redistribution of wealth, because it does not take into account the fact that money is redistributed through the price supports,

677
01:13:51.000 --> 01:13:59.000
that is, the higher prices that we have to pay, or through the restriction of supply, which also drives prices up.

678
01:13:59.000 --> 01:14:14.000
So, overall, any interference with the market economy brings about, in the form of manipulating prices and controlling prices, reduces consumer welfare.

679
01:14:14.000 --> 01:14:22.000
If we look at the economy as serving consumers, and that should always, as Bastiat said, be our perspective.

680
01:14:22.000 --> 01:14:27.000
We should always look at it from the point of view of consumers, because all production takes place ultimately for consumption.

681
01:14:27.000 --> 01:14:34.000
If we look at it that way, we see that it decreases welfare of consumers.

682
01:14:34.000 --> 01:14:39.000
I'll stop here and I'll take questions.

683
01:14:39.000 --> 01:15:01.000
I find your argument very persuasive for the destructiveness of price controls, rent controls. What about the positive case? That is, what happens when, after a long time, rent controls are removed? Is there a case of a recovery?

684
01:15:01.000 --> 01:15:10.000
So that case would be even more persuasive that the rent controls had done the damage.

685
01:15:31.000 --> 01:15:41.000
What is a positive case? Can you give an example or a study of...

686
01:16:01.000 --> 01:16:03.000
It was repealed through the state legislature.

687
01:16:03.000 --> 01:16:06.000
There were many people, this was in Cambridge, right around Harvard.

688
01:16:06.000 --> 01:16:08.000
Many people wanted to live in Cambridge.

689
01:16:08.000 --> 01:16:14.000
And they were unable to because of the tremendous shortage of apartments.

690
01:16:14.000 --> 01:16:21.000
And so what happened was they, remember I said one of the problems was that prospective tenants can't vote.

691
01:16:21.000 --> 01:16:26.000
But since it was a vote in the state legislature, everybody in Massachusetts could vote.

692
01:16:26.000 --> 01:16:31.000
And they were swept away.

693
01:16:31.000 --> 01:16:37.000
It was an overwhelming vote against the rent controls to free up the market.

694
01:16:37.000 --> 01:16:39.000
Now, I never followed that up.

695
01:16:39.000 --> 01:16:45.000
One of my students' husband had been the lawyer for the people in favor of rent controls,

696
01:16:45.000 --> 01:16:47.000
and he said they never stood a chance.

697
01:16:47.000 --> 01:16:53.000
And she actually gave me his notes, which I subsequently lost.

698
01:16:53.000 --> 01:16:59.000
But that would be very revealing to go back and I think Cambridge would be a great case study.

699
01:16:59.000 --> 01:17:05.000
Now let me just mention when I was a student in Boston though, there were rent controls and there were shortages.

700
01:17:05.000 --> 01:17:13.000
Students never had much problem finding apartments, but there were rent controls.

701
01:17:13.000 --> 01:17:21.000
What happened was that Boston College, where I was an undergraduate, wanted to build more dorms.

702
01:17:21.000 --> 01:17:32.500
and the college itself was released from obeying zoning and building codes to an extent.

703
01:17:32.500 --> 01:17:38.500
So they built very viable low-cost housing that you could build for lower income people

704
01:17:38.500 --> 01:17:44.500
by being permitted to truck in huge modular pieces and putting them together.

705
01:17:44.500 --> 01:17:47.500
That could not be done anywhere else in Boston because of zoning laws,

706
01:17:47.500 --> 01:17:53.500
because of building codes that benefited skilled unions and crafts and so on.

707
01:17:53.500 --> 01:17:57.500
So these went up very quickly, they're very clean, they're very nice,

708
01:17:57.500 --> 01:18:04.500
and that's to show you the free market solution to providing housing for poor people.

709
01:18:04.500 --> 01:18:13.500
Modular units, building in factories, and of course, so the local construction unions hate this.

710
01:18:13.500 --> 01:18:21.500
And so the zoning codes, to a great extent, reflect their wishes, because they're a powerful voting block, also they contribute to campaigns.

711
01:18:21.500 --> 01:18:22.500
And building codes.

712
01:18:22.500 --> 01:18:28.500
Yeah, building codes, yeah, I meant building codes in particular, reflects their wishes.

713
01:18:28.500 --> 01:18:29.500
Yes.

714
01:18:29.500 --> 01:18:39.500
What was the difference between a market with price controls, like the airline industry, where you had actually the providers of the service actually competed to offer better services, you know, like better meals.

715
01:18:39.500 --> 01:18:45.900
Right. That's a good point. That was, as opposed to a price ceiling, that was a price floor, okay?

716
01:18:45.900 --> 01:18:51.300
It was a cartel set up under a government agency, the CAB, civilian aeronautics board,

717
01:18:51.300 --> 01:18:56.500
and what happened there was that the airlines still were separate entities,

718
01:18:56.500 --> 01:19:02.800
and so they were still competing with each other for customers, but they couldn't compete by lowering their prices.

719
01:19:02.800 --> 01:19:09.400
So, for example, what they would, YATTA, which was the international sort of agency,

720
01:19:09.400 --> 01:19:15.200
they, when they outlawed, they set minimum prices.

721
01:19:15.200 --> 01:19:20.900
So, the competing airlines began to serve beef burgundy, these just scrumptious meals,

722
01:19:20.900 --> 01:19:23.100
you know, very lavish meals.

723
01:19:23.100 --> 01:19:26.600
And then they began to regulate the meals, okay?

724
01:19:26.600 --> 01:19:31.100
And the same thing happened on US airlines, okay?

725
01:19:31.100 --> 01:19:35.700
Before 1978, when they were decontrolled, what you found was that they're becoming more and more

726
01:19:35.700 --> 01:19:41.900
luxurious. If you remember the stewardesses there, they were competing for stewardesses that were

727
01:19:41.900 --> 01:19:48.380
prettier and prettier. My next door neighbor, I had, I was fortunate to grow up next to very two

728
01:19:48.380 --> 01:19:53.460
gorgeous twins for about three years, my junior, and we became close friends. That's not always a

729
01:19:53.460 --> 01:19:58.780
good thing, and they'd look on me as a brother, but anyway, that's besides the point. But what,

730
01:19:58.780 --> 01:20:08.780
She went for a stewardess' job and she was also very smart and they rejected her because the picture of her voice wasn't right.

731
01:20:08.780 --> 01:20:16.780
She had a very soft voice and so they told her that. That was back before you could be fined for saying things like that.

732
01:20:16.780 --> 01:20:23.780
Okay, so they competed in advertisements, alluring advertisements.

733
01:20:23.780 --> 01:20:27.780
You know, they have a beautiful woman there saying, hi, I'm Cindy, fly me.

734
01:20:27.780 --> 01:20:31.780
Okay, that's basically, yeah, all right.

735
01:20:31.780 --> 01:20:34.780
Okay, so that's the opposite, right?

736
01:20:34.780 --> 01:20:37.780
Because then you're competing to increase quality,

737
01:20:37.780 --> 01:20:40.780
but you can't compete on the price dimension.

738
01:20:40.780 --> 01:20:44.780
Maybe Peter Klein will get into this when he talks about monopolies.

739
01:20:44.780 --> 01:20:46.780
Okay, that's a good point.

740
01:20:46.780 --> 01:20:50.780
That is an effect of a price floor.

741
01:20:50.780 --> 01:21:08.780
You really can't do much with foreign products, you can differentiate, like Purdue chickens, you can differentiate them, sun-kissed oranges and so on in some sense and make them more appealing and try to win some greater share of the market that way.

742
01:21:08.780 --> 01:21:09.780
Yes.

743
01:21:38.780 --> 01:22:06.780
I know the owner of the building where I live, and she said that her funds are completely exhausted, so she has to recover first before she invests into the building, and another problem is that she is not sure whether the deregulation is going to continue after we have a new government.

744
01:22:06.780 --> 01:22:13.780
Let me just ask you, do you notice, as the rents have gone up, have people begun to make alternative living arrangements as far as living in the United States?

745
01:22:36.780 --> 01:22:58.780
The problem is that it's been about a year, and it's rising like ten percent a year. So the change hasn't been that great yet. So as far as I know, people started moving to smaller apartments.

746
01:22:58.780 --> 01:23:03.100
a little bit and as prices go up it will probably be more and more

747
01:23:03.100 --> 01:23:10.100
any other questions? Yes, Ron.

748
01:23:15.740 --> 01:23:22.740
Of the airlines and trucking, yeah, absolutely.

749
01:23:28.780 --> 01:23:57.860
I read then, I can think of this, but I read then after that that far more money was saved

750
01:23:57.860 --> 01:24:12.860
was saved by the ability of industry to reduce inventory because they always had higher inventory of everything because of the delays and difficulties of getting trucking and things like that.

751
01:24:12.860 --> 01:24:22.860
The amount of inventory reduction was like, oh, billions of dollars. It's just incredible. Far more than they say in just trucking costs alone.

752
01:24:22.860 --> 01:24:25.340
How we're just in time.

753
01:24:25.340 --> 01:24:29.460
Just in time inventory, yeah.

754
01:24:29.460 --> 01:24:31.220
Okay, thank you.