Rent Control

Swedish economist Assar Lindbeck said:

Rent control appears to be the most
efficient technique presently known
to destroy city - except for bombing.

In spite of economists explaining the harsh costs associated with rent control, New York city still uses this inefficient system. Most New Yorkers also favor the policy, fearing the skyrocketing rents that might result if rent controls ended.

What do you think of rent control? Why is rent control bad policy? Is rent control "efficient" as your book describes it? In the comment area, address the previous questions and use your knowledge of markets to argue for the end of rent control and assure residents of NYC that the world will not end if rent control does. Post at least one statement and comment on a classmate's post.

To read the comments or post your own comment click "comments" below.

Economists See Bailout as Necessary

Economist usually prefer little government presence in areas where markets excel. The current financial crisis seems to be different, check out this article.

AIG and the Financial Crisis Explained

For an excellent explanation of things in the news try this article.

I posed this question to my Money and Banking professor at the University of Delaware, Dr. James Butkiewitz:

I am following the happenings in the financial sector like everyone else. I hear lots of politicians complaining about taxpayers being on the hook for AIG. Did the Fed issue the loan? If so, isn't the loan an increase in the money supply and not an increase in government debt? Isn't it similar to an open market operation, where this time the Fed is exchanging money for equity?

His response:

As I understand this, they are making the equivalent of a discount loan to AIG. By itself, this action increases the money supply, and would cause the federal funds rate to fall below the target. To keep the funds rate near the target, the Fed could undertake defensive open market sales to drain reserves from the banking system. However, as you probably have also read, the Fed is running low of T-bills to sell, and has made arrangements with the Treasury to obtain more T-bills to be able to maintain overall liquidity in the system at the desired level

To that end, Congress appears willing to authorize paying interest on banks’ reserve deposits with the Fed, effectively instituting the channel/corridor system we discussed this past summer. Thus, if the primary credit rate is 2.25% and the reserve deposit rate is 1.75% (just a hunch) the fed funds rate will stay close to the current 2% target, and will not fluctuate outside of the limits of the channel/corridor (1.75 – 2.25). Also, given the risk of lending, even for 24 hours, to some of the riskier banks, there may be a risk premium involved in fed funds lending that keeps the funds rate about the reserve deposit rate (I’m honestly not familiar with these intricate details of the fed funds market).

He also cited this release from the Federal Reserve.

Root Beer Bar Stool Economics

Our Tax System - Some guys go into a bar.....

Our Tax System Explained: In Root beer Bar Stool Economics

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

Suppose that every day, the same ten men go out for root beer and the
bill for all ten comes to $100. If they paid their bill the way we pay
our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve. 'Since you
are all such good customers,' he said, 'I'm going to reduce the cost of
your daily root beer by $20.' Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so
the first four men were unaffected. They would still drink for free.
But what about the other six men - the paying customers?
How could they divide the $20 windfall so that everyone would get his
'fair share?' They realized that $20 divided by six is $3.33. But if
they subtracted that from everybody's share, then the fifth man and the
sixth man would each end up being paid to drink his beer. So, the bar
owner suggested that it would be fair to reduce each man's bill by
roughly the same amount, and he proceeded to work out the amounts each
should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% saving s).

Each of the s ix was better off than before. And the first four
continued to drink for free.

But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20,'declared the sixth man.
He pointed to the tenth man, 'but he got $10'.

'Yeah, that's right, exclaimed the fifth man. 'I only saved a
dollar, too. It's unfair that he got ten times more than I got'

'That's true' shouted the seventh man. 'Why should he get $10 back
when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't
get anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks so the nine sat
down and had beers without him. But when it came time to pay the bill,
they discovered something important. They didn't have enough money
between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is
how our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them for
being wealthy, and they just may not show up anymore. In fact, they
might start drinking overseas where the atmosphere is somewhat
friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

Politics and Rent Seeking Behavior

Why was there not more regulation of Fannie Mae and Freddie Mac in spite of many efforts? Rent seeking.

From the Washington Post:

Sen. Christopher Dodd, the Democratic chairman of the Senate Banking Committee, has the gall to ask in a Bloomberg Television interview: "I have a lot of questions about where was the administration over the last eight years"... Meanwhile, Dodd -- who along with Democratic Sens. John Kerry, Barack Obama and Hillary Clinton were the top four recipients of Fannie and Freddie campaign contributions from 1988 to 2008 -- actively opposed such measures and further weakened existing regulation.

A Starting Point... the Energy Conundrum

It has been evident in the recent past that the price system is an effective way to address our current energy issues. We have been talking a good game on energy for several years, but it is not until prices increase that personal decisions start to change. Incentives matter. So, how about picking the low hanging fruit. Here are some common sense solutions to our energy crisis.

1) Take Makiw's advice. Increase the gas tax by $.10 per year for the next ten years. A gradual phase in gives consumer the assurance that gas prices will continue to increase so they can plan accordingly. We know that demand for gasoline tends to be relatively inelastic in the short run, but elasticity increases as time passes. As a result of increasing prices, we should see a continuation of the recent interest in fuel efficient cars. As consumer dollars flow to fuel efficient vehicles, producers will respond by competing to produce the most fuel efficient vehicles. Check out this article about a 65 mpg vehicle Ford will produce and sell in Europe, but won't be available in the U.S. because American consumers are not ready for diesel cars yet. Expensive gasoline will also make hybrids and electric cars more attractive.

2) Eliminate the ethanol subsidy. The subsidy is a wasteful example of rent seeking that warps the market for fuel as well as the market for food. Since the much touted benefits of ethanol are questionable (more likely doubtful), let it compete in the marketplace without the subsidy.

3) If you love the idea of ethanol, eliminate the tariff on imported ethanol. The Brazilians use sugar cane to produce ethanol. It is a more efficient process than using corn. Current protectionist policies to protect farmers make ethanol imports cost prohibitive. While this is still an energy import, it is from Brazil instead of Venezuela, Russia, Saudi Arabia, or Iran.

4) You wont find me chanting Drill Baby Drill, but I think we should allow more drilling on Federal lands than we currently do. Current technology allows drilling for oil without the environmental destruction of the past.

While more complicated proposals including CAFE standards tax incentives are being floated by politicians, I think markets may be able solve the problem more effectively though the gas tax.

Readers please feel free to make other suggestions in the comment section.

The Candidates Take on Social Security

We all know the impending problems with Social Security and Medicare. So far politicians have been able to mobilize their base by talking about solutions, but talk has not translated into policy. This article reports:

The McCain strategy:

Obama said McCain's campaign has suggested trimming Social Security benefits and raising the eligibility age...McCain has not specifically embraced such plans. But by saying "everything is on the table" in discussing changes to Social Security, he has opened himself to such criticisms from Democrats. Obama also said McCain wants to privatize a portion of Social Security. McCain has praised the notion of letting younger workers place a portion of their Social Security taxes into a package that is invested and follows them to retirement, but he has not made it a campaign promise."

The Obama strategy:

Obama cited his proposals to place a new Social Security payroll tax on incomes above $250,000 and to eliminate federal income taxes for older people making less than $50,000 a year. He also said he would "allow the government to negotiate with drug companies to lower costs for seniors, and we'll allow reimportation of drugs from other countries and ensure their safety."

Nothing new here for either party. Democrats prefer taxing the rich. I assume Obama would cap benefits for the rich as well, making Social Security more of a social safety net and wealth transfer program than it already is. Republicans preferring to cut benefits at the margins - McCain has discussed adjusting the cost of living benefit increase to more closely match the inflation rate. McCain has also discussed partial privatization, something economists have been talking about for quite some time.

3D Map of Global Economic Output

Click here to view a 3D map of global economic output. Very Cool.

Iowa Futures Market

Futures markets tend to be more accurate than polls. So what do the Iowa Futures Markets have to say about the future presidential election? Check here.

At this point in time, the Iowa market show a close popular vote, but gives Obama the electoral college. The Intrade Market predicts a similar outcome. Remember that market prices are determined with current information. As information changes, so do markets.

Build Your Econ Knowledge

I have discovered a nifty way to build your Econ knowledge and understanding while driving in your car - the Teaching Company sells lectures by some of the top instructors in the country. You may feel a little nerdy telling your friends that you listen to econ lectures instead of classic rock, but if you read this blog you are just a few steps away. :)

Here are my suggestions.

Economics, 3rd Edition hits all the major themes (without the numbers, charts, or graphs) you would encounter in a Principles of Micro/Macro course. (It's on sale right now)

History of the U.S. Economy in the 20th Century is just that. The lecture on the Great Depression is helpful. (It's also on sale right now)

Legacies of Great Economists gives a bio of 10 of the great economic thinkers - my favorite is Milton Friedman if anyone cares.

Modern Economic Issues gives the econ spin on issues from sports stadiums to health care.

Politics and Economic Growth

This paragraph from the Wall Street Journal does a fine job explaining a defining difference between Republican and Democrats:

In stark contrast to Barack Obama, Mr. McCain believes that tax policy should be used to foster the creation of jobs and higher wages through economic growth, rather than to redistribute incomes. The economy is not a zero-sum game in which some people can enjoy higher incomes only if others are made worse off.

One party's platform proposes policies that will grow the economic pie, thus making all pieces bigger at the same time. The other proposes cutting the pieces of the pie in a more equal fashion, making some pieces bigger at the expense of others.