Saturday December 8, 2012

PITTSFIELD

According to a recent Eagle story, the Mill Pond Trailer Park in West Stockbridge is the town’s only mobile home park. If those that advocate rent control get their way, do not expect another one.

California has extensive rent control of mobile home parks, and a new one has not been constructed since 1991. In 1994, the Massachusetts Rent Control Prohibition Initiative was passed into law by voters. But current Massachusetts law unwisely allows for rent control of mobile homes. Most economists oppose rent control, including the liberal Paul Krugman whose columns grace this newspaper.

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Here is a simple lesson in economics. Suppose there was a shortage of apples due to strong demand. By "demand," I do not mean the simple desire to have something, but that desire coupled with the money to purchase. What would happen to price? It would go up.

How much would it go up? Price would go up in proportion to the demand, and would decrease in proportion to the supply. What happens when the price of apples gets high? There is an incentive for producers to grow more apples to increase profits. The greater the price fetched at the market, the greater is the incentive to produce.

Suppose there is an excess of pears due to a weak demand. Equally obviously, the price of pears would fall. There is an inherent marketplace disincentive to grow pears when demand is low vis-à-vis the supply.


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And so the invisible hand of the marketplace works, naturally creating incentives to produce goods and services where demand exceeds supply, and likewise naturally creating disincentives to further produce when supply exceeds demands. We want this result so that producers make more of the things we want and less of the things we do not want.

But what about those poor folks who crave apples when apple prices are high? Is "the problem" that apple prices are too high, or are the high prices simply an undesired symptom of the problem of the marketplace’s inability to supply the demand? By "problem" I mean that cause which needs to be fixed rather than an undesired effect or symptom. In the short run, government could protect the consumer of apples when prices are undesirably high by imposing price restraints. But what would be the effect of such interference in the marketplace? Of course, producers would want to produce fewer apples. How much less? The disincentive would be in direction proportion to the amount of the price restraint. Of course, price restraints would have horrific results. Just as there was a terrific demand for apples, government intervened to limit "profiteering" from the apple shortage, limited the price, and thereby limited the profit incentive to grow more apples. The result would be a handful of apples at an artificially low price. It would be very hard to find apples on store shelves because nobody wanted to grow them. Communist Russia comes to mind.

When you put this truism on paper, it is so obvious it hardly seems worth the ink. Yet it astounds me how often my friends admonish me that "it isn’t that simple" or "it’s more complicated than that" when we apply the same principles to rent control. Yes, it is that simple. The restraint on production that is concomitant with the restraint on price is an ineluctable truth as certain as the law of gravity.

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So what about fixing the cost of mobile homes through rent control at the Mill Pond Trailer Park in West Stockbridge? This is where many throw all reason aside to surf the tidal wave of emotion unrestrained by logic. They say with great emphasis, "But you can live without apples, but you need a place to live for survival." No doubt this is true. But it is a distinction without a difference. The invisible hand of the law of supply and demand does not go away simply because the good or service is an essential of life. It comes back with even more raging vengeance.

When we limit the price that can be fetched on a mobile home, we will have less mobile homes. And if mobile homes are a cost effective way to produce housing for the poor and lower middle class, that creates an immense problem. When government creates a disincentive to create the necessities of life by limiting the price that can be fetched in the marketplace, we will have less of the necessities of life.

The solution to our housing problem is to create incentives for production of housing to increase supply, not disincentives through price restraints.

Rinaldo Del Gallo’s columns have appeared in newspapers across the country.