Friday, September 17, 2004

Prices: The Free Market's Unnecessary Evil (Thus Sayeth the Government)

It's been a pretty slow news week, but this little piece in the Honolulu Star-Bulletin out of Hawaii caught my eye.

As you know, prices for housing are pretty high in Hawaii. As a result, many who can't afford it are forced to rent instead. This was simply unacceptable to the Hawaiian government.

"Hawaiians to get 3,500 homes," reads the triumphant headline. "The state transfers 1,800
acres on three isles to the Hawaiian Homes Department."

It continues:

"At a time when the cost of housing is unreasonable, we will be providing people who clearly are in many cases in a rental situation into a position of home ownership," department Director Micah Kane said yesterday.

This quote is similar to President Bush's pledge to provide FHA no-down-payment loans to America earlier this year, and obviously it's just as politically popular.

But once again both the Hawaiian and U.S. government run into a problem of not really being sure what they want. On the one hand, skyrocketing prices keep people from buying, they say. But on the other hand, they praise the boost that the housing industry has given the economy when many other industries are cutting jobs.

So which is it? Somehow, it makes perfect logical sense to Americans when elected officials both deride and applaud two sides to the same coin. If the housing industry is driven into the ground due to a lack of demand, then people can afford cheap housing. Of course that consequently means no one wanted housing in the first place, and it doesn't bode well for jobs in the industry either. On the other hand, a thriving housing industry necessarily means producers pulling a big profit and raising prices. We can't have that.

The problem politicians and people in general have is looking at prices as an unnecessary evil, rather than what it is -- a necessary good. It is a mechanism for telling the market what to make more of. When a producer makes a massive profit off what he or she is selling, it induces him to raise prices. How is that good, you ask? By raising prices to a certain level, he can see what the market will bear, and, consequently, how much more he needs to produce. Without this pricing mechanism, our economy would not have the information necessary to decide how much to produce.

For example, if an economy wants lots more oranges, but the government puts a price cap on oranges to stem "gouging," how is a producer supposed to know what the economy wants? If, because of the price cap, he pulls only a marginal profit, he will increase his supply of oranges only marginally. If the same producer is allowed to charge whatever he wishes, he can pull a huge profit, and at the same time realize he best produce some more oranges to maximize his profits.

But still, our officials seem to be content to perpetuate such obviously self-contradictory nonsense. The article continues:

"Our board had no difficulty making this decision. We feel that our mission, which is statewide, to provide affordable housing, covers all the people that live in Hawaii. And in fact we see no difference between Hawaiians or others," said Stephanie Aveiro, housing agency executive director.

Their mission is to provide affordable housing? Why stop there? If you're going to define affordable, why not go ahead and make every other product affordable?

The obvious reason why this will never happen is because it's not possible. Picture the economy and prices as a balloon. Forcing one industry to be "affordable" is like trying to flatten one area of a balloon with your foot. When you step on that one area, the rest of the balloon expands. If you use both feet to flatten it all out, the balloon will burst. So would our economy if the government tried to enforce a price cap on every product, which is why it doesn't. So if it is so obvious that price caps on everything would be disasterous, why does it follow the logic that price caps on only somethings are not equally as bad for the economy?

This is the problem with government as a whole. The goal of politicians is to appeal to superficial arguments on issues, not to give it a full logical review.

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