Watching “P”s and “Q”s

by Don Boudreaux on April 17, 2010

in Housing, Monetary Policy, Prices

Here’s a letter sent earlier this week to the New York Times:

Paul Krugman rightly writes that housing prices “rose sharply only where zoning restrictions and other factors limited the construction of new houses.  In the rest of the country – what I [Krugman] once dubbed Flatland – permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases” (“Georgia on My Mind,” April 12).  But his conclusion that this situation, where it existed, “prevented a serious bubble” doesn’t follow.

Housing is a durable good.  When demand for it collapses, newly built homes don’t disappear.  So the prices of homes even in Flatland fall (although not by as much as elsewhere).

What distinguishes Flatland from other places is that much of the boom-spending on housing in Flatland went into new construction rather than into merely bidding up prices for existing homes.  But Flatland no less than elsewhere suffered an unsustainable and economically distorting increase in spending on housing.

Sincerely,

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA

and

George A. Selgin
Professor of Economics
University of Georgia
Athens, GA

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