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Pittsburgh Tribune-Review: “Consistent common sense”

In my column for the Pittsburgh Tribune-Review of March 27th, 2007, I made the case that doing economics well often involves little more than applying common sense consistently. You can read my case beneath the fold.

Consistent common sense

Every semester I emphasize to my freshman economics students that “economics is little more than common sense, consistently applied.” Although I say this to them in the hope of easing any anxiety they might bring to a subject boasting such an imposing name, I’m also sincere.

Economics is common sense, consistently applied. Unfortunately, people do not commonly apply their common sense consistently. It is this inconsistent application of common sense — rather than lack of common sense — that makes economics so startling to people when they first encounter it.

Here’s one of my favorite examples of economists’ ideas that at first seem bizarre but, upon reflection, make a lot of common sense.

During the 1960s when Congress was mandating all sorts of automobile safety rules, such as prohibiting dashboards and car doors from having sharp metal edges, my colleague Gordon Tullock asked what is the goal of such regulation. “To save lives!” was, of course, the reply. “Fine,” said Gordon. “But you’re going about it all the wrong way. If you really want to save as many lives as possible on the highways, you should mandate that each steering-wheel column have a steel dagger jutting out with its point just inches from the driver’s heart.”

Sounds bizarre. But think about it. With sharp daggers jutting ominously out of every steering wheel, people will surely reduce the miles they drive. And when they do drive, they will do so with extraordinary care.

Gordon’s suggestion is built on the commonsense notion that one important way to reduce highway fatalities is to raise the cost to drivers of driving recklessly or negligently. A dagger aimed at each driver’s heart does just that; mandating airbags, seatbelts and soft, cushiony dashboards achieves the opposite result.

Gordon did not really want Congress to mandate that all cars and trucks have steel daggers mounted on their steering columns. His point, however, was a serious one: He wanted Congress to understand that mandating more safety might have unintended ill consequences, such as drivers taking less care while behind the wheel.

A failure to consistently apply common sense was on display in my hometown of New Orleans during the weeks and months after Katrina. Many in New Orleans, including Mayor Ray Nagin, demanded rent control. They argued that Katrina had so impoverished so many New Orleanians that the only way for many families of ordinary means to move back to the city is if government keeps rents artificially low.

Everyone’s common sense reveals that among the things New Orleans needs most if it is to be revived as a major metropolitan area is a commitment by builders to construct and maintain lots of apartments whose rents will be within the financial reach of ordinary citizens.

This same common sense, consistently applied, reveals also that rent-control would scare such builders away. If you want people to take risks and invest their resources and efforts in rebuilding the housing stock of New Orleans — and rebuilding it both speedily and well — you don’t announce that the government will determine the prices at which these business people will be permitted to rent their properties.

Even serious talk of rent control will scare many builders into abandoning their plans to construct new units. Many other builders who originally aimed to build rental units will switch to building houses for sale to owner-occupiers. (Rent control controls rents, not the selling prices of houses and condominiums.) And those few builders who do stick with plans to build rental units will build them more cheaply — smaller and with shoddier building materials and fewer appliances.

The inevitable result will be the construction of fewer and lower-quality rental units.

So — continuing to apply our common sense consistently — we see that the people who are meant to be helped by rent control would be especially harmed by it. A poor family, or even one of modest means, is unlikely to have sufficient money for a down payment on a home. These families are precisely those who most need a bountiful supply of good-quality rental units. Rent control hurts these people.

Wealthier families aren’t adversely affected by rent control. Indeed, they might even benefit from it. As builders switch from building apartments to building houses, the higher supply of houses might cause the price of owner-occupied homes to fall.

Katrina was a natural disaster that devastated New Orleans. Common sense, consistently applied, advises that rent control would only worsen that devastation.