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Beware of the Ceiling

In my latest column for AIER I explain that price ceilings are sometimes imposed, not out of economic ignorance, but out of economic understanding that these interventions can create special-interest benefits. A slice:

But understanding that price ceilings actually decrease consumers’ access to price-ceilinged goods points to another, very different reason why governments sometimes impose price ceilings – namely, to artificially boost consumer demand for goods that compete with the price-ceilinged goods.

Suppose you’re a landlord in a suburb of New York City, and that in your political jurisdiction there is no rent control. What’s your attitude toward New York City’s very strict regime of rent control? The naïve answer is that you don’t care, because your rental units aren’t in the City. But if you’re an actual landlord in that suburb, you’ll quickly come to learn that New York City’s system of rent control is your friend. When rent control inevitably reduces the availability of rental units in the City, many people who would rather rent in the city will be priced out. Some of these people will then naturally settle for what is for them a second-best option – renting in a nearby suburb. They’ll be knocking at your door, as New York City’s depressed supply drives up the demand for your suburban rental units. You can charge higher rents, thanks to rent control in a different city.

In this example, the supporters of NYC rent control don’t intend to bestow unearned benefits on landlords in New Jersey and on Long Island. But what about other instances of price ceilings? Might some of these ceilings be the result, not of economic ignorance, but of economic understanding that price ceilings can deceptively bestow favors on politically influential groups? Consider a cap on the interest rates charged by payday lenders. The public believes this price ceiling to be a well-intentioned measure to protect low-income borrowers. And maybe most, or even all, of the legislators who support this measure are indeed motivated by nothing other than this lovely intention. But maybe not.

A ceiling on interest rates charged by payday lenders reduces the credit and liquidity available to low-income people. Without legal payday loans, some will turn to the underground economy of loan sharks. But many others will borrow in some other legal-but-disadvantageous way, like credit cards or high-interest commercial loans. Credit-card issuers and banks are thus helped by the ceiling on interest rates charged by payday lenders. It is naïve to suppose that credit-card issuers and banks are unaware of this consequence of ceilings on interest rates charged by payday lenders, and naïve also to suppose that these legitimate businesses would never use this knowledge to seek advantages for themselves by lobbying for caps on payday-loan interest rates.

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