Sunday, 4 May 2014

On rent control

Ed Miliband is clearly determined to be the Robin Hood of modern times. His policy proposals on energy, housing and the railways for a future Labour government have one word in common: price control. That makes him the darling of the much battered middle classes (although there has been some dispute recently about how badly the middle classes have actually fared during the recession).

Miliband thinks that the answer to imbalances between supply and demand is state regulation through the control of prices. Fix the price of bread and butter and people will be able to buy these goods aplenty for a fair price, so the logic goes. Miliband's critics have not been shy either with colourful descriptions of this policy approach. Simon Jenkins from The Guardian called the latest proposals for control of rents 'economically illiterate'. So who is right?

There are two reasons why I believe Jenkins is the proverbial voice of reason. First, controlling prices never has the effects those introducing price controls want them to have. Take the example of price controls for food following the war. Germany, just like any other European country suffered severe food shortages between 1945 and 1948. There was ample evidence however that sufficient food was being produced. The Adenauer government, under its Minister for Economics Erhard, abruptly abolished food price controls in 1948. There was much dismay at this move in all political quarters. The fear was that prices would spin out of control. In fact, the opposite happened. Within weeks, shops started to fill with food products and prices started to drop. By the end of the year, food supplies to the German population had stabilised amid record low prices.

Not quite the capitalist - Ludwig Erhard abolished price control and created the German economic miracle

Britain took the opposite way. The British government decided to continue with food price controls and, consequently, rationing and serious food shortages were a constant feature of family life in Britain well into the 1950s. In the meantime, the British government understood food shortages as a problem of insufficient state regulation and control, railing against 'food hoarding' and tightening its bureaucratic planning grip on food stuffs that had previously traded on the open village market for times immemorial. The lesson: the more you try control the supply of a product by setting prices, the less people will want to sell it, hoping for a better price soon. In essence, price controls exacerbate supply side problems, rather than solve it.

This leads to the second reason why Miliband is wrong to call for rent controls. His proposal assumes that rents are a problem for all and everyone in the country. Yet that is clearly not the case. If there is one feature of British economic and social reality that mitigates against central control from Westminster then it is the shocking imbalance between the South East (and South West to some extent) and the rest of the country. Talking of exorbitant rents in the South East and London makes sense. But the same proposition is non-sensical for someone living in Liverpool or Leeds where you can rent a spacious 2 bedroom property for about £450 per month.

Capping rents would mean that fewer people would like to provide rental properties (or repairing existing ones) which would only have the effect of limiting the already tight supply in London and the South East, whilst producing a similar tightening of the yet ample market supply in other areas. In other words, controlling rents would make things worse for everyone involved.

What sounds like a good idea for you if you have ambitions to be Robin Hood is certain to backfire. As the example of food rationing shows we have been here before. But perhaps collective memory is just too short. Who remembers British food rationing after the war?

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