A Swedish economist once remarked that rent control “appears to be the most efficient technique presently known to destroy a city—except for bombing.” Unfortunately, we may soon see the destructive consequences of laws limiting rent increases running rampant in St. Paul, Minnesota.
The city just approved a rent control measure that will limit landlords’ ability to increase rents on its 65,000+ rental properties. They will not be able to increase prices by more than 3 percent each year under the new law. Controversially, the initiative does not account for inflation and applies to new construction, not just existing properties. This makes the St. Paul rent control measureone of the strictest in the US—if not the world.
Opponents of the measure made all the usual critiques. They pointed out, for example, that a supermajority of economists, 81 percent per one survey, oppose rent control because of its long-run consequences. Yes, some renters save money in the short term by enjoying artificially low rents. But the restricted prices limit future construction and housing supply which ultimately leads to a housing shortage and less affordable housing in the long run.
In St. Paul, these consequences are already starting to materialize.
“Less than 24 hours after St. Paul voters approved one of the country’s most stringent rent control policies, Nicolle Goodman’s phone started to ring,” the Star-Tribunereports. “Developers were calling to tell the city’s director of planning and economic development they were placing projects on hold, putting hundreds of new housing units at risk.”
“We, like everybody else, are re-evaluating what — if any — future business activity we’ll be doing in St. Paul,” major developer Jim Stolpestad told the newspaper.
Critics of the rent control initiative, understandably, feel vindicated. But this is just the beginning. If nothing changes, investment and construction of new housing will continue to collapse thanks to this short-sighted reform.
There is still hope, though. The new law doesn’t go into effect until May 1, 2022. That means St. Paul still has 5 months to correct its grave mistake.
Consumer price inflation just hit the highest level in 30 years. Prices rose 6.2 percent from October 2020 to October 2021, according to new government data, prompting a new reckoning with “temporary” inflation that’s proving not so short-lived after all. I interviewed Senator Rand Paul, a libertarian-leaning Republican from Kentucky, to get his perspective on what’s driving our mounting inflation woes.
“I think inflation is pretty easy to explain and people need to know what causes inflation,” the senator said. “[The federal government] gets debt, then the Federal Reserve prints up new money to pay for the debt, that new money enters circulation, and that expansion of the money supply [leads to] inflation.”
Paul argued that this kind of inflation, rooted in government policies, is a “bait-and-switch” form of taxation.
“Big government politicians offer you things they say are ‘free’: free childcare, free healthcare, free college, free cell phones, free this, free that—but it’s not really free,” he said. “Either someone else is going to pay for it through higher taxes, or they’re going to pay for it through borrowing and ultimately inflation. And it really is a bait and switch because often the same people that are being offered free stuff are also the ones who suffer most through the regressive tax that is inflation.”
“We have to explain to people the second order of thinking that goes to understanding that it’s not free,” he concluded.
But what, specifically, is driving the current inflation surge?
“Really the inflation we have this year is probably a responsibility of both parties,” Paul said, referencing the trillions in deficit-financed spending Congress has passed since the COVID-19 pandemic began. “You know, both parties other than myself and a few others were for all the spending of last year. So we borrowed $3-4 trillion last year, and we’re set to borrow at least that much or more this year.”
“I think you may see inflation of 10% or 12% next year,” the senator cautioned. “Now they’re all saying the opposite. The Federal Reserve is saying it’s transitory, but I think the 6% that we’ve got now is based on last year’s borrowing. And I think there’s going to be significantly more borrowing this year. We’ve already spent an extra $2 trillion on a COVID bailout bill, which really didn’t have much to do with COVID, but it was more just a bailout bill, [and now] another trillion on infrastructure.”
But it’s not just Congress, the senator explained, as the Federal Reserve itself shares a large portion of the blame.
“There’s joint blame: Congress is initially to blame for spending money it doesn’t have and then the Federal Reserve says, oh, it’s just our job to paper over this,” Paul said. “It’s our job to buy up that debt and as they do, they create the increased money supply. So really both Congress and the Fed are to blame and they go hand in hand.”
“If we ran a balanced budget, we wouldn’t necessarily need a Federal Reserve,” he continued. “Basically we have a Federal Reserve to pay for all that debt.”
Paul warned that if inflation continues unchecked, we could see a “loss of confidence” in US currency and “people fleeing the dollar.” The senator stressed that with the advent of cryptocurrency, people have more alternatives—taking away protection the dollar may have enjoyed in the past.
I asked Senator Paul about President Biden’s argument that in order to combat inflation, the federal government actually needs to spend trillions more on his “Build Back Better” climate change and welfare agenda.
“President Biden has no idea what causes inflation,” he responded. “I mean, someone should ask him that question. How does [the government] spending more money reduce inflation? How does borrowing more money reduce inflation? That’s some mental gymnastics. It’s hard for me to comprehend.”
I offered the president’s counterargument, bolstered by liberal-leaning economists, that his bill would hugely increase productivity and thus lower inflation pressures over time.
“I think productivity comes from ingenuity and market efficiencies, but I don’t think in any way, productivity is increased by government spending,” Paul countered. “In fact, you could probably argue the opposite.”
“If you had a million dollars and you wanted to let your representatives decide how to spend it, or a bunch of venture capitalists who look at profit and loss and look at markets and make estimates, neither are perfect,” he continued. “It’s all our guesses about the future. But my thinking is that when it comes to the government, it’s politicized. Whereas the investors will only look at profit and loss because their job is narrowly focused towards trying to invest in things that make money.”
“The marketplace is always wiser and smarter than the government,” Paul concluded. “[Remember] what Milton Friedman used to say… that nobody spends somebody else’s money as wisely as their own. And that truism will always mean that the government lacks efficiency and lacks really the drive to make the best decisions for investing. So I would say productivity and the productivity of capital… always has to be less with the government.”
So, the senator warned that if President Biden’s multi-trillion-dollar spending agenda was passed by Congress, it would only worsen, not help, our inflation problems. But Paul noted that this may not happen, because even some moderate Democrats like Senator Joe Manchin are acknowledging the reality of inflation and putting the president’s ambitions on pause.
Only time will tell. But if the federal government fails to rein in its reckless fiscal and monetary policies, we may well see inflation get even more out of control. And nobody will be able to say they weren’t warned.
President Biden continues to fight to pass some version of his multi-trillion-dollar “Build Back Better” spending agenda through Congress. In its various iterations, the plan includes trillions spent on everything from electric vehicle tax credits and green energy subsidies to taxpayer-funded childcare-for-all to housing subsidies and more. The Biden administration claims that the latest version would involve $1.85 trillion in new spending.
The president has made lofty promises about what we’d get in exchange for such a historic investment. (After all, that price tag is more than the inflation-adjusted cost of FDR’s New Deal!)
“[This is] a framework that will create millions of jobs, grow the economy, invest in our nation and our people, turn the climate crisis into an opportunity, and put us on a path not only to compete, but to win the economic competition for the 21st century against China and every other major country in the world,” Biden said in a recent speech. “It’s fiscally responsible. It’s fully paid for.”
“For much too long, the working people of this nation and the middle class of this country have been dealt out of the American deal, and it’s time to deal them back in,” he continued. “If we make these investments, there will be no stopping the American people or America. We will own the future.”
Simply put, Biden argues that his plan to spend trillions will create jobs, grow the economy, and increase wages—all without adding to the $28.9 trillion (and counting) national debt. Yet a new Ivy League economic analysis undercuts every single one of these claims.
Analysts at the Wharton School of Business reviewed President Biden’s latest $1.85 trillion framework proposal and ran the numbers to project its likely economic impacts, under two distinct scenarios. One is the rather unrealistic scenario where it actually only costs $1.85 trillion. Yet because the proposal is structured with many budget gimmicks and short-term spending authorizations that would likely be reauthorized if implemented, its real cost could be as much as $4.25 trillion. Wharton also modeled the likely impact of this scenario.
In the first case, where the president’s plans cost only what he claims, the analysis still finds his promises falling short on nearly all counts. The tax increases included would not, in fact, pay for the entire proposal, and it would lead to a 2 percent increase in government debt over the long run. (That might sound small, but it’s hundreds of billions of taxpayer dollars!) And, while Wharton projects that wages would increase slightly, it finds that the overall economy would shrink, not grow, while business investment and hours worked would decline.
Erm… how’s that revitalizing America? And those dismal results are under Biden’s rosy assumptions. Under the more realistic scenario where spending provisions are accurately accounted for and the real cost is north of $4 trillion, the investment’s return is even more spectacularly awful.
Government debt would increase by 25 percent over 30 years—that’s trillions and trillions in new spending that is not, in fact, paid for. The economy would shrink—not grow—nearly 3 percent over this timeline compared to the baseline, while wages would decline 1.5 percent and hours worked would fall 1.3 percent.
It’s easy to see why government spending could have these meager results. Proponents of big government spending, like Joe Biden, focus solely on the purported benefits of their plans.
Yet every dollar spent somewhere must ultimately, directly or indirectly, come from somewhere else in the economy. The resources invested by the government in one area are, by definition, resources that would have been invested somewhere else by the private sector.
The tax hikes to partially fund the spending discourage work and tax away money that would have otherwise been invested. The debt incurred to partially fund the spending “crowds out” resources available for private sector investment. It’s not just a wash, either. In taking resources that would have been allocated via market signals and instead allocating them based on politics, government redistribution generally leads to net economic losses.
As Ludwig von Mises famously put it, “The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others.”
It’s with the reality of trade-offs in mind that the Wharton analysis is able to reliably predict the negative impacts of Biden’s plans.
This analysis is nothing short of devastating for the president’s plans. Biden wants to confiscate and spend trillions of our taxpayer dollars and is promising us the world in return for this investment. But Ivy League analysts and basic economic principles alike expose how empty those promises really are.
