The Economic Way of Thinking, Part 8; R. Nash

The deputy made it clear that he and his allies in the Congress did not care about the long-term results. The huge inflation in Rus sia's money supply was necessary in the Dr. Nash is a contributing editor ofThe Freeman and professor of philosophy and theology at Reformed Theological Seminary in Orlando, Florida. His many books include Freedom, Jus tice and the State and Social Justice and the Christian Church, both published by University Press·of America. short-run because, he claimed, it would alleviate serious problems resulting from his nation's movement away from Socialism. Had the deputy been a bit more candid, he would have admitted that the planned infla tion in the money supply was going to benefit the deputy and thousands of other Russian bureaucrats like him. Actions like those just described, along with the blase attitude toward the future exhibited by the Russian deputy, are an example of the folly that results whenever individuals or governments ignore the fourth principle of the economic way of thinking, which is the subject for this, the last in my eight-part series. This fourth principle of the economic way of thinking is the importance of always asking what the long-term consequences of any economic action will be.

Short-Run Versus Long-Range Consequences Economic theories are testable in terms of their success in predicting and explaining what takes place in the real world. One way of assessing any economic proposal is to ask what its long-range consequences will be. It is a mistake to notice only the short-term or immediate consequences of economic activ256 ity. Any proposal or policy can affect the way people view a situation and thus can alter their incentives in ways that change their choices. Such a change in incentives often produces other effects that become noticeable only in the long run. American politicians excel at adopting economic policies because they appear to produce desired consequences in the short run. What "the short run" usually means for American politicians is an effect likely to last through the next election. This has often been true of policies adopted because of the help it was claimed they would bring to the poor. But measures that appeared beneficial when viewed in the short term often look quite different after a longer period of time.

This has certainly proved to be the case with the Russian government's continued expan sion of its money supply that has gone far beyond the one-hundred percent increase in mid-1992. The Russian ruble has become worthless and the incomes of tens of mil lions of Russians continue to plummet, leav ing them further behind each week in their quest for the basic necessities of life. As the inflation rate continues to escalate, the left ist-controlled Congress has continued to slow down Russia's feeble efforts to move towards democracy and a market economy. But there is no need to say more about the insane economic policies of the Russian government; there are abundant examples of equally foolish acts by the American government. How the U.S. Government Destroys Industries and American Jobs In 1955, the United States produced half of the world's cotton (some 18 million bales a year). But by 1969, only 11 million bales were being harvested in the United States.

This dramatic decline resulted from growing competition from foreign cotton growers and synthetic fabrics. Lost in the fog of history and government statistics is the sad but true story of how U.S. governmental intrusion into the cotton and textile markets 257 gave added strength to foreign intrusion in these markets. The first leg of this governmental inter vention were federally mandated price sup ports for U.S. cotton that by 1955 had reached a peak of 32 cents a pound. The short-run justification for this price support was the alleged good of cotton growers whose income would increase because of the government's' 'wise and benevolent action." But as we saw earlier in this series, every economic action involves some cost. If you artificially raise the price of U.S. cotton to raise the income of U.S. cotton producers, you open the door to the importing of lower priced cotton from foreign producers. Even more serious was the fact that the price supports raised the price of U.S. cotton above the worldwide market price, cutting dramatically into sales of U.S. cotton abroad. U.S. cotton producers were rapidly losing their niche in the world market.

The federal bureaucracy's answer to this was to subsidize the price of U.S. cotton exported overseas in 1956. This immedi ately created problems for the American textile industry whose manufacturers were now forced to pay more for u.S. cotton than their foreign competitors. This meant that foreign producers of cotton goods could manufacture and sell their goods more cheaply than American millers. The U. S. government's response was to add still an other subsidy, this one for U.S. millers. There was nothing mysterious or surpris ing in any of these long-term consequences resulting from our government's interven tion with the cotton and textile markets. Anyone attuned to the economic way of thinking could easily have predicted what was going to happen; and of course many economists and businessmen issued their warnings. But those warnings were ignored in the mad rush to producesome immediate but short-lived "solution" to some problem.

Notice also that many American business men were eager accomplices in what even tually became the destruction of their in dustries. Once the dangers of the government sub sidies became apparent, assorted changes 258 THE FREEMAN • MAY 1994 were made. But the damage had already been done. Foreign growers had already become established because the u.s. gov ernment's actions gave them an incentive to enter the cotton market. Foreign millers became established because the U.S. gov ernment's actions gave them an incentive. To appreciate fully the damages resulting from this last fact, it is necessary to visit some of the American communities that used to provide tens of thousands of textile jobs. The factories are closed, thejobs were terminated years ago, and the local econo mies were devastated. But few people rec ognize the role of the federal government in bringing about all this loss. And fewer peo ple still recognize how inattention to the fourth principle of the economic way of thinking helped produce the situation. When contemplating any economic action, always ask what the long-term consequences of that action will be.

How Government Destroys a Housing Market Failure to calculate the long-term conse quences of an act has been a major factor in the housing crisis in New York City. When a locality like New York City imposes rent controls, it does so under the pretense that rent controls will stifle the greed of selfish property owners, reflect the greater com passion of the liberal bureaucrats who run the city, and presumably make more decent housing available at a lower cost. But any one familiar with the principle of long-range consequences knows that the· end result of rent controls will not be more available housing but less; and on top of all that, the condition of available housing will continue to deteriorate. As we learned earlier in this series, people respond to incentives. Property owners think they are entitled to some return on their investment. When they begin losing money because of coercive rent controls, the first thing they begin to do is cut back on required maintenance of their property. As the condition of the property declines, it becomes increasingly less desirable to responsible people who find other places to live. As the apartments become increasingly occupied by lower-class residents, the lack of maintenance coupled with the tendency of people to treat other people's property with something less than loving care leads to still a further decline in the quality of the property. Many such properties deteriorate so badly that they eventually become con demned or mysteriously burn to the ground.

If one doubts that this happens, all one need do is make a brief visit to the borough of New York known as the Bronx. Other property owners will survive the rent controls by finding creative ways of getting around the restrictions. A black market in rental property may arise. People able to rent an apartment at the governmen tally approved price may still have to make additional payments under the table, per haps by renting additional furniture or pay ing for a cleaning service. A good exercise in the economic way of thinking would be to consider what would happen to housing in New York City if all rent controls were ended. The short-term consequence, of course, is that the price of housing in the city would jump dramatically. But, of course, the ultimate blame for this would be the original, shortsighted view of the city bu reaucrats. But the long-term consequence would be an enormous increase in the quan tity of new housing as entrepreneurs rush into the market to build new housing in response to the incentives of higher rents.

But as the quantity of new housing in creased, as it would, another long-term consequence would be the significant de crease in the cost of such housing when the quantity of acceptable housing then sup plied by the market increased. Given the obvious answer to New York's housing crisis, the question to ask is why the liberal bureaucrats don't admit their mis takes and abandon their self-destructive policies? One possible answer, of course, is that one must never underestimate the stu pidity of politicians. Whatever the truth may be in the case of these bureaucrats, it is clear that the real losers are the people who live or would like to live in the city.