The hard road of free markets

The fundamental reason so many markets are not free, and so dysfunctional, is that the voters of our democracy don't really want freedom. Freedom will come when we want it, when we insist on it, when the average voter sees a free market solution rather than endless controls as the answer to real world problems. The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.

In that vein today's internet browsing (both HT marginal revolution) brings good news and bad news.

Good news - one more piece of evidence that people from left and right are finally beginning to see the huge damage of zoning and construction restrictions, including inequality, income segregation, and perpetuation of economic status. That "progressives" now see this too is a most heartening development.


Today's data point is What Happened to the American Boomtown, in, yes, the New York Times. The piece notices the dramatic expansions that Chicago and San Francisco experienced in the 19th century, when they were economic magnets.

"Chicago in 1850 was a muddy frontier town of barely 30,000 people. Within two decades, it was 10 times that size. Within another two decades, that number had tripled. By 1910, Chicago — hog butcher for the world, headquarters of Montgomery Ward, the nerve center of the nation’s rail network — had more than two million residents. 

... It was a classic metropolitan magnet, attracting anyone in need of a job or a raise.
But ...migration patterns like the one that fed Chicago have broken down in today’s America....local economic booms no longer create boomtowns in America. 

The places that are booming in size [sunbelt, providing cheap housing] aren’t the economic boomtowns — the regions with the greatest prosperity and highest productivity. In theory, we’d expect those metros, like the Bay Area, Boston and New York, to be rapidly expanding, as people move from regions with high unemployment and meager wages to those with high salaries and strong job markets.

Source: New York Times

So what's the problem? Amazingly, the Times nails it. (Or at least its intrepid reporter Emily Badger nails, it, and the Times let her do it.)

Some people aren’t moving into wealthy regions because they’re stuck in struggling ones. They have houses they can’t sell or government benefits they don’t want to lose. But the larger problem is that they’re blocked from moving to prosperous places by the shortage and cost of housing there. And that’s a deliberate decision these wealthy regions have made in opposing more housing construction, a prerequisite to make room for more people.

Moreover, she gets not only the overall flow but its character -- lower income people move out to make room for the very high skill migrants who can pay outrageous prices to be in the high productivity clusters. This results in inequality and residential segregation.

As a result [of restrictions], housing prices have soared in the most prosperous places, making them inaccessible to lower-income workers and negating much of the allure of the higher wages there. Over this same time, ...high-skilled migrants have clustered in these areas, while low-skilled workers have been more likely to move elsewhere. 

For a Times article, the omissions are just as instructive. No mention of big housing subsidies, and  "affordable" housing mandates (which drive up the cost of market rate housing even more.) We just need to get out of the way and allow more housing.

With left and right apparently now aware of the problem, what's stopping us from fixing it? The bad news:

In the Boston suburbs, the Bay Area, Brooklyn and Washington, people who already live there have balked at new housing for people who don’t.

Now the question -- are these voters just somewhat hypocritically voting their interest, or does it reveal that that average voter doesn't get how markets work? 

Lots of people in a democracy vote their interest, despite their professed ideology. There is plenty of hypocrisy on all sides. People of achingly progressive sensibilities vote for housing policies that keep the unwashed out, drive up long commutes, carbon emissions, and inequality. My neighborhood is full of these charming signs:

If I were not polite, I would add a sticker that says, "as long as you have the $3 million bucks it takes to live here. If not, get out." (Many of the same houses also have signs protesting a local school expansion, which might, well, attract people.) 

But perhaps people just don't understand the basics of how markets work. Evidence for this proposition comes from our second MR link of the day, "Upset about the I-66 tolls?" in the Washington Post. 

I-66 is a new toll road with full real time congestion pricing. This idea is about a week 2 quiz in economics 101. If you have a real-time congestion price on a road, calibrated to keep traffic at 55 mph, then either you make a huge amount of money to pay for roads and underwater pensions, or you clear up traffic forever. Win-win. The basic economic principle is, lines for free stuff are inefficient, and don't try to transfer income by mucking up with prices.  Yet, 

Several Virginia lawmakers are calling on the state to suspend tolls on Interstate 66, condemning this week’s variable tolls that hit as high as $40 as “outrageous” and “unacceptable”.

The high tolls almost immediately sparked outage on social media and drew national attention. Drivers took to Twitter to condemn the high rates with the hashtag #highwayrobbery. ...

“The tolls on I-66 are outrageous,” Wexton tweeted Tuesday. “$30+ tolls are unfair, especially for those of us with limited east-west travel options.

Earlier this week, Del. Timothy D. Hugo (R-Fairfax), the chairman of the House Republican Caucus, called on his colleagues to immediately “come together to craft a realistic public policy solution that helps lower the costs of commuting for single-occupancy vehicles on I-66.”

I wonder what the solution will be. Magic? Building more highways? With what money? You pay with tolls or you pay with taxes.

And Republican members of the Northern Virginia Transportation Commission will introduce a resolution Thursday calling on state officials to “lower, cap and reconfigure” the tolls and restore the previous rush-hour periods

And, then, restore the previous rush-hour traffic jams. The week 1 quiz in econ 101 is, what happens if you reduce the toll to a "fair" amount? And the answer is, I-66 looks like the 405.

So much for free market Republicans. At least they are consistent enough to want to subsidize single-occupancy vehicles not mass transit boondoggles. (And nobody here is adding two plus two, that restrictions on housing construction is why people are suffering these long commutes in the first place. The real answer to congestion is to let people live near where they work!)

It does not occur to anyone that you're really not paying the government. You are paying your fellow drivers to stay home, carpool, come later, so that they will get out of your way and let you sail to work.

The reaction to Uber surge pricing is a similar test. Economists love it. You mean rather than sit in the rain and wait, I can pay more, compensate someone else for waiting, encourage a driver to skip dinner, and take me where I want to go, now? I'm in. Or, I can save some money and go later. Everyone else hates it. And gets cities to ban it. And we go back to waiting.

The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.