All Commentary
Friday, June 1, 2001

Prosperity Is Hazardous to Our Health and Wealth?

More Socialism Is Not the Answer

The left long ago abandoned the argument that socialism would produce greater prosperity than capitalism (although Paul Samuelson still clung to this belief as late as 1988) and now devotes most of its energy to fabricating myriad “problems” with capitalist prosperity. A particularly shallow example of this argument was recently on display in a February 5 New York Times article by David Callahan, entitled “Here’s to Bad Times.”

Callahan, the research director at a New York City public-policy organization called Demos, proclaimed that the prosperity of the 1990s left him “financially battered and psychically troubled.” His biggest complaint is the rising cost of rental housing in New York City, which he blames on prosperity. He revels in the prospect of an impending recession that will presumably moderate the rise in housing costs.

It’s true that New York City has experienced sharp increases in the price of rental housing, but the cause of those increases is government regulation, not prosperity. No city in America has used rent-control laws as widely and has had them in place as long. With over 1.1 million rent-controlled apartments, New York City is a showcase for the policy’s destructive effects: housing shortages that get worse and worse every year; deteriorating housing quality; middle-class families trapped in apartments that are too small for their needs, while affluent retirees pay a pittance for large three- and four-bedroom apartments they have lived in for decades; and virtually no new construction. Callahan mentions all of these problems, but incorrectly blames them on “prosperity.”

Because rent control makes rental apartment housing less profitable (or unprofitable altogether), the number of rental units built each year has dropped precipitously from 35,000 in 1969, the year in which rent control was expanded to hundreds of thousands of additional housing units, to a mere 8,000 units a year over the past decade, despite a burgeoning population in the city.

On top of that, zoning, environmental, and building-code regulations make it even more costly to develop apartment units in the city (and elsewhere). Regulation also stipulates that the residents of apartments have a “right” to reside in the apartments as long as they wish and can even veto a landlord’s decision to renovate the building or turn it into co-ops or condominiums. This additional abolition of property rights makes it even more unlikely that anyone would want to build apartments in New York City. In fact, it is a virtual miracle that anyone does.

Regulation has made being a landlord in New York City so unprofitable that hundreds, if not thousands, of landlords have simply abandoned their properties. The city government has taken over some 40,000 abandoned apartments.

In short, 50 years of housing-market socialism, not free-market capitalism, is the source of Mr. Callahan’s financial “battering.” There is no quick fix to the destructive effects of a half-century of interventionism in housing markets, but the elimination of New York City’s rent controls would be a necessary first step. It would go a long way to restoring the profitability of rental housing, increase its supply, improve its quality, and moderate housing prices in the city.

Mr. Callahan also complains about rising housing costs in other places, such as Silicon Valley. But that part of northern California is famous for its decades-long “growth control” policies, which have also restricted the supply of housing and escalated its costs. Some parts of nearby Marin County even imposed 100-acre-minimum-lot zoning regulations in the 1970s, which drove housing and land prices through the roof. And the same kind of environmentalist extremism that has caused the California energy crisis is also partly responsible for a housing crisis in some parts of the state because of regulatory restrictions on development.

Health-Care Costs

Mr. Callahan’s second complaint is that middle-class people are also supposedly being “wiped out” by the rising costs of health care. Well, there is arguably no other industry in America that has experienced a larger increase in the degree of government control over the past 50 years than health care. As Milton Friedman documented in a 1992 Hoover Institution study titled “Input and Output in Medical Care,” as the hospital industry was transformed from one that was primarily proprietary in the 1920s to today’s system in which most hospitals are either government-run or government-subsidized “nonprofit” hospitals, more and more spending has led to less and less quantity and quality of health care, all other things equal. The increased governmental role in health care has led to a massive bureaucratization, which, coupled with government-induced stimulation of demand through Medicare and Medicaid, has caused health-care costs to explode.

Callahan’s third complaint is that “materialistic values” supposedly “came to pervade our culture” in the 1990s. This is an unprovable assertion, although socialists of all stripes, from Marx to Mussolini to John Kenneth Galbraith, have been bemoaning increasing “materialism” for centuries. One wonders if Mr. Callahan is aware, moreover, that charitable giving in the United States was at an all-time high during the past decade when rampant materialism supposedly blossomed.

What he seems utterly unaware of is the basic economic fact that the only way to become wealthy in any capitalistic economy is to provide goods or services to very large numbers of people. If more and more people become “materialistic” and motivated primarily by the prospect of earning large amounts of money, there will inevitably be more and more entrepreneurs who become successful at providing us with more and better goods and services at lower prices. That’s the only true route to great wealth, but in his confusion Mr. Callahan cries that he is “psychically troubled” by all of this.

His “solution” to these problems is more socialism: “[U]ntil we find a way to share the country’s wealth more equitably . . . it’s hard to get too excited about surges in national prosperity,” he writes. So he celebrates the coming recession: “As I see it, the good times are coming, not going.”

How a recession, which would cause thousands of New Yorkers to lose their jobs, would help the middle class that Mr. Callahan professes to be so concerned about is not explained.