David Archuleta, Another Day in Paradise, and The Great Depression

For those who watched and those who didn’t, Mormon David Archuleta sang “Another Day in Paradise” on American Idol Tuesday night. The judges (namely Randy Jackson and Paula Abdul) generally thought he did well. Simon Cowell thought it was a little depressing. I guess contestants should try to avoid singing about weighty, significant issues, especially ones they are concerned about, and instead stick to the fluffy, substanceless, trivial hedonism of modern day pop music. Who cares about the lyrics and the message anyway, right? We’re only supposed to care about that on that “Idol Gives Back” show. Don’t even talk about charity before then.

Anyway, I was reflecting on the story and message of Phil Collins’ song “Another Day in Paradise.” It’s really about the struggle of the homeless. This should give us pause. Too frequently, this is something skipped over, as if it doesn’t matter, or worse, it doesn’t even exist. Some think that homeless people have obviously just given up in life. If they would only try harder and pull themselves up from their bootstraps, they wouldn’t be homeless. Nothing could be farther from this gross misconception. Homelessness is a terrible symptom of a much more expansive problem.

Perhaps this surprises you on a libertarian website to hear such concern over homelessness. It really is a big problem, just like inner city crime, drugs, and poverty. But the most commonly discussed solutions are not always the best. The best, in fact the only long-term solution to homelessness is right before us.

It’s odd to think that in our day and age, there should be any homeless among us. Habitations are ancient and go back thousands of years. Wigwams, mud huts, and concrete houses as discussed in The Book of Mormon are ancient. What is wrong with us that we have such a problem finding shelter today? Yes, there have been and probably will always be vagrants, those who choose to avoid a house and live on the road. But most people prefer a structure to call home to not having one.

Another oddity is that there are abandoned buildings about. Landlords go out of business from time to time. Why is it that we have a surplus of property and yet a shortage of houses?

The term “shortage” is the key here. Whenever there is a shortage, the pricing mechanism associated with free enterprise was messed up. It sent the wrong signal. As a good becomes more and more scarce (as demand outstrips supply) then prices increase to compensate. If prices are not allowed to compensate (not allowed to go up) then a shortage results. The price sends a false indication that the supply is more abundant (or that the demand is less) than it actually is. A shortage results. We saw this in the 1970s, when the federal government mandated a price ceiling for gasoline. This resulted in mass shortages, long lines, etc.

There’s another problem with price ceilings. In the case of rent, landlords can no longer make a profit when prices are higher than the revenue received from rent payments. So they go out of business, leaving buildings vacant and tenants homeless. This is part of the problem.

But there’s clearly more to it than this. Another aspect is the price floor. We are about to experience problems with price floors in the upcoming recession. Probably the most famous problem with respect to price floors was The Great Depression.

During a recession or even a depression, consumer demands shrinks. Capital available to invest shrinks. The labor force shrinks (people get laid off). As demand for consumer goods and investments decrease, store owners, investment brokers, and manufacturers lower prices to unload their inventory, to encourage investment and consumption.  Better to suffer in the short term than go out of business in the long term.  Eventually, prices will get low enough that people will start buying and investing again. More money invested and more goods being produced translates to more employment. Wages will be lower than they were before, but so are prices (wages can be considered the price of employment). People employed obviously have more money to spend than they did unemployed. As they have more money to spend, demand grows, sometimes outstripping supply. And so prices go back up, including wages. Then things can get back to how they were.

(I’m ignoring for the moment the cause of the business cycle and the existence of recessions and depressions. That, according to Austrian Theory, is central banking policies, which are very widespread today. But that’s another topic. Here, I would just like to talk about the after-effects.)

What I described above is how a free market responds to a recession. We don’t have a free market. We have prices floors and price ceilings, for instance, and all sorts of taxes and fees that distort the pricing signal. Prices no longer are an accurate reflection of supply and demand. So during a recession, when people are laid off and companies stop the production lines, price floors are in place (i.e. minimum wage). Prices cannot adjust for supply and demand to match up. They cannot go low enough. So there are goods that can’t get sold. If this goes on long enough, companies start going out of business. People start getting really nervous and fidgety with their savings. Some will go to the bank and withdraw everything. This is a complicated issue, but simply put, if enough people do this, our fractional reserve banking policies have problems: banks run out of money. And so they close. Nowadays, the banks are FDIC insured. Someday I will talk about the implications here. But for now, we can see huge rippling effects that reach into all sectors of the economy. Instead of a little blip on the radar screen followed by a rapid adjustment, a months-long recession leads to years-long depression. (In the case of The Great Depression, not only were price floors in place, but there was tariff legislation (i.e. Smoot-Hawley), increasing the costs of consumer goods, and huge (unprecendented) amounts of government spending (i.e. Hoover Dam, New Deal, etc.) which further crippled the economy. No wonder it took so many years for the economy to recover. Removing these barriers to economic growth would go a long way to mitigating the short and long-term problems associated with recessions, including the upcoming episode.)

Shortages including homelessness is one of the inevitable effects: as people lose their jobs and income, and have serious trouble finding another stream of income, there’s no way all the bills can be paid. Eventually, that includes the rent or mortgage payment. A swiftly-adjusting economy could prevent long-term recessionary effects, including shortages in labor and housing.

And so the (nowadays) counterintuitive step of removing price floors and price ceilings would have the benefit of allowing the economy to take the lumps a little better, making recessionary recovery much more tolerable for all of us, and significantly reducing problems such as homelessness and unemployment.

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Filed under Austrian Economics, fiscal policy, Libertarian, politics, recession, role of government

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