Perceive More!
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Perceive More!

When Free Markets Fail…

1/27/22

As an economist, I’ve been taught — and I’ve come to appreciate — the value of free markets. The way free markets are supposed to work is as follows: When the demand for a good or service exceeds supply, the price will rise. That price will continue to rise until quantities supplied and demanded come into balance. Similarly, with excess supply, prices will fall, again, until a new equilibrium is achieved. Of course, not all markets can operate freely, as market frictions and barriers to entry (or exit) may often work to frustrate the move to the new equilibrium; but here in America, the overwhelming sentiment is that the free market is an ideal that we generally favor.

That said, most economists tend not to be so doctrinaire as to think that all market activity should be permitted to operate without any oversight, regulation, or intervention. Still, my sense is that most in my profession tend to be cautious about imposing conditions that could potentially inhibit appropriate market adjustments from taking place. Regulations that would constrain market participants from actions that would be expected to eliminate market imbalances, for instance, would generally be considered to be undesirable.

Price controls are a good example of such regulations that economists typically find objectionable. As a rule, in a market where the quantity demanded exceeds the quantity supplied, some rationing method would be required to decide who gets the scarce goods or services. In a free market, the price is the rationing mechanism. With prices constrained from adjusting, though, we have two choices: Either impose no intervention of any kind, in which case fulfillment would be satisfied simply on a first-come-first-served basis. Alternatively, impose some market intervention or allocation rule to select the population that will be served.

Using price as a rationing mechanism has the appeal of being simple and efficient, but it does have its downside. Essentially, price being the rationing mechanism means if you’re rich enough, you’ll be fine; but if you’re poor, you just may have to do without. That outcome may be just fine for non-essential goods, but how about essentials? The tricky part is that different people have different sensibilities as to what is essential.

My guess is that most of us will agree that food and water would be on the essential list, but even food has its caveats. (Is steak an essential?) It gets even muddier as we move on to shelter, education, and healthcare. The consensus as to what qualifies as essential tends to erode further for all of these categories. In any case, whatever your definition of essential, it’s pretty clear that voluntary, donor-dependent charities provide some basic sustenance for those on the receiving end, but they hardly solve the problem. And to be clear, the problem is poverty. The government is the only reasonable, ultimate backstop; and as such, it seems appropriate to task the government in assuring that those essential goods reach the entirety of the population.

We can’t let people starve, nor can we reasonably expect to provide basic requirements in kind, universally. Public housing, for example, may work for those who are able to secure a unit, but given the limited supply of such units, many qualifying households are left out. Somewhat more than 9.3 million people or 2.8 percent of Americans receive housing subsidies from the primary housing assistance programs. Meanwhile the census bureau estimates that 11.4 percent of Americans were living below the poverty line in 2020. Housing subsidy programs thus function like lotteries, conferring benefits to a limited number of households while failing to address the needs of a broader, poor population.

So what’s the best way to solve the problem of poverty? As distasteful as this may be to those who view poor people as lazy and shiftless, income supplements are, hands down, the most cost-effective way to address poverty. This approach avoids the overhead inherent in any alternative rationing system. Income supplements also go a long way toward preserving the dignity of those needing the assistance by protecting their personal spending preferences. Income supplements may be faulted for not fully solving poverty, but they would undeniably serve to mitigate it.

The 2021 Child Tax Credit, enacted as part of the American Rescue Plan Act, was a positive step in this direction. It’s as close as we are likely to come to a universal basic income program. Unfortunately, it was enacted as a temporary measure; and due to the lack of support for the Build Back Better bill on the part of Joe Manchin and Krysten Sinema, this program expired at the end of 2021 — despite being cited as having cut child poverty by 30 percent.

I might have some sympathy for the view that the child tax credit as defined in the 2021 act may have extended its benefits too far up the income ladder, but the fact that Manchin and Sinema haven’t managed to find a way to assure the continuance of this program in some fashion — to say nothing about every one of the Republicans senators — speaks volumes about their indifference to the plight of the poor, who, when forced to rely on price as a rationing mechanism, may literally be left out in the cold. Let them eat cake!

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Perceive More! is a publication that features pieces challenging our understanding of reality and pushes us in wanting to know more.

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Ira Kawaller

Ira Kawaller

Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University.

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