Socialism—defined as a centrally planned economy in which the government controls all means of production—was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty. Yet the idea and the ideal of socialism linger on. Whether socialism in some form will eventually return as a major organizing force in human affairs is unknown, but no one can accurately appraise its prospects who has not taken into account the dramatic story of its rise and fall. The Birth of Socialist Planning It is often thought that the idea of socialism derives from the work of Karl Marx. In fact, Marx wrote only a few pages about socialism, as either a moral or a practical blueprint for society. The true architect of a socialist order was Lenin, who first faced the practical difficulties of organizing an economic system without the driving incentives of profit seeking or the self-generating constraints of competition. Lenin began from the long-standing delusion that economic organization would become less complex once the profit drive and the market mechanism had been dispensed with—“as self-evident,” he wrote, as “the extraordinarily simple operations of watching, recording, and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.” In fact, economic life pursued under these first four rules rapidly became so disorganized that within four years of the 1917 revolution, Soviet production had fallen to 14 percent of its prerevolutionary level. By 1921 Lenin was forced to institute the New Economic Policy (NEP), a partial return to the market incentives of capitalism. This brief mixture of socialism and capitalism came to an end in 1927 after Stalin instituted the process of forced collectivization that was to mobilize Russian resources for its leap into industrial power. The system that evolved under Stalin and his successors took the form of a pyramid of command. At its apex was Gosplan, the highest state planning agency, which established such general directives for the economy as the target rate of growth and the allocation of effort between military and civilian outputs, between heavy and light industry, and among various regions. Gosplan transmitted the general directives to successive ministries of industrial and regional planning, whose technical advisers broke down the overall national plan into directives assigned to particular factories, industrial power centers, collective farms, and so on. These thousands of individual subplans were finally scrutinized by the factory managers and engineers who would eventually have to implement them. Thereafter, the blueprint for production reascended the pyramid, together with the suggestions, emendations, and pleas of those who had seen it. Ultimately, a completed plan would be reached by negotiation, voted on by the Supreme Soviet, and passed into law. Thus, the final plan resembled an immense order book, specifying the nuts and bolts, steel girders, grain outputs, tractors, cotton, cardboard, and coal that, in their entirety, constituted the national output. In theory such an order book should enable planners to reconstitute a working economy each year—provided, of course, that the nuts fitted the bolts; the girders were of the right dimensions; the grain output was properly stored; the tractors were operable; and the cotton, cardboard, and coal were of the kinds needed for their manifold uses. But there was a vast and widening gap between theory and practice. Problems Emerge The gap did not appear immediately. In retrospect, we can see that the task facing Lenin and Stalin in the early years was not so much economic as quasi military—mobilizing a peasantry into a workforce to build roads and rail lines, dams and electric grids, steel complexes and tractor factories. This was a formidable assignment, but far less formidable than what would confront socialism fifty years later, when the task was not so much to create enormous undertakings as to create relatively self-contained ones, and to fit all the outputs into a dovetailing whole. Through the 1960s the Soviet economy continued to report strong overall growth—roughly twice that of the United States—but observers began to spot signs of impending trouble. One was the difficulty of specifying outputs in terms that would maximize the well-being of everyone in the economy, not merely the bonuses earned by individual factory managers for “overfulfilling” their assigned objectives. The problem was that the plan specified outputs in physical terms. One consequence was that managers maximized yardages or tonnages of output, not its quality. A famous cartoon in the satirical magazine Krokodil showed a factory manager proudly displaying his record output, a single gigantic nail suspended from a crane. As the economic flow became increasingly clogged and clotted, production took the form of “stormings” at the end of each quarter or year, when every resource was pressed into use to meet preassigned targets. The same rigid system soon produced expediters, or tolkachi, to arrange shipments to harassed managers who needed unplanned—and therefore unobtainable—inputs to achieve their production goals. Worse, lacking the right to buy their own supplies or to hire or fire their own workers, factories set up fabricating shops, then commissaries, and finally their own worker housing to maintain control over their own small bailiwicks. It is not surprising that this increasingly Byzantine system began to create serious dysfunctions beneath the overall statistics of growth. During the 1960s the Soviet Union became the first industrial country in history to suffer a prolonged peacetime fall in average life expectancy, a symptom of its disastrous misallocation of resources. Military research facilities could get whatever they needed, but hospitals were low on the priority list. By the 1970s the figures clearly indicated a slowing of overall production. By the 1980s the Soviet Union officially acknowledged a near end to growth that was, in reality, an unofficial decline. In 1987 the first official law embodying perestroika—restructuring—was put into effect. President Mikhail Gorbachev announced his intention to revamp the economy from top to bottom by introducing the market, reestablishing private ownership, and opening the system to free economic interchange with the West. Seventy years of socialist rise had come to an end. Socialist Planning in Western Eyes Understanding of the difficulties of central planning was slow to emerge. In the mid-1930s, while the Russian industrialization drive was at full tilt, few raised their voices about its problems. Among those few were ludwig von mises, an articulate and exceedingly argumentative free-market economist, and friedrich hayek, of much more contemplative temperament, later to be awarded a Nobel Prize for his work in monetary theory. Together, Mises and Hayek launched an attack on the feasibility of socialism that seemed at the time unconvincing in its argument as to the functional problems of a planned economy. Mises in particular contended that a socialist system was impossible because there was no way for the planners to acquire the information (see Information and Prices)—“produce this, not that”—needed for a coherent economy. This information, Hayek emphasized, emerged spontaneously in a market system from the rise and fall of prices. A planning system was bound to fail precisely because it lacked such a signaling mechanism. The Mises-Hayek argument met its most formidable counterargument in two brilliant articles by Oskar Lange, a young economist who would become Poland’s first ambassador to the United States after World War II. Lange set out to show that the planners would, in fact, have precisely the same information as that which guided a market economy. The information would be revealed as inventories of goods rose and fell, signaling either that supply was greater than demand or demand was greater than supply. Thus, as planners watched inventory levels, they were also learning which of their administered (i.e., state-dictated) prices were too high and which too low. It only remained, therefore, to adjust prices so that supply and demand balanced, exactly as in the marketplace. Lange’s answer was so simple and clear that many believed the Mises-Hayek argument had been demolished. In fact, we now know that their argument was all too prescient. Ironically, though, Mises and Hayek were right for a reason they did not foresee as clearly as Lange himself. “The real danger of socialism,” Lange wrote, in italics, “is that of a bureaucratization of economic life.” But he took away the force of the remark by adding, without italics, “Unfortunately, we do not see how the same or even greater danger can be averted under monopolistic capitalism” (Lange and Taylor 1938, pp. 109–110). The effects of the “bureaucratization of economic life” are dramatically related in The Turning Point, a scathing attack on the realities of socialist economic planning by two Soviet economists, Nikolai Smelev and Vladimir Popov, that gives examples of the planning process in actual operation. In 1982, to stimulate the production of gloves from moleskins, the Soviet government raised the price it was willing to pay for moleskins from twenty to fifty kopecks per pelt. Smelev and Popov noted: State purchases increased, and now all the distribution centers are filled with these pelts. Industry is unable to use them all, and they often rot in warehouses before they can be processed. The Ministry of Light Industry has already requested Goskomtsen [the State Committee on Prices] twice to lower prices, but “the question has not been decided” yet. This is not surprising. Its members are too busy to decide. They have no time: besides setting prices on these pelts, they have to keep track of another 24 million prices. And how can they possibly know how much to lower the price today, so they won’t have to raise it tomorrow? This story speaks volumes about the problem of a centrally planned system. The crucial missing element is not so much “information,” as Mises and Hayek argued, as it is the motivation to act on information. After all, the inventories of moleskins did tell the planners that their production was at first too low and then too high. What was missing was the willingness—better yet, the necessity—to respond to the signals of changing inventories. A capitalist firm responds to changing prices because failure to do so will cause it to lose money. A socialist ministry ignores changing inventories because bureaucrats learn that doing something is more likely to get them in trouble than doing nothing, unless doing nothing results in absolute disaster. In the late 1980s, absolute economic disaster arrived in the Soviet Union and its Eastern former satellites, and those countries are still trying to construct some form of economic structure that will no longer display the deadly inertia and indifference that have come to be the hallmarks of socialism. It is too early to predict whether these efforts will succeed. The main obstacle to real perestroika is the impossibility of creating a working market system without a firm basis of private ownership, and it is clear that the creation of such a basis encounters the opposition of the former state bureaucracy and the hostility of ordinary people who have long been trained to be suspicious of the pursuit of wealth. In the face of such uncertainties, all predictions are foolhardy save one: no quick or easy transition from socialism to some form of nonsocialism is possible. Transformations of such magnitude are historic convulsions, not mere changes in policy. Their completion must be measured in decades or generations, not years. Heilbroner on Who Predicted Socialism’s Demise But what spokesman of the present generation has anticipated the demise of socialism or the “triumph of capitalism”? Not a single writer in the Marxian tradition! Are there any in the left centrist group? None I can think of, including myself. As for the center itself—the Samuelsons, Solows, Glazers, Lipsets, Bells, and so on—I believe that many have expected capitalism to experience serious and mounting, if not fatal, problems and have anticipated some form of socialism to be the organizing force of the twenty-first century. … Here is the part hard to swallow. It has been the Friedmans, Hayeks, von Miseses, e tutti quanti who have maintained that capitalism would flourish and that socialism would develop incurable ailments. Mises called socialism “impossible” because it has no means of establishing a rational pricing system; Hayek added additional reasons of a sociological kind (“the worst rise on top”). All three have regarded capitalism as the “natural” system of free men; all have maintained that left to its own devices capitalism would achieve material growth more successfully than any other system. From Robert Heilbroner. “The World After Communism.”Dissent (Fall 1990): 429–430. About the Author Robert Heilbroner, a socialist for most of his adult life, was the Norman Thomas Professor of Economics (emeritus) at the New School for Social Research and author of the best-seller The Worldly Philosophers. He died in 2005. The editor of this volume, David R. Henderson, edited this article slightly, but only to adjust it for developments in the formerly socialist countries, not to change any of its other substantive content. Further Reading   Hayek, Friedrich A. “Socialist Economic Calculation: The Present State of the Debate.” In Hayek, Individualism and Economic Order. 1942. Reprint. Chicago: University of Chicago Press, 1972. Heilbroner, Robert. “After Communism.” New Yorker, September 10, 1990. Heilbroner, Robert. “The Triumph of Capitalism.” New Yorker, January 23, 1989. Lange, Oskar, and Fred Taylor. On the Economic Theory of Socialism. New York: McGraw-Hill, 1938. Mises, Ludwig von. “Economic Calculation in the Socialist Commonwealth.” In Friedrich A. Hayek, ed., Collectivist Economic Planning. London: Routledge and Sons, 1935. Smelev, Nikolai, and Vladimir Popov. The Turning Point. New York: Doubleday, 1989.   (0 COMMENTS)

Social Security, or, to be precise, Old Age, Survivors and Disability Insurance (OASDI), is the U.S. government program that pays benefits to workers after retirement, to spouses and children of deceased workers, and to workers who become disabled before they retire. In 2003, the program had 47 million recipients, of whom 32.6 million were retired workers and their dependent family members, 6.8 million were survivors of deceased workers, and 7.6 million were disabled former workers and their dependent family members. Social Security is financed through a payroll deduction (FICA) tax that is more than adequate now, but soon will be less than the amount needed to pay benefits. The first social security program originated in Germany in 1889 under Chancellor Otto von Bismarck. By 1935, when President Franklin Delano Roosevelt signed the U.S. Social Security law, thirty-four European nations operated some form of old-age retirement plan based on transfers from workers to retirees. The U.S. Social Security system remained a retirement and survivor benefit program until 1957, when Congress began changing it significantly. The only previous changes had been increases in benefits and in taxes. In 1957, Congress broadened the program to include disability Insurance benefits for severely disabled workers. In 1972, Congress approved automatic cost-of-living adjustments (COLAs) and in 1977 changed the benefit formula to provide a constant percentage of work income. Then, in 1983, in response to a funding crisis, Congress raised the payroll tax rate to its current level, increased the retirement age, and started to tax benefits. In spite of and, in some cases because of, these changes, the system faces serious challenges in the future. In 1945, the United States had more than forty workers per retiree, so a minimal tax on workers could support all retirees. However, the system that began with few receiving benefits had to mature, and this maturation process meant that more and more individuals would become eligible for benefits. Thus, this idyllic world could not last. The combination of increased life expectancy from sixty-one years for those born in 1935 to seventy-six for those born in 2004, increased benefits, and falling birthrates has reduced the number of workers per retiree to three. By 2030, only two workers will be available to support each retiree. U.S. Social Security comprises two distinct programs, each covering a separate population and each with its own method of financing. Old Age and Survivor Insurance (OASI) provides two types of benefits: retirement benefits for retired workers and benefits to the spouses and children of deceased workers. Disability Insurance (DI) provides benefits for disabled workers and their dependents on the same basis as retirement benefits are determined. Social Security retirement benefits are based on average indexed monthly earnings for the thirty-five highest earnings years prior to retirement. The benefit formula is set up to favor lower-income workers. For example, in 2004, someone with average monthly earnings of $624 received a benefit that replaced 90 percent of earnings. Someone whose average monthly earnings were $3,760 received a benefit that replaced 42 percent of earnings, while someone with monthly earnings at the then-taxable maximum of $7,325 received a benefit that replaced only 28 percent of earnings. Early retirement—retirement between age sixty-two and the full-benefit age—results in a deduction from full benefits based on the actuarial assumption that early retirees will collect benefits for a longer period of

Years later, the extraordinary cost of the 1980s S&L crisis still astounds many taxpayers, depositors, and policymakers. The cost of bailing out the Federal Savings and Loan Insurance Corporation (FSLIC), which insured the deposits in failed S&Ls, may eventually exceed $160 billion. At the end of 2004, the direct cost of the S&L crisis to taxpayers was $124 billion, according to financial statements published by the Federal Deposit Insurance Corporation (FDIC), the successor to the FSLIC. Additionally, healthy S&Ls as well as commercial banks have been taxed approximately another $30 billion to pay for S&L cleanup costs. Finally, the federal courts are still resolving the so-called goodwill cases stemming from regulatorily inspired mergers of failing S&Ls into healthy S&Ls in the early 1980s (discussed below). Resolving these cases will probably cost taxpayers another $5–$10 billion. The bankruptcy of the FSLIC did not occur overnight; the FSLIC was a disaster waiting to happen for many years. Numerous public policies, some dating back to the 1930s, created the disaster. Some policies were well intended but misguided. Others had lost whatever historical justification they might once have had. Yet others were desperate attempts to postpone addressing a rapidly worsening situation. All of these policies, however, greatly compounded the S&L problem and made its eventual resolution more difficult and much more expensive. When disaster finally hit the S&L industry in 1980, the federal government managed it very badly. Fifteen public policies that contributed to the S&L debacle are summarized below. Public Policy Causes with Roots Before 1980 Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for

New York State legislators defend the War Emergency Tenant Protection Act—also known as rent control—as a way of protecting tenants from war-related housing shortages. The war referred to in the law is not the 2003 war in Iraq, however, or the Vietnam War; it is World War II. That is when rent control started in New York City. Of course, war has very little to do with apartment shortages. On the contrary, the shortage is created by rent control, the supposed solution. Gotham is far from the only city to have embraced rent control. Many others across the United States have succumbed to the blandishments of this legislative “fix.” Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a “rent ceiling,” on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed. (An enactment prohibiting apartment rents from exceeding, say, $100,000 per month would have no effect since no one would pay that amount in any case.) But if rents are established at less than their equilibrium levels, the quantity demanded will necessarily exceed the amount supplied, and rent control will lead to a shortage of dwelling spaces. In a competitive market and absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result. With shortages in the controlled sector, this excess demand spills over onto the noncontrolled sector (typically, new upper-bracket rental units or condominiums). But this noncontrolled segment of the market is likely to be smaller than it would be without controls because property owners fear that controls may one day be placed on them. The high demand in the noncontrolled segment along with the small quantity supplied, both caused by rent control, boost prices in that segment. Paradoxically, then, even though rents may be lower in the controlled sector, they rise greatly for uncontrolled units and may be higher for rental housing as a whole. As in the case of other price ceilings, rent control causes shortages, diminution in the quality of the product, and queues. But rent control differs from other such schemes. With price controls on gasoline, the waiting lines worked on a first-come-first-served basis. With rent control, because the law places sitting tenants first in the queue, many of them benefit. The Effects of Rent Control Economists are virtually unanimous in concluding that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available.”1 Similarly, another study reported that more than 95 percent of the Canadian economists polled agreed with the statement.2 The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners milton friedman and friedrich hayek on the “right” to their fellow Nobel laureate gunnar myrdal, an important architect of the Swedish Labor Party’s welfare state, on the “left.” Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”3 His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”4 That cities like New York have clearly not been destroyed by rent control is due to the fact that rent control has been relaxed over the years.5 Rent stabilization, for example, which took the place of rent control for newer buildings, is less restrictive than the old rent control. Also, the decades-long boom in the New York City housing market is not in rent-controlled or rent-stabilized units, but in condominiums and cooperative housing. But these two forms of housing ownership grew important as a way of getting around rent control. Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, fewer repairs, and less maintenance. For example, Paul Niebanck found that 29 percent of rent-controlled housing in the United States was deteriorated, but only 8 percent of the uncontrolled units were in such a state of disrepair. Joel Brenner and Herbert Franklin cited similar statistics for England and France. The economic reasons are straightforward. One effect of government oversight is to retard investment in residential rental units. Imagine that you have five million dollars to invest and can place the funds in any industry you wish. In most businesses, governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing? This line of reasoning holds not just for you, but for everyone else as well. As a result, the quantity of apartments for rent will be far smaller than otherwise. And not so amazingly, the preceding analysis holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to have a chilling effect on such investment. Instead, everything else under the sun in the real estate market has been built: condominiums, office towers, hotels, warehouses, commercial space. Why? Because such investments have never been subject to rent controls, and no one fears that they ever will be. It is no accident that these facilities boast healthy vacancy rates and relatively slowly increasing rental rates, while residential space suffers from a virtual zero vacancy rate in the controlled sector and skyrocketing prices in the uncontrolled sector. Although many rent-control ordinances specifically exempt new rental units from coverage, investors are too cautious (perhaps too smart) to put their faith in rental housing. In numerous cases housing units supposedly exempt forever from controls were nevertheless brought under the provisions of this law due to some “emergency” or other. New York City’s government, for example, has three times broken its promise to exempt new or vacant units from control. So prevalent is this practice of rent-control authorities that a new term has been invented to describe it: “recapture.” Rent control has destroyed entire sections of sound housing in New York’s South Bronx and has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonments are not available, William Tucker estimates that about 30,000 New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. Thanks to rent control, and to potential investors’ all-too-rational fear that rent control will become even more stringent, no sensible investor will build rental housing unsubsidized by government. Effects on Tenants Existing rental units fare poorly under rent control. Even with the best will in the world, the landlord sometimes cannot afford to pay his escalating fuel, labor, and materials bills, to say nothing of refinancing his mortgage, out of the rent increase he can legally charge. And under rent controls he lacks the best will; the incentive he had under free-market conditions to supply tenant services is severely reduced. The sitting tenant is “protected” by rent control but, in many cases, receives no real rental bargain because of improper maintenance, poor repairs and painting, and grudging provision of services. The enjoyment he can derive out of his dwelling space ultimately tends to be reduced to a level commensurate with his controlled rent. This may take decades, though, and meanwhile he benefits from rent control. In fact, many tenants, usually rich or middle-class ones who are politically connected or who were lucky enough to be in the right place at the right time, can gain a lot from rent control. Tenants in some of the nicest neighborhoods in New York City pay a scandalously small fraction of the market price of their apartments. In the early 1980s, for example, former mayor Ed Koch paid $441.49 for an apartment then worth about $1,200.00 per month. Some people in this fortunate position use their apartments like hotel rooms, visiting only a few times per year. Then there is the “old lady effect.” Consider the case of a two-parent, four-child family that has occupied a ten-room rental dwelling. One by one the children grow up, marry, and move elsewhere. The husband dies. Now the lady is left with a gigantic apartment. She uses only two or three of the rooms and, to save on heating and cleaning, closes off the remainder. Without rent control she would move to a smaller accommodation. But rent control makes that option unattractive. Needless to say, these practices further exacerbate the housing crisis. Repeal of rent control would free up thousands of such rooms very quickly, dampening the impetus toward vastly higher rents. What determines whether or not a tenant benefits from rent control? If the building in which he lives is in a good neighborhood where rents would rise appreciably if rent control were repealed, then the landlord has an incentive to maintain the building against the prospect of that happy day. This incentive is enhanced if there are many decontrolled units in the building (due to “vacancy decontrol” when tenants move out) or privately owned condominiums for which the landlord must provide adequate services. Then the tenant who pays the scandalously low rent may “free ride” on his neighbors. But in the more typical case the quality of housing services tends to reflect rental payments. This, at least, is the situation that will prevail at equilibrium. If government really had the best interests of tenants at heart and was for some reason determined to employ controls, it would do the very opposite of imposing rent restrictions: it would instead control the price of every other good and service available, apart from residential suites, in an attempt to divert resources out of all those other opportunities and into this one field. But that, of course, would bring about full-scale socialism, the very system under which the Eastern Europeans suffered so grimly. If the government wanted to help the poor and was for some reason constrained to keep rent controls, it would do better to tightly control rents on luxury unit rentals and to eliminate rent controls on more modest dwellings—the very opposite of the present practice. Then, builders’ incentives would be turned around. Instead of erecting luxury dwellings, which are now exempt, they would be led, “as if by an invisible hand,” to create housing for the poor and middle classes. Solutions The negative consequences of rent legislation have become so massive and perverse that even many of its former supporters have spoken out against it. Instead of urging a quick termination of controls, however, some pundits would only allow landlords to buy tenants out of their controlled dwellings. That they propose such a solution is understandable. Because tenants outnumber landlords and are usually convinced that rent control is in their best interests, they are likely to invest considerable political energy (see Rent Seeking) in maintaining rent control. Having landlords “buy off” these opponents of reform, therefore, could be a politically effective way to end rent control. But making property owners pay to escape a law that has victimized many of them for years is not an effective way to make them confident that rent controls will be absent in the future. The surest way to encourage private investment is to signal investors that housing will be safe from rent control. And the most effective way to do that is to eliminate the possibility of rent control with an amendment to the state constitution that forbids it. Paradoxically, one of the best ways to help tenants is to protect the economic freedom of landlords. Rent Control: It’s Worse Than Bombing new delhi—A “romantic conception of socialism” … destroyed Vietnam’s economy in the years after the Vietnam war, Foreign Minister Nguyen Co Thach said Friday. Addressing a crowded news conference in the Indian capital, Mr. Thach admitted that controls … had artificially encouraged demand and discouraged supply…. House rents had … been kept low … so all the houses in Hanoi had fallen into disrepair, said Mr. Thach. “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy,” he said. —From a news report in Journal of Commerce, quoted in Dan Seligman, “Keeping Up,” Fortune, February 27, 1989. About the Author Walter Block (wblock@loyno.edu) holds the Harold E. Wirth Eminent Scholar Chair in Economics at Loyola University’s Joseph A. Butt, S.J., College of Business Administration. Further Reading   Arnott, Richard. “Time for Revisionism on Rent Control?” Journal of Economic Perspectives 9, no. 1 (1995): 99–120. Baird, Charles. Rent Control: The Perennial Folly. Washington D.C.: Cato Institute, 1980. Block, Walter. “A Critique of the Legal and Philosophical Case for Rent Control.” Journal of Business Ethics 40 (2002): 75–90. Online at: http://www.mises.org/etexts/rentcontrol.pdf. Block, Walter, and Edgar Olsen, eds. Rent Control: Myths and Realities. Vancouver: Fraser Institute, 1981. Brenner, Joel F., and Herbert M. Franklin. Rent Control in North America and Four European Countries. Rockville, Md.: Council for International Urban Liaison, 1977. Grampp, W. S. “Some Effects of Rent Control.” Southern Economic Journal (April 1950): 425–426. Johnson, M. Bruce, ed. Resolving the Housing Crisis: Government Policy, Decontrol, and the Public Interest. San Francisco: Pacific Institute, 1982. Niebanck, Paul L. Rent Control and the Rental Housing Market in New York City. New York: Housing and Development Administration, Department of Rent and Housing Maintenance, 1968. Salins, Peter D. The Ecology of Housing Destruction: Economic Effects of Public Intervention in the Housing Market. New York: New York University Press, 1980. Tucker, William. The Excluded Americans: Homelessness and Housing Policies. Washington, D.C.: Regnery Gateway, 1990.   Footnotes 1. Richard M. Alson, J. R. Kearl, and Michael B. Vaughan, “Is There a Consensus Among Economists in the 1990’s?” American Economic Review 82, no. 2 (1992): 203–209.   2. Walter Block and Michael A. Walker, “Entropy in the Canadian Economics Profession: Sampling Consensus on the Major Issues,” Canadian Public Policy 14, no. 2 (1988): 137–150, online at: http://141.164.133.3/faculty/Block/Blockarticles/Entropy.htm.   3. Gunnar Myrdal, “Opening Address to the Council of International Building Research in Copenhagen,” Dagens Nyheter (Swedish newspaper), August 25, 1965, p. 12; cited in Sven Rydenfelt, “The Rise, Fall and Revival of Swedish Rent Control,” in Rent Control: Myths and Realities, Walter Block and Edgar Olsen, eds. (Vancouver: The Fraser Institute, 1981), p. 224.   4. Assar Lindbeck, The Political Economy of the New Left (New York: Harper and Row, 1972); cited in Sven Rydenfelt, “The Rise, Fall and Revival of Swedish Rent Control,” in Rent Control: Myths and Realities, Walter Block and Edgar Olsen, eds. (Vancouver: The Fraser Institute, 1981), pp. 213, 230.   5. States New York “public advocate” Mark Green: “the number of rent-controlled apartments fell 18.2% between 1991 and 1993 and the new data we have analyzed shows an even greater decline—30%—from 1993 to 1996. Indeed, the total number of rent-controlled apartments has fallen by 75% from its peak of 285,000 in 1981” (http://www.tenant.net/Alerts/Guide/papers/mgreen1.html). This is due to the fact that when rents reach a certain level ($2,000 per month under certain conditions), apartments leave the controlled sector altogether. Inflation plus a “hot” New York City housing market have pushed many units above this level. See on this http://www.housingnyc.com/html/resources/faq/decontrol.html. Ken Rosenblum, Mike Golden, and Deborah Poole provided the above cites.   (0 COMMENTS)

Businesses complain about regulation incessantly, but many citizens, consumer advocates, and nongovernmental organizations (NGOs) think it absolutely necessary to protect the public interest. What is regulation? Why do we have it? How has it changed? This article briefly provides some answers, concentrating on experience with regulation in the United States. Regulation consists of requirements the government imposes on private firms and individuals to achieve government’s purposes. These include better and cheaper services and goods, protection of existing firms from “unfair” (and fair) competition, cleaner water and air, and safer workplaces and products. Failure to meet regulations can result in fines, orders to cease doing certain things, or, in some cases, even criminal penalties. Economists distinguish between two types of regulation: economic and social. “Economic regulation” refers to rules that limit who can enter a business (entry controls) and what prices they may charge (price controls). For example, taxi drivers and many professionals (lawyers, accountants,

The federal government has increasingly assumed responsibility for reducing poverty in America. Its primary approach is to expand programs that transfer wealth, supposedly from the better off to the poor. In 1962, federal transfers to individuals (not counting payments for goods and services provided or interest for money loaned) amounted to 5.2 percent of gross domestic product, or 27 percent of federal spending (Stein and Foss 1995, p. 212). By 2000, federal transfers had increased to 10.9 percent of GDP, or approximately 60 percent of federal spending; GDP was $9.82 trillion and federal spending was $1.79 trillion. These transfers are commonly referred to as government redistribution programs, presumably from the wealthy to the poor. The unstated implication is that income was originally distributed by someone. But no one distributes income. Rather, incomes are determined in the marketplace by millions of people providing and purchasing services through voluntary exchanges, and government transfers necessarily limit these exchanges. That explains the quotation marks around the term “redistribution.” Almost without exception, academic studies and journalistic accounts of government’s effect on the well-being of the poor focus exclusively on the effectiveness of programs that actually transfer income to the poor. What does this leave out? It leaves out all the programs that transfer income away from the poor. To know the net amount the poor receive after considering transfers to and transfers from them, we need to consider all government transfer programs. Such an examination yields a striking fact: most government transfers are not from the rich to the poor. Instead, government takes from the relatively unorganized (e.g., consumers and general taxpayers) and gives to the relatively organized (groups politically organized around common interests, such as the elderly, sugar farmers, and steel producers). The most important factor in determining the pattern of redistribution appears to be political influence, not poverty. Of the $1.07 trillion in federal transfers in 2000, only about 29 percent, or $312 billion, was means tested (earmarked for the poor) (Rector 2001, p. 2). The other 71 percent—about $758 billion in 2000—was distributed with little attention to need. Take Social Security, for example. The net worth per family of the elderly is about twice that of families in general. Yet, Social Security payments transferred $406 billion in 2003 to the elderly, regardless of their wealth. Also, qualifying for Medicare requires only that one be sixty-five or older. Because this age group’s poverty rate is quite low (only 10.4 percent in 2002), most of the more than $280 billion in annual Medicare benefits go to the nonpoor. What is more, the direct transfer of cash and services is only one way that government transfers income. Another way is by restricting competition among producers. The inevitable consequence—indeed, the intended consequence—of these restrictions is to enrich organized groups of producers at the expense of consumers. Here, the transfers are more perverse than with Medicare and Social Security. They help relatively wealthy producers at the expense of relatively poor (and, in some cases, absolutely poor) consumers. Many government restrictions on agricultural production, for example, allow farmers to capture billions of consumer dollars through higher food prices (see agricultural subsidy programs). Most of these dollars go to relatively few large farms, whose owners are far wealthier than the average taxpayer and consumer (or the average farmer). Also, wealthy farmers receive most of the government’s direct agricultural subsidies. Restrictions on imports also transfer wealth from consumers to domestic producers of the products. Again, those who receive these transfers are typically wealthier than those who pay for them. Consider, for example, the tariffs imposed on steel imports in 2002 to save steelworkers’ jobs. A study done for the Consuming Industries Trade Action Coalition in 2003 found that the steel tariffs eliminated the jobs of about 200,000 U.S. workers in industries that, because of the tariffs, had to pay more for the steel needed in their production processes. This is far more jobs than were saved, because the entire American steel industry employs only 187,500 workers, only a fairly small fraction of whom would have lost their jobs without the steel tariffs. Also, consumers had to pay more for products containing steel. Since unionized steelworkers earn more than the average worker and consumer, the steel tariffs transferred wealth to a few well-paid and politically organized workers at the expense of many less-well-paid workers and consumers. Not only do the poor receive a smaller percentage of income transfers than most people realize, but also the transfers they do get are worth less to them, dollar for dollar, than transfers going to the nonpoor. The reason is that subsidies to the poor tend to be in kind rather than in cash. Slightly over half of all the transfers targeted to the poor are in the form of medical care. In addition to medical care, the poor receive a significant proportion of their assistance for such things as housing, energy, and job training.

“Rent seeking” is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. Gordon Tullock originated the idea in 1967, and Anne Krueger introduced the label in 1974. The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher Social Security payments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors. But why do economists use the term “rent”? Unfortunately, there is no good reason. David Ricardo introduced the term “rent” in economics. It means the payment to a factor of production in excess of what is required to keep that factor in its present use. So, for example, if I am paid $150,000 in my current job but I would stay in that job for any salary over $130,000, I am making $20,000 in rent. What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.” It has been known for centuries that people lobby the government for privileges. Tullock’s insight was that expenditures on lobbying for privileges are costly and that these expenditures, therefore, dissipate some of the gains to the beneficiaries and cause inefficiency. If, for example, a steel firm spends one million dollars lobbying and advertising for restrictions on steel imports, whatever money it gains by succeeding, presumably more than one million, is not a net gain. From this gain must be subtracted the one-million-dollar cost of seeking the restrictions. Although such an expenditure is rational from the narrow viewpoint of the firm that spends it, it represents a use of real resources to get a transfer from others and is therefore a pure loss to the economy as a whole. Krueger (1974) independently discovered the idea in her study of poor economies whose governments heavily regulated their people’s economic lives. She pointed out that the regulation was so extensive that the government had the power to create “rents” equal to a large percentage of national income. For India in 1964, for example, Krueger estimated that government regulation created rents equal to 7.3 percent of national income; for Turkey in 1968, she estimated that rents from import licenses alone were about 15 percent of Turkey’s gross national product. Krueger did not attempt to estimate what percentage of these rents were dissipated in the attempt to get them. Tullock (1993) tentatively maintained that expenditures on rent-seeking in democracies are not very large. About the Author David R. Henderson is the editor of this encyclopedia. He is a research fellow with Stanford University’s Hoover Institution and an associate professor of economics at the Naval Postgraduate School in Monterey, California. He was formerly a senior economist with President Ronald Reagan’s Council of Economic Advisers. Further Reading   Krueger, Anne O. “The Political Economy of the Rent-Seeking Society.” American Economic Review 64 (1974): 291–303. Tullock, Gordon. Rent Seeking. Brookfield, Vt.: Edward Elgar, 1993. Tullock, Gordon. “The Welfare Costs of Tariffs, Monopolies and Theft.” Western Economic Journal 5 (1967): 224–232.   (0 COMMENTS)

Throughout most of modern history, economic sanctions have preceded or accompanied war, often in the form of a naval blockade intended to weaken the enemy. Only when the horrors of World War I prompted President Woodrow Wilson to call for an alternative to armed conflict were economic sanctions seriously considered. (Wilson claimed that, by themselves, sanctions could be a “deadly force” and a very effective diplomatic tool.) Sanctions were subsequently incorporated as a tool of enforcement in each of the two collective security systems established in this century—the

Saving means different things to different people. To some, it means putting money in the bank. To others, it means buying stocks or contributing to a pension plan. But to economists, saving means only one thing—consuming less out of a given amount of resources in the present in order to consume more in the future. Saving, therefore, is the decision to defer consumption and to store this deferred consumption in some form of asset. Saving is often confused with investing, but they are not the same. Although most people think of purchases of stocks and bonds as investments, economists use the term “investment” to mean additions to the real stock of capital: plants, factories, equipment, and so on. Between 1990 and 2005, the annual rate of U.S. net national saving (net national income less private consumption expenditures less government consumption expenditures, all divided by net national income) averaged only 5.3 percent. In contrast, the nation’s saving rate was 7.6 percent in the 1980s, 10.3 percent in the 1970s, and 13.0 percent in the 1960s. The 2004 rate of U.S. saving of just 2.2 percent is remarkably low, not only by U.S. standards, but also by international standards. Differences in how the statisticians in different countries define income and consumption make comparisons across nations difficult. But, corrected as well as possible for such data problems, America’s saving rate is significantly lower than that of other industrialized countries. This explains, in large part, why the United States has run a very large current account deficit (see International Trade) in recent years. The U.S. current account deficit measures the amount that foreigners invest in the United States net of what Americans invest abroad. Because Americans are not saving very much, they do not have much to invest in the United States, let alone abroad. Foreigners are making up the difference by investing heavily in the United States. Why do countries save at different rates? Economists do not know all the answers. Some of the factors that undoubtedly affect the amount people save are culture, differences in saving motives, economic growth, demographics, how many people in the economy are in the labor force, the insurability of risks, and economic policy. Each of these factors can influence saving at a point in time and produce changes in saving over time. Motives for Saving The famous life-cycle model of Nobel laureate Franco Modigliani asserts that people save—accumulate assets—to finance their retirement, and they dissave—spend their assets—during retirement. The more young savers there are relative to old dissavers, the greater will be a nation’s saving rate. Most economists believed for decades that this life-cycle model provided the main explanation of U.S. saving. But in the early 1980s, Lawrence H. Summers of Harvard and I showed that saving for retirement explains less than half of total U.S. wealth. Most U.S. wealth accumulation is saving that is ultimately bequeathed or given to younger generations. The motive for bequests and gifts

Since the late 1950s, the regulation of risks to health and safety has taken on ever-greater importance in public policy debates—and actions. In its efforts to protect citizens against hard-to-detect hazards such as industrial chemicals and against obvious hazards in the workplace and elsewhere, Congress has created or increased the authority of the Food and Drug Administration, the Environmental Protection Agency, the Occupational Health and Safety Administration, the Federal Trade Commission’s Bureau of Consumer Protection, and other administrative agencies. Activists in the pursuit of a safer society decry the damage that industrial progress wreaks on unsuspecting citizens. Opponents of the “riskless society,” on the other hand, complain that government is unnecessarily proscribing free choice in the pursuit of costly protection that people do not need or want. This article describes some facts about risk and discusses some academic theories about why people on both sides of the risk debate take the positions they do. The health of human beings is a joint product of their genetic inheritance (advice: choose healthy and long-lived parents), their way of life (the poor person who eats regularly and in moderation, exercises, does not smoke, does not drink to excess, is married, and does not worry overly much is likely to be healthier than the rich person who does the opposite), and their wealth (advice: be rich). Contrary to common opinion, living in a rich, industrialized, technologically advanced country that makes considerable use of industrial chemicals and nuclear power is a lot healthier than living in a poor, nonindustrialized nation that uses little modern technology and few industrial chemicals. That individuals in rich nations are, on average, far healthier, live far longer, and can do more of the things they want to do at corresponding ages than people in poor countries is a rule without exception. Prosperous also means efficient. The most polluted nations in the world, many times more polluted than democratic and industrial societies, are the former communist countries of Central Europe and the Soviet Union. To produce one unit of output, communist countries used two to four times the amount of energy and material used in capitalist countries. On average, individuals unfortunate enough to live in an inefficient economy die younger and have more serious illnesses than those in Western and industrial democracies. A little richer is a lot safer. As Peter Huber demonstrated in Regulation magazine, “For a 45-year-old man working in manufacturing, a 15 percent increase in income has about the same risk-reducing value as eliminating all hazards—every one of them—from his workplace.” Among the many facts that might be observed from Figure 1 and Tables 1A and 1B is that longevity has increased dramatically since 1900. The trend continues if we look further back—boys born in Massachusetts in 1850 could expect to live to an average age of 38.3, girls until 40.5. Turning to death rates, note the decline by half since 1900 of deaths from all forms of accidents and the spectacular declines in all sorts of diseases. The 88 percent drop in deaths from pneumonia and influenza is par for the course. On the other side of the ledger, cancer deaths continue to rise, though their increase has slowed, and deaths from major cardiovascular diseases remain high.