Bastiat's Bastions

In today’s Wall Street Journal, William McGurn does an excellent job describing why it is impossible for Obama (or anyone else) to give an income tax cut to 95 percent of Americans. Why? Because approximately 40 percent of Americans don’t pay income taxes.

McGurn writes:

In most parts of America, getting money back on taxes you haven’t paid sounds a lot like welfare. Ah, say the Obama people, you forget: Even those who pay no income taxes pay payroll taxes for Social Security. Under the Obama plan, they say, these Americans would get an income tax credit up to $500 based on what they are paying into Social Security.

McGurn does a very nice job of debunking the notion that, as Obama’s camp suggests, the tax credit won’t really be a payroll tax cut. Still, McGurn misses a larger point called the Earned Income Tax Credit (EITC).

Many low income families qualify for the EITC, which was originally designed to offset some of their payroll taxes. Naturally, the EITC has been expanded through the years. For at least the last seven years, EITC payments more than offset low-income workers’ payroll taxes.
The exact amount of the credit depends on martial status, the amount of income earned, and the number of children in the family.

Here’s an example (using numbers from a couple of years ago):

Single with no children, earning $15,400
- .0765 payroll tax = 1,178; EITC = $2,747
- Federal income tax = $613
- Net Credit: $956

Married with one child, earning $16,849 in wages
- .0765 payroll tax = 1,289; EITC = $2,747
- Federal income tax = $0 (may even get an additional “refund”)
- Net Credit: $2,747 (at least)

Granted, someone in either of these two situations probably is not having an easy time of things, but that is not the point. The point is simply that our tax system already has the type of credits Obama’s plan is calling for and then some. All the more frightening that Obama is quoted as saying: “We’re not going to solve Social Security and Medicare unless we understand the rest of our tax policies.”

NM

In case you haven’t heard, Sen. Clinton and Sen. McCain have each advocated cutting the federal highway-use tax on gasoline from Memorial Day to Labor Day to save drivers (rather, voters) a whole 18.4 cents per gallon, which amounts to about 5% of what they spend on gasoline. Senator McCain suggests making up the difference in the federal highway infrastructure fund with money from the federal government’s general fund, adding about $10 billion to our already blossoming federal deficit. Sen. Clinton, along with Sen. Obama have advocated placing a windfall profits tax on the oil companies . Obama, it should be noted, has opposed the Clinton-McCain gas tax holiday.

 

Some opponents of the tax holiday (New York Times Blog and Wall Street Journal) have countered that the short-term tax break would not affect prices that consumers pay, and these opponents are correct. Think about the underlying downward-sloping demand and somewhat upward-sloping supply of gasoline. The short-term upward-sloping supply of gasoline, during the summer months, becomes vertical, as the refineries in the U.S. are all operating at their maximum output levels. With a completely inelastic supply of gasoline, all of any tax falls on the suppliers, but all of any tax-cut is enjoyed by the suppliers. If the price to buyers were to decrease at all from their present levels, the quantity demanded would increase as buyers respond to lower prices by buying more, which we know from the law of demand. But with no more units able to be supplied by refiners, there would be a shortage which would push the price up, back up to its original level. This would save nothing for tax payers over the summer and would cut highway infrastructure moneys, money that could build new bridges, like the ones we see we could use after the Minneapolis bridge disaster last year.

 

A similar disaster for the millions of drivers would occur with Clinton and Obama’s windfall profits tax on oil. The Carter windfall-profits tax amounted to little more than an excise tax on gasoline from domestic oil, raising gas prices for consumers, cutting the profits on domestic oil, cutting domestic production, and raising reliance on foreign oil. Even if a tax were devised that taxed just profits, which is not what happened with the 1980 windfall profits tax under Jimmy Carter, the long-run results of such a tax would be to make refineries less profitable, reducing long-run supply from what it would have been otherwise, and raising the price of gasoline at the pumps from what it would have been. The Obama plan would put a tax on every barrel of oil that sold at a price higher than $80, which would mostly just get passed along to consumers, who have a very inelastic demand for oil, while oil companies could easily sell their oil outside of the US without the tax (elastic supply of oil to the US), reducing the amount of oil supplied in the US and increasing the prices at the pumps for consumers.

 

But this increase in prices because of the tax is something that consumers never see, never seem to notice, and blame the higher prices on the oil companies, and not on the federal government, just as the high prices from the lack of investment in new refineries is blamed on the oil companies instead of the myriad of federal and state regulations, such as the needed, but ill-designed air pollution regulations.

 

What Clinton and McCain want is a reduction in gas prices now, but their tax-holiday idea, while popular, would completely fail to do what taxpayer/voters want it to do, cut prices at the pump. What it will do is make them relatively more popular than Obama, from what they would have been otherwise (economists say, “ceteris paribus“), because voters hear the speech and believe what their candidate tells them. All Clinton and Obama’s windfall profits tax would do is to raise prices on gasoline, as a tax would tend to fall on consumers who have a relatively inelastic demand for gasoline, instead of on owners of oil companies, the stockholders of oil companies. Stockholders have many options in the long run and will divert their funds away from oil companies if these companies are forced to pay a profits tax. Cutting supply raises price. Cutting supply to a good that has an inelastic price raises price a lot.

 

Clinton says she is “reluctant to throw her lot in with economists.” I’m even reluctant to throw my lot in with politicians. While corporations that lie in their ads and promotions can be convicted for fraud, it seems that fraud does not apply to politicians vying for our votes.

 

Two lessons. One, people trying to get elected are to be believed about as much as those emails from the dying wife of the Nigerian Oil Minister who wants to make you rich. The other lesson is that what we have been talking about in class with burdens of taxes and elasticities was to help understand real proposals, and to help us detect BS before we down in it face first.

And here is a little update–other economists weigh in here.

-MC

Big government advocates assert that democratic choice is somehow to be preferred to choices made through market processes. The idea is usually that people in markets act selfishly and have little information and are swayed too easily by advertising dollars, but when those same people get behind the curtain of the voting booth, they are somehow smarter. A lesson comes from Oregon. After his election to the governor’s mansion, Oregon’s Gov. Ted Kulongoski was sure to make some statement about the “people having spoken.” Those same voters, when they voted down a cigarette tax increase to fund children’s health insurance that Kulongoski backed, have suddenly become dullards whose votes can be easily bought by the tobacco lobby. If a tax increase does get passed in Oregon, it will only be the voters coming to their senses. Then, the “right decision” will have been made–because it agrees with the big government advocates. Here is my question: If the votes of the people are to be distrusted, and seen as being manipulatable by special interests when pet projects are voted down, how is it that those same voters suddenly become all wise, all knowing and altrusitic when they vote on how tax dollars are to be spent?

-MC

Here is my offering along the lines of my class’s recent essay assignment.   The main assignment was to write an essay, much like my blog posts here, commenting on some news item using analysis we have developed in class.    

As you know, Congress has offered subsidies for ethanol production, in an attempt to become less reliant on foreign sources of energy.  Those subsidies, along with high gasoline prices, have caused the price of corn (the main crop used for ethanol)   to shoot up.  This article from USA Today (that appeared in the Arizona Republic) conveys one of the most unfortunate, and I would add, disastrous, side effects of high corn prices.    

With higher corn prices, the opportunity costs of growing other grain crops have gone up.   One of the crops that farmers have found easy to switch away from in order to grow corn has been barley.  This may not sound too bad if you are only thinking about putting barley in a soup.  However, think about what the biggest use of barley happens to be—making barley malt, the main ingredient in beer.  As a result, beer prices are expected to rise about 9% or so.  

In early English (and Scottish) folksongs and the poetry of Robert Burns, John Barleycorn is the personification of this great grain, a grain, after malting, that is used to make both beer and Scotch.  In fact the rock band, Traffic, title one of their albums and songs, “John Barleycorn must die” (you can see and hear Traffic perform the song on Youtube).  See this article about John Barleycorn in Wikipedia.

In the songs, various people, especially those with addictions to drink, do their best to kill John Barleycorn.  In many versions of the song, people do indeed kill John Barleycorn.   However, Barelycorn comes back from the grave to get his revenge for those who mistreated him.

And Ahmadinejad thinks he is having trouble with riots over gasoline rationing!

–MC

People have attacked Bush’s tax cuts as tax cuts for the rich. Many people seem to believe that the government helps the rich and disregards the poor. The notion is that some people think that the rich pay too little in taxes and not enough help is given to the poor. The questions of “how much is enough help for the poor?” and how much of the incomes of the rich to be paid in taxes is enough?” never seem to be answered, though. Of course, we should all see that these are just normative questions, questions which cannot be answered objectively.

Often, people have looked at the question what proportion people’s incomes go to taxes and whether that proportion tends to go up or down as incomes go up. The idea is that people with higher incomes “should” (that’s a normative “should”) pay more, and pay a larger share of their incomes, than poorer individuals, an idea sometimes referred to as the “ability to pay” principle of taxation. If we tax a good, say by $1.00 per unit of the good, and that good has an income elasticity equal to one, the percent of the average person’s income going to pay that tax would stay constant as the incomes rose. This is termed a “proportional tax.”

If the income elasticity of demand is greater than one for some good that is taxed, the proportion of incomes going pay that tax increases as incomes go up. A tax on such a good is termed “progressive” and clearly meets the “ability to pay” principle. Luxury goods are generally considered to be those with income elasticities greater than one, and so a luxury good tax seems to meet this “ability to pay” principle. We have be careful about this, because sometimes such taxes affect the sellers more than the buyers because the sellers have a lower elasticity of supply than the buyers’ elasticity of demand. In these cases, we would be concerned about the workers in the luxury good market. And of course, if the income elasticity of demand on some taxed good is less than one, the proportion of the average person’s income going to pay the tax goes down as income goes up. Such a tax is considered to be a “regressive” tax, and clearly violates that “ability to pay” principle.

What we should really be doing though, is instead of looking at taxes in isolation, is looking at the spending that taxes finance and see if the net effect of the taxes and the spending is proportional, progressive or regressive. For instance, what if we taxed the poor a bit more than the rich, but, in the meantime, used those taxes to pay for goods and services that would be extremely beneficial to the poor, such as Head-Start programs?

That is exactly what is done in a newly released study from the Tax Foundation. That site gives an overview of the study, but the entire report can be downloaded from the site. This study is one of several that has looked at both government spending to benefit those in certain income groups and the taxes paid by people in those income categories, together. The study boils things down to a few easy to understand numbers. The study asks the question, “for each dollar paid to government in taxes, how much do people get back?” Alternatively, we can see this as the price of government spending for one’s benefit? The poor get over $8 for each dollar in taxes they pay, while those in the top 20% of incomes get back $0.41 and those in the middle group get $1.30. Based on these levels of benefits for each dollar paid in taxes, is it any wonder that the poor generally vote for more taxes and spending while the rich tend to vote the opposite way? With those in the middle group getting more in benefits than they pay in taxes, why doesn’t the size of government grow at even a higher rate than it has?

MC

Read this article from cnn.com. In the article, the head of the Food and Drug Administration comments on whether the FDA should regulate the amount of nicotine in cigarettes.

In a rare, sensible act from the head of the FDA, he suggests that the FDA should not regulate the amount of nicotine. What is this? A regulator saying he wants fewer things to regulate? This is indeed a very rare breath of fresh air.

The head of the FDA has the following claim – if the amount of nicotine was reduced in a cigarette, consumers would simply respond by smoking more cigarettes. Sounds right to me.

But let’s take a stroll down memory lane. Over the years, taxes on cigarettes have increased substantially. As with any tax, consumers and producers look for means to avoid the tax. If the tax on cigarettes was imposed by the pack, several options come to mind to implicitly avoid the tax. Producers of cigarettes could increase the number of cigarettes per pack (say to 50 instead of 20), increase the length of a cigarette, or, drum roll, increase the amount of nicotine (the active ingredient) in a cigarette. My students should be having flashbacks to alcohol prohibition and drugs.

Federal legislation explicitly prohibits cigarette manufacturers from increasing the number of cigarettes per pack, and the long cigarette was a flop as well. What does that leave to avoid the tax? Increasing the nicotine content of cigarettes. Over time then, the increased nicotine content of cigarettes is largely a direct result of government policy!

Back to the present day… nicotine is the active ingredient in cigarettes. A reduction in the amount of nicotine allowed in a cigarette is essentially an increase in taxes on cigarettes – or better still an increase in the taxes on nicotine. Why? Even though the tax is imposed per pack, what consumers are interested is in the tax per unit of nicotine. If there were 10 units of nicotine in a pack and the tax is $1 per pack, then the tax on nicotine is $0.10 per unit. If they reduce the amount of nicotine allowed in half, to say 5 units (and the size of a pack and cigarette stay the same, as does the tax per pack), then the tax of nicotine becomes $0.20 per unit. Another way to think of this is that you have to buy two packs to get the same amount of nicotine as before.

Now the problem has just been reduced down to the simple fact that limiting the amount of nicotine in a cigarette is just an increase in the tax on smokes. The price consumers pay will increase, the amount of nicotine consumption decreases (even though people would smoke more packs), and Uncle Sam collects some more tax revenue. As the demand for nicotine is inelastic, people end up spending more on nicotine.

Should we do it? A good thing will be that there will be a small reduction in nicotine consumption and some more tax revenue. The bad things will be that we are again taxing cigarette smokers, a tax which falls disproportionately on the poor. A second side effect is that there would be more overall smoking, and that means more inhalation of all of those other items that cause cancer in cigarettes.

My stance “ hurray for the FDA!

–CT

Smoking behavior and its effects of non-smoking is constantly in the news. The latest news is from the mighty halls of Congress where Rep. Tancredo’s (Republican) cigar smoke drifted into Rep. Ellison’s (Democrat) office and a member of Rep. Ellison’s staff called the Capital Police to investigate. The rule on smoking in Congressional offices is that the Congressman decides makes the smoking policy for his own suite of offices. That seems like a decent rule.

Here at Nicholls, things are a bit different.The first edition of the Nicholls Worth in 2007 led with the headline “Smoking ban causes decline in bar sales.” Not only has the Nicholls Worth provided Nicholls economics students with a good example of complementarity of goods (goods that tend to be used together), but other important issues are raised in their editorial on the smoking ban. The editor clearly sees through the smoke that clouded the thinking of our state legislators (surely those guys in

Baton Rouge were smoking something much stronger than mere tobacco when they came up with this one). The editor sees that both smokers and non-smokers have rights and that these rights are reciprocal. If we allow smoking, we grant certain initial rights to smokers that end up harming non-smokers. If we ban smoking, the rights of the non-smokers are upheld, harming smokers. Smoking in a public place, where some innocent by-standers are harmed by the production or consumption of someone else is an example of a general class of problems with not only markets, but all forms of social exchange, a problem that economists term “externalities.” With externalities, costs (or benefits) are imposed on those “external” to the original exchange, someone other than the buyer or the seller, a sort-of innocent bystander problem. In situations of external costs, the buyer gets the good without paying all of the costs of his actions and ends up consuming more than he or she would if he had to pay full cost.

As an aside, note that people are now claiming that those who consume fossil fuels, such as gasoline, are creating external costs through the creation of greenhouse gases, such as CO_{2 .} These greenhouse gases lead to global warming, they suggest, and fossil fuel consumers should (that is a very normative “should” by the way) be forced to pay full costs of their actions via instituting a tax on carbon meant for combustion.

Well, all of this leads us to something called the Coase Theorem. Ronald Coase, in 1960, suggested that there was a problem of this whole notion of externality, which also is called “social cost.” The problem, he said, was due to this reciprocal nature of externalities. We can cater to the smokers, costing the non-smoker, or to the non-smoker, costing the smokers, as was noted by the Nicholls Worth editorial. So, no matter which way we set the “rights,” there will be external costs. Coase suggested that if the very act of trading (making transactions) was costless, it would not matter who had the initial right that the other side would pay to get their way, that either way, we would end up in the same place, further, that we could not improve on that situation without harming someone—which is what economists call “economic efficiency” or “Pareto Optimality.” The idea is that if the non-smoker preferred not to be bothered by the smoke of others more than the smoker preferred to be able to smoke, the non-smoker should be willing to pay the smoker to refrain from smoking. So if there were no costs to cutting a deal with the smoker, we would end up in the same place if we gave the smoker the right to smoke and the non-smoker could buy him out or if we gave the non-smoker the right to have no-smoking to start with, and after the dealing were done, we would be at an efficient position.

One of the main points of Coase’s theorem, and one that is pointed out by law professors Guido Calabresi and Douglas Melamed in their very important work, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral (Harvard Law Review, 1972), is that there are often cases of what Coase called high “transactions costs,” and when these costs are significant, economic efficiency is served by setting the rights in such a way as to arrive at the rights that would occur if there were no transactions costs, because the costs of cutting a deal are just not worth the bother. Transactions costs should be understood as just costs of cutting the deal as separate from what people face with the deal itself. Lawyers’ fees for coming up with terms of the contract would be a form of transactions costs. The opportunity cost of waiting in line to make payment would be another type of transactions cost. Another way, then, of understanding transactions costs is a cost of trading not received by the other side of the exchange.

Here is a little of what Calabresi and Melamed had to say:

The first issue which must be faced by any legal system is one we call the problem of “entitlement.” Whenever a state is presented with conflicting interests of two or more people, it must decide which side to favor. Absent such a decision, access to goods, services, and life itself will be decided on the basis of “might makes right” – whoever is stronger or shrewder will. Hence the fundamental thing that law does is to decide which of the conflicting parties will be entitled to prevail. The entitlement to make noise versus the entitlement to have silence, the entitlement to pollute versus the entitlement to breathe clean air, the entitlement to have children versus the entitlement to forbid them – these are the first-order of legal decisions.

They go on to point out that once the state picks who has the right to something, such as the right to smoke or the right to clean indoor air, the state must then decide how to enforce those rights. Three methods for protecting people’s entitlements that Calabresi and Melamed suggest are:

Property rules, which involve the law of contracts, where the price is set by the free working of the market system, rather that by government or judicial edict. The terms of trade or the rates of exchange are set through bargaining or through the market.

Liability rules, which involve tort law, where the price or exchange rate is set by a judge or some other dispassionate third party. The terms of trade or the rates of exchange are determined by a judge or uninvolved third party.

Inalienability, which means no exchange of rights can take place at all, no matter how much one side may be willing to pay the other side to get his way.

Largely what Calabresi and Melamed talk about is the balancing of costs to non-smokers of this second-hand smoke and the costs to smokers of not being allowed to smoke. While it might make sense to have such bans in some public spaces, extending the notion of public space to the privately owned bars and restaurant seems to be a stretch because these places are owned by some private citizen(s). We should note that it is exactly these restaurant and bar owners who have the most to gain from setting the smoking or no-smoking rules because they are in a position to balance the costs of smokers not being able to smoke with the costs of non-smokers breathing second-hand smoke. Whether it is ok or banned in their establishments is a decision to be made by the owner with an eye on demand by their customers and the demand lost by making one decision or the other. Banning favors the non-smokers, and restaurants may wish to cater to non-smokers and do away with smoking in their place of business, but they must face what happens to their paying customers. Does the business, on net, gain or lose revenues? Allowing smoking, of course, favors the smoker. Still, if it meant that much to non-smokers, they could always pay smokers to stop. In a competitive environment, some restaurants or bars could always ban smoking in their establishment and gain many of the avid non-smokers as a result, and others could specialize in catering to smokers. With a private ban ordered by the owner of the business, the business owner could still be persuaded into changing his decision if it could be shown to be worth it.

We should note some other conclusions of Calabresi and Melamed concerning where the rights fall.

That economic efficiency standing alone would dictate that set of entitlements which favors knowledgeable choices between social benefits and social costs of obtaining them, and between the social costs and the social costs of avoiding them;

That this implies, in the absence of certainty as to whether a benefit is worth its costs to society, that the cost should be put on the party or activity best located to make such a cost-benefit analysis;

That in particular contexts, like accidents or pollution, this suggest putting costs on the party or activity which can most cheaply avoid them;That in the absence of certainty as to who that party or activity is, the costs should be put on the party or activity which can with the lowest transaction costs act in the market to correct an error in entitlements by inducing the party who can avoid social costs most cheaply to do so; and

That since we are in an area where by hypothesis markets do not work perfectly–there are transaction costs–a decision will often have to be made on whether market transactions or collective fiat is most likely to bring us closer to the Pareto Optimal result the “perfect” market would reach.

However, an out-and-out ban on smoking in bars and restaurants, as our legislature has passed, puts the entitlement protection that Calabresi and Melamed discuss into the realm of “inalienability,” where no one can act to trade to correct errors in entitlements. The law creates prohibitive transactions which make it more or less impossible for smokers and non-smokers in a bar to make any trades that will lower the total costs of smokers not being able to smoke and non-smokers facing second-hand smoke. Who is in the best position to act to reduce these social costs? The owner–just like the Congressmen get to do in their own offices.

In the interest of full disclosure, I should tell you that several times when the issue of cigarette tax increases for the state of Louisiana came up in the legislature, I was asked to testify before the House Ways and Means Committee concerning my research on the effects of state cigarette tax hikes. The Tobacco Industry did pay me as an expert. My main publication on this was “A Note on Estimating Cross-Border Effects of State Cigarette Taxes“ RM Coats – National Tax Journal, 1995, where I estimate two crucial tax elasticities of cigarette demand that allowed me to estimate the effect of state cigarette taxation on the change in cigarette demand to and from other states. In my testimony, I noted that I was an avid non-smoker. I should also point out that my research on cigarette taxation has been cited by those on both sides of the issue.

MC

FYI,

Reports of the President’s Council of Economic Advisors were just released. Here was the email I got. If you find something interesting in here, please share it with us in the comment section.

MC
______________________

The Council of Economic Advisers (CEA) today released the 2007 Economic Report of the President. The annual report provides an overview of the U.S. economic outlook and puts into broader context many of the economic issues that underlie the Administration’s policy decisions.
CEA Chairman Ed Lazear conducted a news conference about the report and the transcript can be viewed on-line here:

Fact sheet from the White House communications office:

Full report

Chapter 1: The Year in Review and the Years Ahead
Chapter 2: Productivity Growth
Chapter 3: Pro-Growth Tax Policy
Chapter 4: The Fiscal Challenges Facing Medicare
Chapter 5: Catastrophe Risk Insurance
Chapter 6: The Transportation Sector: Energy and Infrastructure Use
Chapter 7: Currency Markets and Exchange Rates
Chapter 8: International Trade and Investment
Chapter 9: Immigration

Thank you.

Gary D. Blank
Chief of Staff
Council of Economic Advisers
The White House
(202) 395-5084

Here is a comment I recently posted to a blog post by Don Boudreaux on his blog, Café Hayek.

Read Don’s Nov. 4^th post here.

Don,

Could it be that those who argued against the draft in the 1970s, many good economists, such as Bob Tollison and Roger Miller, were wrong in just not being thorough enough in their analysis? While they correctly noted that the draft was a more costly way to raise an army, they somewhat failed to note the public choice results of the change to an all-volunteer force. In Bob’s case, this means not making a point that he was making over and over again about the nature of public interest legislation. That point is that when benefits of some proposal are concentrated while the costs are spread out rather thinly and evenly, the legislation will see little opposition and is more likely to be passed. The opposite is, of course true as well, that when the costs are concentrated but the benefits are spread out thinly and evenly, the opposition will be tough and it will be difficult to carry. In a way, this is part of the problem that Anshu Sharma noted in his Nov. 4th post. When benefits are widespread, but low to most, people do not “feel” or perceive those benefits and do not favor them, so special interest legislation prevails over public interest or public goods legislation.

When we went from the draft, which unfairly concentrated the costs of war onto those who were being drafted, to a so-called volunteer force or more correctly, a professional force, or a mercenary force, we change it from one where the costs are less concentrated on the soldiers and are spread across all taxpayers, thus decreasing opposition to military involvement.

Still, to the extent that military involvement is defensive (and so, one of the few real public goods) and not mere imperialism, then at least the benefits to military activity are spread out as well, and here voters will be mostly unmotivated either for or against the military activity. In which case, national defense, a public good, will not suffer from this special interest bias against public goods.

So here I am having come full circle. Tollison, Miller and other economists in the 70s who fought against the draft made no errors of omission in doing so. Moving from a draft to a professional force removed the public choice bias against proposals that have costs that are concentrated on a few.

One other point should be made against Reinhardt’s characterization of our troops in Iraq mentioned by one of the other commentators. If Reinhardt thinks that troops now are cannon fodder, under a draft it would be worse. When troops are easy to replace by going back to the draft board and telling them to send more, current troops are not as well treated and are more likely to be thought of expendable. In the 25 or so years since the draft was ended, I cannot think of a single “they were expendable” case, as we had with Iwo Jima or D-Day. When we rely upon paid troops and must pay “compensating differentials” to attract troops, minimizing the human risk of war suddenly becomes more important.

Morris Coats

Kimberly Barrilleaux, a student in my Econ 211 class, sent me this New Orleans Times-Picayune article on a new type of rent control passed by the St. Bernard Parish Council (10/4/2006). As you can see by reading the article, St. Bernard has established a peculiar style of rent controls, not on the level of the rent charged, but instead on who one could rent to. In a parish where 93% of the homeowners are white, establishing an ordinance that denies homeowners the right to rent their homes to anyone but blood relatives (which the ordinance does), clearly keeps most non-whites from being able to rent in St. Bernard, unless they were renting their before the storm. This clearly violates the civil rights of anyone not kin to someone wishing to rent their St. Bernard homes out. The lawsuit charging a violation of the fair housing act and equal protection under the law is surely warranted.

Councilman Mark Madary nails the issue on the head. In the Times-Picayune article, Paul Rioux writes:

Madary…said St. Bernard can’t afford to turn away anyone who wants to invest in rebuilding the parish after virtually all of its 27,000 homes were swamped by Katrina.

“Without an infusion of outside investors to jump-start the recovery, you might be living next to a debris pile for a lot longer than you would like,” he said. “The longer the houses sit empty, the harder it is to convince people to come back.”

He said the ordinance also unduly restricts property rights.

“When you buy property, you buy the rights that go with it,” he said. “To go back retroactively and change those rights is unconstitutional in my opinion.”

This ordinance is a violation of the property rights of all current homeowners. It denies them the right to sell their property to those who would build rental housing in the area (as this potential market for their houses disappears) and to rent their homes out to the renter who would pay them the highest rent.

This ordinance constitutes a “takings” because the property owner is denied the market that was once part of their potential market. By reducing the number of potential buyers and renters, the demand for housing in St. Bernard is kept down, as is the incentive to build such homes for rental or speculative purposes. This ordinance limits housing and the future growth of St. Bernard.

To make matters worse, this ordinance is not a very smart move for politicians who wish to spend money raised through taxes. Rental homes are not given homestead exemptions and are completely taxed and their value is affected by the rental income they generate. Owner occupied housing, which is partially homestead exempt (for the first $75,000 in value), will generate less income as the housing demand is depressed by this ordinance, which reduces the values of all homes.

MC