The Politics of Hate

When my parents were married in 1948 there was a severe shortage of housing in New York City. The severe shortage was directly caused by New York City rent controls.

My parents did find a 600 square-foot flat in the Bronx for $51 a month rent. Due to rent controls, this was lower than the market clearing price; and there were many applicants to rent the apartment. How did the landlord select among the many applicants for the apartment? He placed cheap furniture in the apartment and, before awarding the lease, required the renter to purchase the furniture. The price of the furniture was $2100 which is just under $20,000 in today’s dollars. As you can imagine, raising that money in 1948 was a huge undertaking. My parents raise that sum, rented the apartment, and then promptly threw out most of the furniture that they had purchased. The purchase of the furniture was essentially a bribe to the landlord.

Over 60 years later rent controls still exists in New York City. Approximately 70% of the New York City’s rental apartments are either rent controlled or rent stabilized. And as you might expect, with rent controls in place for over 60 years, many New Yorkers see below market rents as an entitlement.

Tenants treat with disdain landlords who, in their eyes, have become less than human beings—they are “others” who deserve to be exploited. A popular sport for tenants is finding loopholes in the law to further exploit their position. The result has been that the property of landlords is appropriated for use by the tenants who are being “protected.”

For politicians and tenants to justify rent control, they must pit one group against another; and pitting landlord against tenant tears at the social fabric in New York City. Such an attitude of mind does not remain limited to housing; it spills over into all areas of commerce. As looking to exploit your position becomes common behavior, trust withers in each of us as we become skeptical of the motives of others. In the absence of trust, more and more regulations are demanded to “protect” consumers, and transaction costs rise. New York City has become a very expensive place to do business.

Last week President Obama decleared war on oil speculators saying that “We can’t afford a situation where some speculators can reap millions while millions of American families get the short end of the stick. That’s not the way the market should work.”

This is as much the politics of hate as is New York City’s multi-generational attack on landlords. The only way that oil speculators can make money is by buying up energy supplies at times of relatively bountiful supplies and selling them when supply is scarcer. If a speculator is purchasing energy today they must expect that prices will be higher in the future. By shifting supplies to the future, they provide an important service for the consumer: they help to smooth out fluctuations in the price of oil.

Is it possible that oil speculators could “reap millions” while giving consumers the “short end of the stick”? To think that a speculator or group of speculators can successfully manipulate the energy market is absurd. The energy market is so huge that the influence of any subgroup must be necessarily small in relationship to the whole market. If the speculator moves against market trends, the speculator must lose money. Why? Suppose energy prices will fall next year. If so, any speculator that buys now to sell next year will lose money. They will be buying high and selling low. Again, the speculator can only make money by transferring supplies of energy, from the present to the future, for the benefit of the consumer.

Of course the economics of speculation is completely misunderstood by most Americans. Whether any individual politician understands the economics of speculation is of course unknown; but demonizing oil speculators, like demonizing landlords, is “good” politics. It is a favored strategy of politicians in times of economic crisis when consumers are frightened, want instant solutions, and are eager to find “others” to be the scapegoats. For a politician to exploit this fear is unworthy.

If President Obama really wanted to bring down energy prices he would cut government spending and thus influence Fed chair Ben Bernanke to stop his extreme expansionary monetary policy. He would ask Congress to stop subsidizing solar, ethanol, nuclear, and other favored forms of energy. These actions would free up billions of dollars of new capital for entrepreneurs to discover new and viable forms of energy. With each discovery, the price of energy will come down.

Of course, President Obama has no intentions of reducing the role of government; and thus, he turns to the politics of hate that pits one group of Americans against another. He seeks to disunite rather than to unite. Yet, oil speculators and oil consumers both have the same interests in the energy market. Oil consumers are relieved when fluctuations in energy prices are not extreme; oil speculators provide this service.  Those who preach the politics of hate want you to forget this—they want you to believe that they are your savior.

This is distressingly similar to New York City’s disastrous decades of rent control. The results will be the same: The politics of hate begets distrust; distrust begets more regulations, which beget less trust. Loss of trust in the market depresses the economy. And who will step into the breach? You guessed it—those who preach the politics of hate.

2 Responses to The Politics of Hate

  1. Steve P says:

    Barry,
    Good points regarding government intervention and its negative impact on both the economy and the social fabric. I don’t believe speculators are always a benefit to consumers though. Many commodities behave alot like financial instruments rather than economic goods.
    Oil appears to be one of those where herding behavior by speculators actually hurts consumers when prices go up too high. (Naturally we prefer it when they drive prices lower). The 2008-2009 price pump and dump was a prime example. Perhaps in a real free market economy without central banking we’d see less dramatic price changes in some of these commodities.

    • Barry Brownstein says:

      Thanks Steve for your always astute comments. Yes, I agree that herding occurs but I don’t think it occurs to the same degree as in the stock market. Aren’t we dealing with far more sophisticated investors who have more on the line? One round of herding and they are out of business. They have far more incentive to get it right than the average stock market investor.

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