Tyler Cowen recently the study This suggests that the public does not believe in supply and demand, at least when it comes to the housing market.
A recent survey found that most people would like to see house prices fall, but contrary to the consensus of experts, they don’t believe that increased supply will lead to lower prices.
Before dealing with the housing issue, it is worth pointing out that a similar pessimism is emerging in many other contexts, and, as we will see, it would be a mistake to see this pessimism as a rejection of the supply and demand model; something else is going on.
Consider these two scenarios presented to the average person:
A. Companies are facing significant increases in the costs of key raw materials for their products.
B. Companies benefit from significant savings in the costs of key raw materials for their products.
How will the firm behave in each case? For economists, nothing is that simple: our model is symmetric: a profit-maximizing firm has an incentive to raise prices in case A and lower prices in case B. (Incidentally, theory predicts these outcomes even if the firm is a monopoly.)
Throughout my life, I have found that ordinary people don’t see things this way. It’s not a matter of not recognizing supply and demand; Asymmetric PessimismWhat is the cause of this pessimism?
1. Asymmetric pessimism is probably correct: firms may indeed raise prices in case A but not in case B. In the long run, this is not the case. However, we cannot exclude the possibility that, due to nominal “price stickiness”, consumers may have seen some instances where actual prices were not reduced immediately.
2. In a generally inflationary environment, people may find that prices rise more often than they fall. Economists Relative PriceBut the public focuses on nominal prices: if a company raises prices by 2% in a year when Consumer Price Index (CPI) inflation is 4%, that’s a price cut to economists but a price increase to the public.
3. Perhaps people hate sounding naive or optimistic. I’m not the only one to have noticed that pessimism is more intellectually fashionable than optimism. Someone like Steven Pinker is considered a prominent contrarian simply for pointing out a series of positive trends that anyone with a half-way education should already know about. Is the world getting richer, healthier, safer? What else is new? But he seems to have become a controversial figure.
4. The media mostly reports bad news. So what do voters think when asked if the new government’s policies will solve long-standing problems? Do they expect to wake up next year to find the newspapers reporting that economic problems have been solved and housing is now “affordable”?
5. They equate greed with high prices. Lower the price A firm that tries to lower its prices after input prices fall is “greedy.” However, most people probably assume that the profit-maximizing option in this case is not to lower prices. Having already determined that the firm is greedy, we work backwards to conclude that it cannot lower its prices.
I think people believe that the laws of supply and demand apply to housing markets. Ask them what would happen to apartment rents if a large influx of immigrants came to town. I think you’re answering a different question than the one the economic pollster had in mind. The pollster might think he was asking, “Other things being equal, how will an increase in housing supply affect prices?” The public might respond as if they were asked, “If this regulatory adjustment is made, do you expect apartment rents to fall a year from now?”
In my opinion, these polling questions are not particularly useful. Instead, imagine a country where one political party opposes building more housing and another party supports massive efforts to increase the supply of new housing. Also assume that these policy views are widely known among the population. Now ask young college-graduating voters which political party is more likely to make housing more affordable.
There’s no need to guess at that question: a few months ago, the UK Conservative Party campaigned on a somewhat NIMBY platform, while the Labour Party campaigned on a YIMBY platform. This survey From the recent elections:
One might assume that this pattern is due to the fact that wealthy people vote Conservative. But it’s not that simple.
In fairness, some Conservative voters were retirees on modest incomes who may have been better off in their younger years.
