The controversy over a hazardous-duty supplement to the minimum wage required by the recent referendum results in Portland is only a precursor of the harm that voter approval of a higher minimum wage, Green New Deal requirements for new construction and rent-control mandates will cause. The effect of their passage will be to make new building more expensive, reduce the city’s rental housing stock and impede job growth.
There are good reasons why the country’s Founders established our government as a representative republic instead of a direct democracy. They were afraid that without the filter of deliberations by a body of elected representatives, the public would decide issues based on inadequate or misleading information, the passions of the moment and the impulses of empathy and compassion – populism in action – without careful consideration of costs, trade-offs and potential adverse consequences that may not be immediately obvious. The results of the referendum votes are a classic case of what can happen when voters succumb to the anodyne language of referenda that promise only benefits, skip the legislative study process or ignore the views of their representatives.
Assar Lindbeck, a Swedish economist who was the chairman of the Nobel economic sciences prize committee for many years, has said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.” That description is extreme, but the sentiment is one that an overwhelming percentage of economists of all political affiliations agree with. The reason is that in all cases where rent controls have been imposed the results have been so disastrous for the rental housing stock they have had to be removed or altered in some way to mitigate the most damaging effects.
Released in 2018, a study by Rebecca Diamond and two colleagues at Stanford University found that the 1994 imposition of rent controls in San Francisco caused the rental housing stock to decline by 15 percent, and rents to rise sharply in units that were exempt. These results reflect the universal response to the policy, which is that developers build fewer new properties, and landlords convert rental units to condos or repurpose buildings to make them exempt from the controls.
The experience in Portland in coming years is likely to be no different. Rent controls are almost always a reaction to higher rents caused by an inadequate supply of affordable housing. But instead of price controls, which make conditions worse instead of better, the solution is to encourage more supply by relaxing expensive and time-
Increases in minimum wages are a popular economic policy that often wins approval in both legislatures and in referendums. It is also one of the most harmful policies that we have. The debate is usually about how many people lose their jobs when minimum wages are raised, and whether or not the benefits to recipients exceeds the value of the lost wages. But this is only part of the story.
Another cost of higher minimum wages, one rarely mentioned in the debates, is that fewer jobs get created, and those that are created go to more experienced and productive employees. Studies that have reached this conclusion include an examination by University of California at Riverside economists David Fairris and León Bujanda of the impact of a 1997 Los Angeles “living wage” ordinance. As a result, a growing core of individuals will be unemployable because their educations, experience and skills don’t allow them to make contributions that are equal to the higher minimum wage. The consequences will be evident in the unemployment data in the years to come and in slower job growth.
Referenda are a terrible way to make policy. Social activists love them because they get to appeal directly to voters who don’t ask many hard questions. Elected bodies can make policy mistakes, but at least policy issues are usually given more time and study than they are likely to get from voters. If voters think that their representatives get too many things wrong, they can elect new ones. But between elections, if you are asked to sign a referendum petition, politely say no thanks.
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