Artificial Scarcity and the Semmelweis Reflex
Two months ago, Atlantic writer Derek Thompson penned a widely shared piece advocating for an “abundance agenda”. In it, he marvels at our “national failure to increase the supply of essential goods”:
Health care: The U.S. has fewer physicians per capita than almost every other developed country, in part because our medical-residency system has for 40 years constricted the supply of U.S. physicians by forcing them to go through scarce and poorly funded residency-training programs. Meanwhile, the American Medical Association, the country’s top trade group for doctors, has in the past few decades blocked nurses from delivering care and impeded foreign-trained doctors from practicing here. America has tried very diligently to create medical scarcity, and in typically plucky American fashion, we’ve succeeded.
Housing: Homes have become famously unaffordable in many coastal cities. Since 1980, average house prices in the New York City metro area have risen about 700 percent; in San Francisco they have increased by more than 900 percent. Simply redistributing cash or slashing taxes alone won’t do much to fix this problem. The culprits are largely regulations that prevent the construction of taller apartment buildings that can hold more units.
College: Elite colleges are failing every abundance-agenda test imaginable. They’re hardly expanding the total number of admissions; their share of total enrollment has actually been shrinking; and they’re admitting fewer of the low-income students who gain the most by attending elite colleges in the first place.
Everybody loves abundance, and everybody hates scarcity. Having access to an abundance of material goods is more commonly thought of as simply “being rich”, and saying someone is plagued with material scarcity is just creating a euphemism for “being poor”.
There are harmful goods that probably should be more scarce, such as dangerous drugs or weapons. However, Thompson is talking about essential goods, goods that absolutely should be as abundant as possible.
A progressive might be concerned that a focus on abundance will come at the cost of equity; what if increased material abundance were to be captured entirely by the rich? This might be an issue if Thompson was calling for an abundance of expensive yachts, but again, we are looking exclusively at essential goods, which are consumed much more evenly by rich and poor. An abundance of essential goods is going to make society more equal, not less.
Abundance is the name of the game. We go to our jobs every day to create abundant material goods that we then trade with each other. We even invent new technologies to create even more abundance in the future, raising living standards for everyone. Policies that create artificial scarcity would seem to be self-defeating.
Yet, Thompson is correct that as a society we have somehow embraced policies that make essential goods artificially scarce. This is doubly mysterious when we consider that artificial scarcity policies are often championed by self-described “progressives”, a label usually reserved for those concerned with improving the lot of the less fortunate. While the American Medical Association might be traditionally conservative, elite colleges are famously liberal, and restrictive housing policy is a hallmark of our bluest cities.
Many influential voices have recently spoken in favor of some version of the abundance agenda, from U.S. Treasury Secretary Janet Yellen to New York Times columnist Ezra Klein.The idea of an abundance agenda is good framing and perhaps also good marketing. But if an abundance agenda for essential goods is such a good idea, we must first ask: How did we even end up here? How did the artificial scarcity agenda become so popular?
Let us start with a partial answer: Everybody hates scarcity, except for the people that control access to scarce goods.
Any time that scarcity is reduced, the pie gets bigger for society. But while most members of society gain, the people that controlled access to scarce goods lose.
This is most clear when we get advances in technology that render scarce goods obsolete, what Joseph Schumpeter called “creative destruction”. For example, here is Charlie Munger last month reminiscing about the World Book encyclopedia:
One of the investments that nobody ever talks about at Berkshire is the World Book Encyclopedia. I grew up on it. You know, they used to sell it door to door. They had every word of the English language graded for comprehension and a vast amount of editorial input, so it was easy for a child who wasn’t necessarily a brilliant student to understand that encyclopedia. It was more understandable. Berkshire made $50 million a year pre-tax out of that business for years and years. I was always so proud of it because I grew up with it. It helped me and so forth. And, of course, I liked the 50 million a year.
Then a man named Bill Gates came along and he decided that they were going to give away a free encyclopedia with every damn bit of his personal computer software. Away went our $50 million a year. Now, we still sell the encyclopedias in libraries, making a few million per year doing that. But most of the wealth just went away and all that wonderful constructive product.
That’s just the way capitalism works. It has destruction.
The ideal way to make money in business is to make something new that is better than anything that exists today. The new thing will be scarce by virtue of being unique and hard to replicate; for example, consider the iPhone. This creates abundance for society because the new thing is a better deal than the scarce thing came before it.
This is not the only way to make a lot of money in business; we have also discussed the scenario where artificial scarcity is created by monopolies or cartels.
Imagine you live on an island, and you and your friends grow oranges. You and your friends trade some of your excess oranges to other islanders for rice and pearls and canoes.
If you and your friends get together and conspire to fix the price of oranges, you will all be richer. You have locked down all of the oranges you need for yourself, and you can tell everyone else that from now on you will be demanding more rice and pearls and canoes for the oranges you are trading away, and they will have to comply if they don’t want to die of scurvy.
Since oranges are now more expensive, the other islanders will buy less oranges from you, but you will get richer overall, because you are gouging them for more rice and pearls and canoes in trade for the oranges you do sell. This arrangement is great for you as long as you can keep the other islanders from finding alternate sources of Vitamin C.
The problem with this arrangement for society as a whole is that the pie has shrunk; in total nothing has changed on the island except there are fewer oranges to go around. You and your friends are richer but the other islanders are much poorer.
The policy of allowing monopolies and cartels will make some members of society better off, but does not universalize. Orange scarcity works for you because there are other islanders that are producing abundant rice and pearls and canoes that you can extract. If the other islanders also make rice, pearls, and canoes scarce, what remains will simply be a poor island where everything is scarce.
We saw that self-interested cartel behavior is certainly at least part of what drives the scarcity agenda. The American Medical Association lobbies to restrict the number of doctors that can practice and homeowners lobby to prevent new construction, and they have both done so quite effectively.
It would be tempting to simply conclude that the scarcity agenda is the product of selfish special interests, but we still have to answer one nagging question from before: Why are progressives so often the leading advocates for artificial scarcity?
From what we saw before, artificial scarcity is bound to be very regressive, especially when applied to essential goods and services. If there are fewer slices of the pie to go around, it is inevitable that the poorest and least powerful members of society will be the ones left without a bite.
If goods are rationed by the market, clearly the poor will be left behind; someone who makes $200,000 a year will be able to afford high prices, but someone who makes $20,000 will have to make some difficult choices.
But this is not a problem specific to free markets. Even if we instead ration scarce goods by a lottery or waiting list, it is still all but inevitable that the poor and middle class will be the only ones impacted by artificial scarcity.
The rich and powerful always maintain their slice by using a parallel system—they own their own homes, they hire private doctors, and they send their kids to private school—so everyone else still ends up fighting it out over the shrunken pie that remains. The only way to help the less fortunate is by minimizing scarcity.
Even though America is the richest major country in the world, essential goods often remain out of the reach of low income Americans because we have passed laws mandating that they be scarce. It is illegal to build new homes, and so the rent is too damn high and so some people live with their parents well into adulthood. The supply of doctors is limited, and so it is too expensive for some to get insurance or treatment.
The cynical explanation is that progressives are dishonest hypocrites, but there is plenty of evidence to the contrary. They regularly support and pass redistributive policies, raising taxes on the rich and expanding services for the poor. Their detractors would be the first to tell you that they are actually a bunch of dangerous socialists.
The problem with redistribution is that it cannot overcome an artificial cap on supply. Within the constraints of a supply cap, there is not that much to redistribute; it is not like very many rich people have three apartments or spend time in the hospital for fun or take nine years to finish undergrad. The only way to provide for the less fortunate is to lift the cap.
If the abundance agenda is clearly the progressive solution, then why is everyone so eager to create artificial scarcity?
The general story is that from the 1960s through the 1980s, many of our largest cities—places like New York, Los Angeles, and San Francisco—all enacted policies to strictly limit new development. These “NIMBY” (Not In My Back Yard) policies aimed to preserve cities just the way they were at the time the new policies were passed, and to prevent more crowding and congestion. Note that these large cities have actually always been extremely progressive places; for example, San Francisco votes about 90% Democratic in national elections.
As manufacturing declined and the knowledge economy grew, those large cities became more attractive places to live and work.
Normally, when demand increases, new construction would meet that demand, and housing prices would not go far beyond the cost of new construction. This is what happens for other goods: for example, the demand for air travel has gone way up, but air travel has actually gotten cheaper because Boeing and Airbus produce enough planes to satisfy that demand.
This should generally hold for housing as well. Even though land is finite, we can build upward, so each individual new unit uses a negligible amount of land.
These artificial scarcity policies eventually caused housing prices to decouple from construction costs. As demand grew, housing prices had to go way, way up, to discourage potential newcomers from moving in and to encourage existing residents to move away. Home prices in San Francisco and Los Angeles rose by around 600% since 1987, a period in which consumer prices only grew by 150%.
This made artificial scarcity even more popular; not only could existing residents preserve their communities, but existing property owners could now generate extraordinary levels of passive income and wealth by gouging desperate future would-be residents. The median home price today in San Francisco is an astounding $1.5 million.
Housing scarcity in major cities inevitably spilled over into the rest of the country; everyone has to live somewhere.
Most people have the intuition that housing is totally fungible, and that blocking housing construction in one city will be offset by additional equivalent housing being constructed in another city, so that the net effect of NIMBYism is minimal. This is contradicted by the evidence. The median monthly rent for a 1-bedroom apartment is $1,200 in Houston, while it is $3,300 in San Francisco. We might construct housing in other places instead, but it is hardly equivalent.
The disconnect, as we have discussed in the past, is that in a knowledge economy, our ability to be productive is increasingly dependent on our ability to collaborate in person. We want to live where the jobs are, and companies want to locate where the skilled workers are, and so we get industry-specific agglomerations in places like Silicon Valley and New York. This then drives up wages for the local residents that service them, like teachers, doctors, and lawyers. Under a regime where local housing is artificially scarce, local property owners end up capturing most of the higher wages for themselves through higher rents and housing prices.
A century ago, manufacturing was on the rise, and we constructed dense cities at logistical hubs on major navigable rivers and lakes, to be able to ship raw materials and finished goods but also to able to efficiently exchange ideas. People moved from farms to our biggest cities at the time, places like Buffalo, St. Louis, and New York.
Today, our most innovative organizations cluster in cities like San Francisco and Los Angeles, for much the same general reason that manufacturers clustered in Buffalo and St. Louis a century ago; to take advantage of natural amenities (like sunshine!), but also to be able to swap ideas and trade with similar organizations.
When we restrict these cities from growing, we lose out on the natural economic advantages from size and density, we transfer wealth from workers to property owners, and we put a heavy strain on low-income households and households who do not own property and miss out on the bounty.
We can verify this by looking at the data:
Here we can see that for a long time, nationwide housing construction never fell too much, as fast growing cities like Dallas and Phoenix picked up the slack; however, other cities are starting to get tapped out, and since 2005, housing construction has been very low:
This led to a situation where rents have been growing faster than inflation. Nationwide, rents have cumulatively risen more than 20% faster than inflation since 2000, with most of the growth occurring in the past decade:
Keep in mind that rising rents disproportionately affect low-income households because they spend a much higher share of their income on rent. In many cases, the lowest income households spend at least half their income on rent:
Beyond low income households, the biggest losers from housing scarcity are members of the younger generation. In the US, over 70% of adults over the age 45 own their own home, which fully insulates them from housing scarcity and higher rents. In fact, housing scarcity benefits homeowners by giving them the option of selling their home at an inflated price later and downsizing or moving to a cheaper locale for retirement. It is not only older homeowners that are shielded from housing scarcity; some older renters are also insulated from housing scarcity through local rent control.
By contrast, the younger generation does not yet own a home, nor have they been living anywhere long enough to benefit from rent control. In finance terms, they are born “short housing”; they will have to consume housing in the future, and figure out a way to acquire it. Since the burden of housing scarcity is entirely borne by non-homeowners, we expect young people to be particularly hard hit.
The Urban Institute compiled Census data showing that the share of 25-34 year olds living at home with their parents shot up since 2005, which marked the end of the last housing boom, and the beginning of the period where nationwide rent growth outstripped income growth and inflation. They note that the shift from 11.6% in 2005 to 22.0% in 2017 represented an additional 5.6 million adults moving in with their parents.
The share of young adults living with their parents increased at every income level, but as one might expect, was especially concentrated among low-income young adults:
They find that the growth in young adults living at home cannot really be explained by other social factors, such as delayed marriage. But it makes total sense that the artificially constrained housing supply had to be rationed, and the only way for that to happen was by driving up rents enough to force millions of young adults to move in with their parents.
This divide between young and old goes some way to explain why housing is such an emotional topic. NIMBYs, largely made up of older property owners, see themselves as the defenders and preservers of the neighborhoods that they moved into, against the developers that would have destroyed them, and high housing prices are a just reward for their years of activism.
In response, some younger adults organized as “YIMBYs” (Yes In My Back Yard), who advocate for more construction and who see NIMBYism as price gouging and generational theft. They see NIMBYs as members of a generation that moved into the homes and cities prior generations built for them, and blocked new homes from being built for the next generation. They are also upset that NIMBYs passed special tax exemptions for themselves (like Prop 13 in California) so that they would be spared the burden of funding social services.
They see NIMBYs less as preservationists and more as the private-equity buyers that took over cities and slashed investment and raised prices to milk the asset dry.
Naturally, NIMBYs do not agree with this characterization, seeing themselves as “real” progressives. So how do big city NIMBYs reconcile their progressive ideals with their support for regressive housing policies?
The answer is a surprising one: NIMBYs insist that NIMBYism actually isn’t regressive, because housing scarcity isn’t real.
To be clear, housing scarcity is real. Skyrocketing rents in big cities and around the nation are a clear signal that housing is scarce.
Still, that does not stop people from claiming otherwise. Sometimes they will say so in so many words, as Kevin Drum did last week:
The real issue here is that America doesn't have a housing crisis…There's just a disconnect from reality that seems to motivate so much of what [urbanists] say and do.
Usually, the NIMBY claim that housing scarcity isn’t real is less explicit. Here is an example of a mainstream NIMBY argument, as made recently by Nathan J. Robinson in Current Affairs:
Even though [YIMBYs] talk a lot about the need for affordable housing, they tend to be opposed to requiring developers to make housing affordable, assuming that the Invisible Hand of the free market will take care of that.
Here’s an excerpt from the [YIMBY] article linked in the FAQ on how it’s a “fallacy” and a “myth” that we need more affordable housing rather than market-rate housing:
What really matters is not whether new housing is created at a price point that low- and moderate-income households can afford, but rather, whether the overall housing supply increases enough that the existing housing stock can “filter down” to low and moderate income households.”… that process depends on wealthier people moving into newer, more desirable homes. Where the construction of those homes is highly constrained, those wealthier households end up bidding up the price of older housing—preventing it from filtering down to lower income households and providing for more affordability.
Funnily enough, while conservatives often insist that there is no such thing as “trickle-down economics,” here we have a very clear example of it in the wild—but with the word “filter” used instead of “trickle.”
“Trickle-down economics” is usually a term used to justify tax cuts for the rich. Tax cuts for the rich give them a larger portion of the economic pie, assuming they come at the cost of government services for society as a whole. (The only way this might work is if tax cuts incentivize rich people to work harder and expand the economic pie by enough to offset their larger slice - a dubious assumption in all but the most extreme cases.)
“Filtering” just describes the ordinary reuse of durable goods, which is about as mundane and uncontroversial as it gets. Everyone now knows that if you choke off the supply of new cars, new cars and used cars will become more scarce and more expensive. This is because people don’t usually throw away their used cars after they buy a new one. It is equally true that if you choke off the supply of new homes, used homes will also become more scarce and more expensive.
What is the alternative theory here - that homes vanish into thin air once the current tenants move out? Or that rich people vanish into thin air if we do not let them build new homes?
It is unclear the reuse of homes can possibly have to do with trickle-down economics. No one is advocating that we use public money to buy new homes for rich people. No one is giving rich people a bigger piece of the pie. Rich people want to allocate their own consumption toward building new homes, and we are just observing that this has the side effect of reducing scarcity for everybody else, since the homes they move out of do not disappear from the available supply.
With the current disruption in automotive manufacturing, this should be common sense for everybody by now, but just in case there was any doubt, there is a plethora of studies showing that this holds for the housing market. Note that Robinson does not present any evidence supporting his argument, because there is no evidence - just say “trickle-down economics” and hope everyone nods along.
This whole line of reasoning is an example of Scarcity Trutherism. Every time someone argues that we must reduce scarcity by increasing supply, the response by artifical scarcity advocates is some convoluted conspiracy theory, that explains that scarcity isn’t real and increased supply won’t help and you’re dumb for even suggesting it.
Here is a second argument he gives, where he tells a hypothetical story of a 30 unit building being replaced by a 100 unit ultra-luxury building in which:
They are swiftly bought up, 20 by rich people who live in the city, 30 by rich people lured to the city by its new pencil tower, and 50 by rich people who have no intention of living in the city but think pencil tower condos are an asset worth owning in a swiftly-gentrifying city.
He then concludes that the Econ 101 story is too simple because:
In the elaborate perfect game of musical chairs envisioned by the Econ 101 story that causes housing to “filter down,” there are still more people for fewer units in our city. The overall housing supply has increased but the per-capita housing supply has not, because we’re luring rich people from elsewhere to our city.
If we accept the terms of his hypothetical, he is of course correct, assuming that he is talking about luring people from outside the country. We have added only 20 inhabitable units (because 50 of the 100 units will never be inhabited, and we destroyed 30 units) but we have brought 30 new residents into the country. Rents will go up and ten families will be displaced to make room for the foreigners and speculators.
We actually want to focus on the assumptions in his hypothetical, because they make explicit what is at the heart of the NIMBY narrative. The NIMBY narrative, as he makes clear, is that high rents are exclusively caused by foreigners and speculators, both of which are attracted by newly constructed housing. If we don’t build new housing, they won’t come, and rents will stay low for native residents, and everyone will have an affordable place to live. Ergo, housing scarcity isn’t real.
Proof of the popularity of this narrative is the excitement among NIMBYs around vacancy taxes, billed as an important tool for making housing more affordable. This enthusiasm is based entirely around the NIMBY narrative: Expensive cities are expensive because foreign speculators have bought up all of the condos and are keeping them empty, and a vacancy tax will encourage them to lease them out or sell them.
Vacancy taxes are politically popular because they fit this popular narrative. Vancouver passed a vacancy tax in 2017, Melbourne and Oakland passed vacancy taxes in 2018, and Los Angeles and San Francisco are scheduled to vote on vacancy taxes this year.
The problem is that the popular NIMBY narrative is nonsense, and vacancy taxes have been ineffective as a result. Bloomberg reports that at the time the vacancy tax passed in Vancouver, only 2,538 of the city’s 200,000 homes were vacant or under-utilized, and that number fell by only 645 units after the tax passed (representing 0.3% of the total housing stock). Meanwhile, rents continued to rise. Melbourne ended up taxing only 587 vacant units, a fraction of expectations.
The problem isn’t foreigners and speculators, it’s the lack of new housing.
We could continue going through different popular NIMBY arguments, from insufficient rent controls to greedy landlords to corrupt developers, but they all hinge on the same point: the myth that housing scarcity somehow isn’t real.
Why do NIMBYs persist in claiming that housing scarcity isn’t real, despite all clear evidence to the contrary?
It turns out that above all else, we have deep psychological needs, and our beliefs are shaped by our emotions and our identities far more than by any facts or evidence.
Progressive NIMBYs want two contradictory things: They want their communities to be frozen in time, and they want to support the less fortunate. They have been successfully doing the former for decades, but that creates artificial scarcity, which hurts the less fortunate.
If the rich NIMBYs stay in their homes, and few new homes get built, and we have continued population growth and urbanization, then it follows that there will be too many people chasing too few empty homes. Since the rich NIMBYs have their housing needs locked down, the group subjected to the Housing Hunger Games will be, on average, a lower-income cohort.
The NIMBYs resolve this contradiction by latching on to any narrative that suggests that housing scarcity isn’t real, which in turn would exonerate their policies and show that they have been good progressives all along.
Here is a possible story to consider: Most NIMBYs are intelligent, generous members of society. They are true progressives that support redistribution and racial equality, and they vote and act this way almost all of the time. This is in fact what motivates their NIMBYism - their desire to protect and improve their communities.
The problem with NIMBYism is that it rests on an elementary logical fallacy, something you might have learned in school as the “fallacy of composition”, that what is true for one must be true for the whole.
NIMBYism is fundamentally based around exclusion, and around hoarding access to vital and finite existing infrastructure. NIMBYism works great for existing generations and existing communities, but in a growing country, NIMBYism creates a growing underclass of The Excluded, people forced by housing scarcity to live in overcrowded conditions or to pay backbreaking rents or to pay extortionate prices to purchase a home from a NIMBY.
Like everybody else, NIMBYs think of themselves as “the good guys”. In their free time, they engaged in NIMBY activism as a way to give back to their communities and protect them from greedy developers and speculators who would despoil their communities for personal profit.
There were always voices warning of the corrosive impact of artificial scarcity, but for many decades this could be dismissed as developer propaganda. Housing prices were rising, but not at an alarming rate, as growing suburbs in the development-friendly Sunbelt handled much of the overflow from NIMBY cities.
Sometime after the last housing boom, development slowed even in the Sunbelt, as the available development sites became more and more marginal, and the housing crisis began to bite in earnest. Housing scarcity became a fact of life, and under the rules of the current system, the burden was entirely pushed onto the younger generation. This caused a backlash against NIMBYism, correctly identified as the cause of housing scarcity.
For NIMBYs, this backlash was a threat to their identities and their egos, and the framework with which they view the world. YIMBYs cast NIMBYs as “the bad guys”, the group whose blundering and selfishness created the housing crisis that we must solve today.
Faced with this, NIMBYs desperately looked for any narrative or any evidence that would confirm that they were right all along, and that their original framework was actually the correct one for viewing the world.
This is simply human nature - when faced with evidence that contradicts our core beliefs about ourselves, our tribe, or our society, our first reaction is to find any reason to reject it, and in that pursuit we become open to very dubious theories that promise to confirm our prior beliefs, and blind to the most obvious evidence that contradicts them.
The classic example you might be aware of is the famous story of Ignaz Semmelweis. As a recent medical school graduate in Vienna in the 1840s, Semmelweis learned that the one of the two maternity clinics at his hospital had an extremely high mortality rate from childbed fever.
One day, his friend was accidentally cut with a scalpel during an autopsy and died of something similar to childbed fever. He realized that the maternity clinic with the high mortality rate was staffed with medical students who performed autopsies, and he worked out that childbed fever could be eliminated if doctors were forced to wash their hands before attending to patients.
He introduced hand washing to the maternity clinic, and childbed fever rates immediately plummeted. Armed with this evidence, he and his colleagues spread the word. To their surprise, they were met with ridicule and rejection from the leading doctors of the time.
The medical community objected that his explanation of how childbed fever is transmitted did not match leading theories of disease at the time (this was before germ theory was developed). Moreover, they felt disrespected:
The established physicians of high reputation and not accustomed to new ideas could not accept that a young assistant (and a foreigner to boot) declared their hands to be unsanitary. Instead of respecting the convincing results and scientific progress, they exhibited a symptom called “Semmelweis reflex” (“Semmelweis effect”), a reaction that denotes denying new results out of principle.
Semmelweis, frustrated by the resistance from the medical establishment, lashed out, calling them “efficient murderers” (not without justification), which caused the establishment to dig in even harder.Semmelweis eventually died in an insane asylum, and it would be decades before hand-washing was widely adopted in the medical community.
It is tempting to hear this story and conclude that the Semmelweis reflex is somehow unique to ignorant 19th century doctors, just as when we observe modern-day examples of popular conspiracy theories and delusions, we try to take comfort that they seem to be confined to the Other Tribe.
The conclusion we should take is that you and I are no different from anyone else. To think otherwise is to all but guarantee that we will consistently fall victim to confirmation bias and motivated reasoning.
This is just the way we are wired. When confronted with irrefutable evidence that our deepest held and most loved beliefs are inherently contradictory, we reflexively resolve the cognitive dissonance by rejecting the evidence instead of changing our beliefs. We all have dozens of dumb narratives stuck in our heads that we preserve in this manner.
The best we can hope to do is to be conscious of the Semmelweis reflex and try to examine our best loved ideas more closely against available evidence. As Charlie Munger put it, “Any year you don’t destroy one of your best loved ideas is probably a wasted year.”
Derek Thompson wrote a follow-up article last month about artificial scarcity in medicine:
Imagine you were planning a conspiracy to limit the number of doctors in America. Certainly, you’d make sure to have a costly, lengthy credentialing system. You would also tell politicians that America has too many doctors already. That way, you could purposefully constrain the number of medical-school students. You might freeze or slash funding for residencies and medical scholarships. You’d fight proposals to allow nurses to do the work of physicians. And because none of this would stop foreign-trained doctors from slipping into the country and committing the crime of helping sick people get better, you’d throw in some rules that made it onerous for immigrant doctors, especially from neighboring countries Mexico and Canada, to do their job.
Okay, I think you’ve caught on by this point. America has already done all of this. Starting in the late 20th century, medical groups asserted that America had an oversupply of physicians. In response, medical schools restricted class sizes. From 1980 to 2005, the U.S. added 60 million people, but the number of medical-school matriculants basically flatlined. Seventeen years later, we are still digging out from under that moratorium.
He goes on to note that Europe has a shorter path to becoming a doctor, far more doctors per capita, lower medical expenditures, and similar health outcomes. And yet, no one seems to be in a hurry to reform the American health care system. No doubt if you asked the AMA, they would have a million reasons why there is in fact no doctor shortage and their policies were right all along. Sound familiar?
As he goes through his other examples, from higher education to nuclear energy, he will find the same story, over and over. A special interest group gets a policy passed that creates artificial scarcity for their own benefit, and then they create narratives that deny that scarcity is real.
Policies designed to create artificial scarcity are great to study because they always eventually do exactly what they say on the tin. Since everyone hates scarcity, the victims of the policy get very upset when that comes to pass. Artificial scarcity strikes an especially heavy blow against the least powerful and most vulnerable in society, who are stuck with a disproportionate share of the burden.
The people who created the artificial scarcity policy in the first place, who were themselves exempted from the effects and are almost certainly currently profiting from it, respond to the inevitable criticism by insisting, improbably enough, that in fact no scarcity exists!
They express dismay over the disrespect shown by those who have the temerity to question the policy, and cast aspersions on the intelligence and motives of the critics.
When confronted with incontrovertible evidence that other states or countries have an abundance of the good or service in question, they argue that local conditions are different, and no honest comparisons can be drawn. If they finally admit that scarcity is real, they explain that the simultaneous existence of scarcity and an active policy designed to create scarcity is mere coincidence.
They claim that repealing the policy will be deleterious to public safety. They theorize that repeal will somehow set a dangerous precedent. They blame scarcity on capitalism or communism or nefarious and greedy actors. They find a disadvantaged group that actually benefits from artificial scarcity, and ask why the critics hate them.
When considered in aggregate, these arguments resemble the ravings of a conspiracy theorist. Of course, their proponents believe them sincerely. The psychological biases that cause them to persevere in supporting artificial scarcity operate entirely subconsciously.
Then, finally, once the policy is repealed, everything is fine and dandy, and the whole experience is memory-holed. The hard-liners continue to insist that it was all better in the good old days, but no one ever dares to propose reinstating artificial scarcity after it has been repealed.
Consider all of the Depression-era laws that created artificial scarcity which were repealed in the 1970s under the banner of “deregulation”: “fair trade” laws that permitted retail price fixing, and regulations that kept supply low and prices high in airlines, trucking, and banking.
Can you imagine a politician today proposing to triple airfares to support the profits of United Airlines? The next artificial scarcity policy always surfaces in a different sector, just as it did in the 1970s with housing.
Artificial scarcity policies are by no means unique to America. If anything, they might be worse overseas. Witness labor laws that discourage business formation and hiring, which benefit existing companies and older employees but result in high youth unemployment and brain drain. Or policies that keep inefficient companies alive, weighing down the productive capacity of the entire economy.
It is remarkable to consider that there are all of these artificial scarcity switches scattered everywhere, and if we could just find a way to flip them to the off position, it would have a far bigger immediate impact on our material well-being than developing affordable solar power or cheap electric cars or any of the technologies people work so hard on to provide abundance for society. Such is the power of human nature that those switches are tenaciously guarded by people who sincerely believe they have society’s best interest at heart.
Perhaps the larger lesson is how much we underrate the power and pervasiveness of self-deception in our professional and personal lives.
We fret about how hard we work and what tools we use when our organizations routinely refuse to adopt simple best practices due to not-invented-here syndrome or other similar biases. This is the reason so many underperforming companies have a miraculous turnaround after a change in management, even though the new management team is much less knowledgeable than the old management team – they will improve the situation simply by making the obvious changes that the previous management team refused to accept. This is also why skilled salespeople are so important even for products that seemingly should sell themselves; there is a natural resistance to anything new in an organization.
And for all of the benefits that a small dose of self-deception can have for our mental health, it should go without saying that many of the problems we have in our personal lives are because we live in denial of certain important truths, and we can experience a major turnaround the moment we manage to accept them.
We can be optimistic that the abundance agenda will eventually make some headway, if only because society cannot long tolerate too much artificial scarcity. However, it is human psychology that is at the root of our problems with artificial scarcity, and history suggests that that is a problem we can never fully solve.
The housing discourse illustrates some common mistakes in economic reasoning, a couple of which are worth mentioning here (and have been mentioned in the past by others), although they probably deserve their own post to explore in detail:
It is commonly assumed that the best way of measuring the success of proposed policy is by looking at the change in rent. The problem with just looking at rents is that there are many ways to lower rents without solving the scarcity problem or making people better off, so you run into Goodhart’s Law.
For example, it is easy to lower rents by lowering local wages, as we observe in any recession, and so people inevitably propose policies to rid the city of high paying jobs or sabotage the local economy in creative ways.
This actually might be good for some subset of residents that do not rely on the local economy for income, but for everyone else, it is like trying to lose weight by chopping off your legs. It just creates a new artificial scarcity problem.
The same goes for proposals to keep rents low by preventing improvements to local living conditions; individually they might work, but in aggregate they do nothing but lower living conditions for everyone.
Finally, this is also of course true of rent controls. They transfer wealth from property owners to existing renters, which might be ok, but in most cases they will make the scarcity problem worse by discouraging construction.
If you studied economics in college, you probably recall starting by learning about utility curves and budget constraints. The idea is that you are always trying to figure out how to maximize utility, even if it is hard to measure; this is the true goal. As the economist Scott Sumner likes to say, never reason from a price change.
Unfortunately there is no single measure that can be substituted for rents, so one just has to keep in mind the limitations of just measuring rent.
A second common mistake is to look at local housing markets as if they are islands. Households and companies can respond to changes in conditions by moving to other cities, at some cost and on some lag.
NIMBY policies in one city will create spillover into other cities. NIMBY policies in a lot of cities simultaneously, as we have today, creates a lot of spillover. The ability of other cities to absorb this spillover has prevented housing costs from rising too much, but is limited.
Conversely, increasing housing supply in just one NIMBY city will have less impact than might be expected. If you increase housing supply by 100,000 units in San Francisco, you would expect to lower rents in every other city, as they will lose residents to San Francisco and there will be less remaining demand. The biggest impact will still be in San Francisco – the ratio of rent in San Francisco to rent in the rest of the country will have to come down to get people to move – but the impact is far less than it would be if people could not move.
This is why small, isolated attempts to increase housing supply can be a little disappointing. It would be far better to find a way to increase housing supply in a lot of markets simultaneously.
This also explains why rent is so high in New York, even though it is so uniquely large and dense. At some level, rents in similarly desirable markets should eventually converge, since people (and employers) choose where to move in part based on rents.
(Also note the corollary here that an increase in desirability will cause rents in a market to converge upward to rents in other similarly desirable markets, even if supply is growing rapidly. The increase in demand will overwhelm any increase in supply, although the increased supply does keep rent from going up as much as it would have. Also, the additional supply lowers rents by a little bit in all of the other markets that lost residents to the growing city. This explains the experience of Austin and Seattle.)
High rents in our densest megacities merely indicate that there is an undersupply of housing in those kinds of cities and neighborhoods relative to demand. Since there is a finite number of people in this country, constructing more dense neighborhoods in megacities will inevitably bring down rents.
This also means that constructing more dense neighborhoods will also lower rents everywhere else, even in the suburbs, even if it means knocking down existing lower density housing. Imagine destroying one single family house to create a ten unit apartment building. To fill the apartment building, ten single family houses will end up getting vacated, which more than makes up for the lost house.
The last common mistake to be aware of is the mistake of thinking of housing as separate from the rest of the economy. Housing is a crucial part of the substrate that the rest of the economy is built on. To provide utility, housing needs to be adequately connected to jobs and services. Location, location, location.
I believe this is the mistake Kevin Drum makes by looking at a measure of housing units. There are plenty of very marginal older housing units in rural or depressed areas. They provide housing but with access only to low wage jobs and limited services, and have hidden costs in terms of commute time and transportation costs. Many of these end up getting demolished every year.
It is fine to subsidize people who want to stay in these marginal areas, but we should also make every effort to accommodate people who want to move. It’s not enough to look at the number of units overall, we have to also look at the utility of where they are located.
There is an insidious backward logic that comes into play if you decide that “filtering” isn’t real and all new housing must be affordable. The strongest sign that there isn’t enough housing in a given location is that prices are very high.
If you want all of your new housing to be affordable, you will tend to permit new housing where prices are low, in marginal locations where there isn’t as much unmet demand. This is the exact opposite of what you want to do!
You should let people build as much housing as possible in the most expensive cities and neighborhoods first, which is where people want to live. That might upset the wealthy people that live there right now, but it’s still the right move. New housing in expensive neighborhoods will still effectively pull down prices everywhere else, as it still removes people that would otherwise live elsewhere.
We have covered possible housing solutions before, but here are some possibilities:
The simplest solution is to allow more new housing construction in areas that are seeing high demand. The objection is always that new housing will do nothing because demand is infinite, but that is simply not true, because population is very much finite. At some point, everyone that wants to live in a big city or a dense neighborhood will be there, and supply and demand will be in balance.
Moreover, if every major metro area was forced to allow enough development to increase the population by an extra 20% over the next decade, it’s unlikely residents of those cities will even notice a difference, especially if new development is concentrated in walkable areas close to mass transit, which is where the demand is anyway. That would likely be more than enough to alleviate the problem. California currently has a version of this policy at the state level that they are trying to enforce.
People sometimes propose building new cities or growing small towns to avoid disturbing the NIMBYs in the big cities, but that is impractical. The big cities already have the infrastructure in place, and we know there is demand to live in the biggest cities based on housing prices there. Housing prices in smaller towns are generally lower and suggest less demand, and it is not clear that building more housing there will do anything.
This also reveals an issue where we are giving preferential tax treatment to people who are reaping excess profits from the artificial scarcity that they themselves created. The most common justification given for preferential treatment of capital gains and real estate is that it incentivizes productive investment, but here it does quite the opposite.
If we let people vote for artificial scarcity, we should prevent them from getting tax breaks on the excess profits they get from the subsequent price gouging. Otherwise we are subsidizing disinvestment. It is perfectly normal today for a millionaire California homeowner to pay virtually no property taxes, no income taxes on imputed rent, and limited or no capital gains tax. Meanwhile, California workers pay up to 50% tax on earned income.
Property owners that benefit from artificial scarcity should be paying higher taxes than workers, if anything. For example, we could require that property owners in municipalities with high property values that are not permitting enough successful development pay a minimum 2% annual property tax (a normal rate in places like Texas and New Jersey) and also have to pay ordinary income tax rates every year on unrealized capital gains.
Also, regardless, ultra-regressive tax regimes like Prop 13 should probably be banned at the federal level, simply on equity grounds.
You might recall our look at ride-hailing. We examined the theory that ride-hailing was just some VC/techbro conspiracy to monopolize the taxi industry through predatory pricing. We found that the theory was a little silly; it rests on the idea that human dispatchers are going to coordinate 80,000 cars in New York City more cheaply and efficiently than a computer can, and that people don’t care about the convenience of apps.
The theory has some superficial plausibility because ride-hailing companies still lose money, and often when we see companies that lose money, it’s a sign that the underlying business is unsustainable. But losing money is just as often a function of difficult competitive dynamics, as we see in airlines.
The “software doesn’t work” conspiracy theory is mostly goofy and harmless—by now, even taxis have embraced apps, and the people that are regulating ride-hailing have correctly identified that software is powerful and are acting accordingly. But the theory has legs among outsiders because it fits the evil tech company / evil financier narrative so well; some people will not let go of it no matter what. It causes otherwise intelligent people to publish long screeds about it that consist of nothing but circular logic and bad math.
Another popular set of conspiracy theories that persists has to do with financial market structure and/or short sellers. People get very emotional about “the algos” or perceived market manipulation but in reality there is nothing there. It just fits the narrative some people have about the world being a struggle of the little guys against the shadowy moneyed interests—it’s what we want to believe. In reality the world is mostly a fight to get rid of the incorrect narratives that we have in our heads that make us feel good but cause us to buy dumb meme stocks (which is how people really hand money over to the rich and undeserving).
In the US, Oliver Wendell Holmes separately made the same discovery at the same time as Semmelweis, and got the same reaction from the American medical establishment; one leading Philadelphia obstetrician
…derided [Holmes’] arguments as the “jejeune and fizzenless dreamings” of a sophomoric writer, and declared that any practitioner who met with epidemic cases of puerperal fever was simply “unlucky”.
If someone called my arguments “jejune and fizzenless dreamings”, I would be more confused than insulted.
Scott Alexander once asked why the housing discourse is so emotional and uncivil. This is the answer – while superficially it looks like a disagreement between people that value preservation and people that prefer change, in reality it like the handwashing debate; between people who think scarcity is real and people who do not.
One side literally does not believe there is any issue (because their brains won’t let them see it) and feels disrespected by the suggestion that there is any problem at all, and the other side feels frustrated and gaslighted because the evidence is so conclusive that there is a huge problem that is easily solvable. They both assume malicious intent from the other side (which is just how our brains our wired) but in fact they both honestly believe they are advocating what is in the best interests of the general public.
This is an investing newsletter, so it is worth considering a little tangent here:
Why should one actively pick investments for their own portfolio? Why should one learn about investing at all?
Strictly from a financial standpoint, there is no reason whatsoever for any regular person to be actively picking stocks instead of investing in an index fund. None. There is little chance you actually outperform an index fund, and even if you do, the total alpha you generate for your tiny portfolio will not change your financial future in a meaningful way, nor will it provide a good return on your time invested in the endeavor.
However, if you are conscientious and disciplined about it, investing will teach you vivid lessons about human psychology that you cannot learn in a meaningful way merely by reading a book.
Research an industry. Come up with a thesis. Buy the stock. Track the stock over time. What do you do when you are confronted with evidence that your thesis might be wrong? Do you sell immediately? Ignore it? Interpret it in such a way that it confirms your thesis? (That’s confirmation bias.) Change your thesis and hold on to the stock? Blame the Fed?
Whether you outperform or underperform, if you are able to be honest with yourself, you will learn that a) you are not smarter than everyone else and b) confirmation bias and motivated reasoning do not only happen to other people.
No one can totally overcome psychological bias, but to some extent you can hope to “name it and tame it”.