Planning, Obsolescence

Posted: Aug 29, 2014 12:01 AM

Almost everyone recognizes the importance of planning.

If you’d like to retire some day (good luck if you’re younger than, say, 50) you’d better be socking money away in a 401(k). That takes planning. People plan trips, plan meals, plan renovations. In many cases it only makes sense to plan.

But there are some times when planning is overdone. When it can even lead to problems. That’s when planning is done, not by people but to people. By governments.

“Some governments are trying to curb the growth of cities by imposing limits on movement and restrictions on land use,” The Economist magazine reported recently. Planning. But it’s not likely to work. In fact, such planning often ends up driving up prices in particular areas and forcing people to move further from where they work.

“In Seoul, for example, a protected greenbelt did little to prevent sprawl, but led to astronomically high house prices in the center,” the magazine pointed out. In a later story, it cited problems with London’s similar greenbelt. There, homebuilding is limited to “former industrial sites which are expensive to build on,” which again drives up prices.

The problem is simple: planning sounds like a good idea, so when governments propose plans, people want to go along. But as Friedrich Hayek pointed out in the classic book The Road to Serfdom, governments simply don’t have enough information to plan an entire economy effectively.

The Economist story talks about governments trying to encourage people to live in particular areas, but that’s not likely to work. As an NYU researcher points out, between 1990 and 2000, urban populations and land cover grew at the same rate whether or not governments tried to plan cities. People went where they wanted to, not where they were told to.

For a more direct example of planning, consider rent control.

In several American cities, most notably New York and San Francisco, local governments set ceilings on how much particular owners may charge in rent. This creates a false housing shortage.

“Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand,” wrote the famously non-conservative economist Paul Krugman almost 15 years ago.

“Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go -- and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable.” The Nobel-laureate has changed his views on many things since that piece was written, but probably not on the damage done by rent control.

Of course, governments can meddle without directly setting prices. Central banks set national interest rates. Growth in London is booming, so Mark Carney, head of the Bank of England, is suggesting his central bank may raise rates this year. But it’s a difficult line to walk; almost everywhere else in the country, housing prices are below their peak. Should the central bank plan based on the boom towns, or the bust?

Then there’s planning by a legislature. Lawmakers decide that something is necessary: Everyone must have health insurance (ObamaCare), or all banks must be regulated (Dodd-Frank), to cite recent examples. Hayek foresaw the problem with this approach.

“Democratic assemblies cannot function as planning agencies. They cannot produce agreement on everything -- the whole direction of the resources of the nation -- for the number of possible courses of action will be legion,” he wrote in The Road to Serfdom. “Even if a congress could, by proceeding step by step and compromising at each point, agree on some scheme, it would certainly in the end satisfy nobody.”

Again, look no further than ObamaCare and Dodd-Frank; nobody’s satisfied, because those laws are attempting to do the impossible. They aim to plan against all potential problems, and they end up falling short.

Let’s let Paul Krugman, himself a frequent proponent of government planning, have the last word. “Now you know why economists are useless: when they actually do understand something, people don’t want to hear about it,” he quipped in the year 2000.

Useless is too strong a word. But economists would be better off setting aside their grand plans, and simply reminding us that markets work when they empower people, not governments, to make plans.