Capital Controls and Market Manipulations Aren’t Helping Anyone

A pattern of capital controls and market manipulations prove to be disastrous economic policy, especially for those they were intended to help!

March 11, 2019

By: Bobby Casey, Managing Director GWP

If private property is the linchpin of capitalism, then capital controls is the linchpin of socialism.  No one will call Venezuela failed capitalism, least of all its leader Nicolas Maduro or his predecessor Hugo Chavez.  They certainly BLAME capitalism, but in examining the economic artifacts, there’s no evidence of capitalism doing much more than working in the shadows to get essentials to some people.

I bring this up because there is a general tenor in the political atmosphere at the federal and local levels that seem to be moving in the direction of capital controls.  These are policies that dictate how people should spend their money, despite their economic shortcomings.  If in fact any of these policies lead to greater prosperity, then I would have a hard time arguing against them.

Controlling capital isn’t just the Federal Reserve manipulating interest rates, although, that’s a huge component.  It also includes asset forfeiture, the scrutiny of financial transactions, and the presumption of guilt (and criminalization) based on the size of those transactions or the destination of those transactions.  We’ve seen this with luxury home investments, offshore accounts, cryptocurrencies, and even small businesses who deal in multiple small cash transactions.

Beyond even those things, you have the price controls during natural disasters by way of anti-price gouging laws. 34 states have anti-price gouging laws by the way.  After Hurricane Sandy, the New Jersey Attorney General’s office issued 65 subpoenas to businesses accused of price gouging.

Never mind the basic principles of supply and demand.  Without free-flowing price indicators, the market isn’t prompted to prioritize it’s demands during a crisis.  You don’t need lumber when houses aren’t being washed away in a hurricane.  But you do when they are!  You don’t worry about whether you can get potable water or groceries when the weather if fair.  You worry when the grocery store has its electricity and windows blown out though.

If essentials need to be shipped in from further away, and the supply is limited, shouldn’t a premium be leveled as a natural consequence to the circumstances?  Or does water have a fixed price regardless of value?  This is precisely what lead to the barren shelves in Venezuela’s grocery stores: they fixed the pricing of goods.

The minimum and living wage advocates are also part of this overall capital control movement.  Despite the destruction of jobs and the greater barriers to entry for the unskilled labor market, politicians still play to populism.  Is there an initial bump to those who get to keep their jobs and see an increase?  Sure.  But the in the long run?  It slowed job growth, unemployment went up (especially among the poor and unskilled), and increased failure of business.

The claim is that if we were to abolish the minimum wage entirely, then no one would get paid.  Which is absurd because then how would people buy things from the businesses that employ them?  I’m sure Head & Shoulders WANTS to charge $100 per bottle of shampoo.  And if they could make more money doing so, they absolutely would.  But they don’t.  They go for about $5 per bottle.  Why?  Because that is the sweet spot where they can make the most amount of profits off the least amount of effort. 

The same is true for wages.  Of course, if a business could get away with paying people nothing or close to nothing, they would.  It’s what is often known as interns and apprentices.  But they can only get away with it until that employee finds a gig that will pay them, and from there someone who offers something more valuable in compensation.  Competition for talent is WHY only 4.7% of workers 16 and older make minimum wage, while the remaining 95.3% make OVER that.  Because competing businesses are willing to pay for good talent. 

In both – price control regulations, minimum wages – the intention was to help the less fortunate… and in both cases the loss was greater than the gains.  Now the latest hot button topics is RENT CONTROL!

Rent Control isn’t a new thing.  It’s practically a long-standing tradition in places like New York where it’s been around since 1943. 

Four states plus the District of Columbia have some local jurisdictions with rent control: California, Maryland, New Jersey, and New York.  Oregon just passed a law that makes rent control policy state-wide.  The only state in the union that has such a policy.

Rent control isn’t a fixed policy.  Each jurisdiction has its own spin on it.  For example, Oregon has a 7% plus inflation cap on the annual increase of rents for building over 15 years old; while California’s cap is 3%.

Once a tenant moves out, the cap goes away, and the landlord is free to charge whatever they want.  The 7% kicks in at the start of the new contract on the new price.

Oddly, the vast majority of landlords don’t raise their annual rents more than 10% year over year anyway, so who is this law for? The few that do?

Naturally, the fear is that landlords will drive tenants out, so Oregon included a “just-cause” clause in the law to ensure that there was a justifiable reason for the tenant to be evicted.

As employers know, there are other ways to drive people out… especially when it’s too complicated legally to simply tell them to get out.  Perhaps new enhancements aren’t made on the property… no new coats of paint.  No new appliances or upgrades.  Only the vacated units get those.

That’s just a tiny consequence of rent control.

What about people who would rather list their properties on Airbnb than rent them because they can’t raise their rents to meet demand?  Everyone thinks of large apartment buildings, but a landlord can just as easily own a house, condo, or duplex; and if demand is high enough, it might make sense for them to just do daily rentals than annual ones.

What about future developers?  If there’s a cap on the rents they can charge, what incentive is there to building that jurisdiction?

Lowered supply is NOT how to address high rent and housing crises!  More people will be displaced than before, and the new rents will be much higher to compensate for that.

Once again, a well-intended policy that hurts the very people it purports to help!

If this isn’t socialist capital controls, I don’t know what is.  This absolutely is NOT free-market capitalism:

  • Scrutiny of deposits both in amounts and locations
  • Scrutiny of alternative currency use
  • Scrutiny of purchases and investments
  • Dictates on what you can and cannot charge for goods and services
  • And of course, control over the yields of the currency

None of these things are going to help the productivity of the economy, as, to date, none of them have.  They all offer limited benefits to a few folks, but long-term detriment to everyone else.  Capital controls and centralized market manipulations are the fast track to economic disaster and failure.

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