Tyler Cowen recently linked to a study that suggests that the public does not believe in supply and demand, at least when applied to the housing market:
Recent research shows that most people want lower home prices but, contrary to expert consensus, do not believe that increased supply would lower prices.
Before we talk about housing, it’s worth noting that a similar kind of pessimism shows up in many other contexts. And as we will see, it is a mistake to see this pessimism as a denial of the supply-and-demand model – there is something else going on.
Consider the following two scenarios, presented to an average person:
A. A company is facing much higher costs for a key ingredient in its product.
B. A company benefits from much lower costs for a key ingredient in its product.
In any case, what is the company likely to do? For an economist, nothing is easier. Our models are symmetrical. A profit-maximizing firm will have an incentive to raise prices in case A, and lower prices in case B. (By the way, theory predicts these outcomes even if the firm is a monopoly.)
Over the course of my life, I have discovered that this is not the way ordinary people look at things. It is not a matter of not being aware of supply and demand, it is asymmetric pessimism. What are the causes of this pessimism?
1. Maybe the asymmetric pessimism is true. Perhaps companies would indeed raise prices in case A, but not lower them in case B. In the longer run, this is not the case. But it’s not impossible that consumers may have noticed a few real-life examples of prices that weren’t immediately reduced for nominal “price stability.”
2. In a generally inflationary environment, people might rightly observe that prices rise much more often than they fall. Economists are interested relative pricesbut the average person looks at nominal prices. If a company increases prices by 2% in a year with CPI inflation of 4%, that is a price reduction for an economist and a price increase for an average person.
3. Maybe people hesitate to sound naive or pollyannish. I am hardly the first to observe that pessimism is more intellectually fashionable than optimism. People like Stephen Pinker are seen as notable contrarians merely because they point out some positive trends that any semi-educated person should already be aware of. The world is becoming richer, healthier and safer? What else is new? But apparently he has become a controversial figure.
4. The media mainly brings bad news. So what should a voter think when asked whether a new government policy could solve a long-standing problem? Do they expect to wake up next year to newspapers reporting that our economic problems have now been solved and that housing is now “affordable”?
5. Equating greed with high prices. Actually, that’s what companies do lower prices after input prices fall are ‘greedy’. But many people probably assume that in that case profit maximization consists of not lowering prices. Since they have already decided that companies are greedy, they then reason back to the conclusion that prices will not be lowered.
I suspect people do believe that the laws of supply and demand apply to the housing market. Ask them what will happen to apartment rents as a flood of immigrants pours into their city. I suspect they answer a different question than what an economic pollster thought they were asking. The pollster might think they are asking, “All else being equal, how does increased housing supply affect price?” The public might respond as if asked, “If this regulatory change happens, do I expect apartment rents to be lower a year from now?
In my opinion, these survey questions are not particularly useful. Instead, imagine a country where one political party is opposed to building more housing and the other political party favors a massive push to increase the supply of new housing. And also suppose that these policy views are generally known among the public. Now ask a young voter about to graduate which party is likely to make housing more affordable.
We don’t have to speculate on that question. A few months ago, the British Conservatives campaigned on a somewhat Nimby platform, while Labor ran a strong Yimby platform. Check out this survey of the recent elections:
You might assume that this pattern is due to wealthier people voting conservatively. But it’s not that simple:
To be fair, some of the Conservative voters were retirees on modest incomes who might have been wealthier at a younger age.