Econ101 Lessons from St. Paul

Econ 101 has been getting bad rap the last few years. The time when Freakonomics was the book to be seen reading if you wanted to look smart is long past, and nowadays the principles taught in Econ 101 are often derided as simplistic, abstract theorizing, “zombie economics” removed from the complexities of the real world. Even worse, in books like Economism by James Kwak, they are condemned as nothing but rationalizations for particular economic policies. Perhaps it was such arguments that convinced the leaders of St. Paul, Minnesota, that they could ignore the lessons taught in Econ 101.

In any intro economics class, students will learn about the effects of price floors and price ceilings. A price floor – a legally set minimum price which can be charged for a good or service – will, if set above the market price for the good or service in question, lead to a lower quantity demanded and greater quantity supplied than would otherwise be the case, leading to an excess of supply over demand. Price ceilings work in reverse. If set below the market price for the good or service in question, they will lead to a higher quantity demanded and lower quantity supplied than would otherwise be the case, resulting in an excess of demand over supply, or shortages.

In 2018, the Saint Paul City Council passed a minimum wage ordinance which, from January 2020, would raise the city’s minimum wage by stages to $15 an hour for all firms by 2028. A minimum wage is a price floor, setting a price below which it is illegal to buy or sell labor. And, according to new research from the Federal Reserve Bank of Minneapolis, even just the anticipation of the minimum wage hike appears to have driven declines in jobs, hours, and overall earnings for restaurant workers in St. Paul, just as Econ 101 would predict.

In elections on November 6, St. Paulites voted to enact one of the strictest rent control measures in the United States, capping annual rent increases at 3% with no allowance for inflation or exemption for new built properties. A rent control law is a price ceiling, setting a price above which it is illegal to rent accommodation. Econ 101 would, then, tell us to expect a higher quantity of housing demanded and lower quantity supplied than would be the case at the market rate, leading to shortages, exactly the problem the measure was intended to fix in the first place.

And that is, again, exactly what is happening. Data compiled by the U.S. Department of Housing and Urban Development shows that, since the measure was passed, the number of building permits issued in St. Paul is down over 80% compared to the same period during the previous year. The city’s mayor, Melvin Carter, who supported the ordinance, is now desperately trying to get it amended to exclude new builds.

To be sure, Econ 101 simplifies the real world. That is what models do. They abstract from reality to isolate underlying factors. That is why there is a good sized body of empirical literature, supporting the theory, on the harmful effects of both minimum wage laws and rent controls. Hopefully the city’s leaders will learn and others will learn from their example. As a proud former resident, I want to the city to be famous for Grumpy Old Men, not bad public policy.

John Phelan is an Economist at Center of the American Experiment.