The Economy: A Dishwasher's Dilemma

Every summer I spend several weeks at Cape Cod, which provides an alternative viewpoint of how the economy works since, as a sub-division of the People's Republic of Massachusetts, it is not subject to the same set of forces as the rest of the U.S. economy. In several otherwise reputable restaurants where I recently dined, service was delayed by the lack of silverware. Further investigation revealed a severe shortage of dishwashers, in spite of the fact that the minimum wage on the Cape has now risen to $9.50 an hour, while dishwashers, according to the local classified ads, are being offered $12 an hour. Apparently there are insufficient takers even at these rates. I will readily concede that dishwashing is not the first idea that comes to mind for a career opportunity, but one might think the Cape, being a relatively pleasant place to spend the summer, would have no trouble attracting part-time workers at that wage. Digging a little deeper, the problem turns out to be that while wages are attractive, living accommodations are so expensive that, on balance, summer help cannot afford to work on the Cape. A recent survey of home prices by major city showed San Francisco, Los Angeles, and New York City at the top of the list. No surprises there. However, Boston was a close fourth: All those newly minted millionaires from Fidelity Investments and its imitators have bid up the price of housing throughout the eastern part of the state. According to local realtors, home prices on the Cape have risen 20% over the last year. In a free-market society this problem would be solved by having individual homeowners rent out rooms to summer help. Many of the houses on the Cape were built in the olden days when space constraints were not so common, so there are lots of extra rooms that could be used. But that is where the People's Republic rules come into force. It presumably will come as no surprise that Massachusetts is not very business-friendly, but in some cases regulations are carried to extremes. In particular, homeowners are not allowed to rent out separate rooms without a specific permit, which is very seldom granted. According to some of our neighbors who oppose these permits, if Mrs. Mahoney down the street rents out an extra room, pretty soon she will be operating a gift shop, followed by a car wash, a gas station, and who knows what else. It may seem I am exaggerating to make a point, but be assured that is not the case. A few years ago I had a message on my answering machine that said "Evans Economics." Apparently the local authorities had nothing better to do than call each and every local phone number, because when checking our messages one day we were rudely informed that it was illegal to run a business out of our home and to cease and desist forthwith. So we changed our message. To return to the more macroeconomic implications of this Massachusetts nonsense, attempts to keep neighborhoods pristine apply not only to the prohibition of renting out extra rooms, but to building new homes generally. As a result, home prices rise even as unskilled labor becomes increasingly scarce. That encourages local businesses to inform the Federal Reserve Bank that wage rates are rising, causing Greenspan and company to worry a great deal more about wage-based inflation than would be the case if free markets operated properly. I am not among those who believe in the butterfly effect, whereby the inability to rent an extra room on Old Main Street in South Yarmouth causes a worldwide recession. Nonetheless, there is a message here all the same. To the extent that free-market forces of demand and supply are subverted by high-handed local regulations, monetary policy is not the appropriate tool for governing the economy. Instead, more emphasis should be placed on defeating anticompetitive regulations wherever possible. Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill.