Despite all the contrary evidence provided by these fires, Gavin Newsom still believes that government knows best.

Jim Geraghty writes here on the way that a series of policy decisions contributed to the scale of the disaster now affecting Los Angeles. As he explains:

There is no policy, at the federal, state, or local level, that can eliminate the threat of wildfires. But policy choices can mitigate or exacerbate those risks and the consequences of those fires, and unfortunately, the bad decisions of Southern California have piled up, year by year, decade by decade.

Dominic Pino gives an example of how regulation can make things worse, setting out how price controls on insurance will also make recovery from this tragedy more difficult. Much of California’s rules in this area are still driven by the effects of Proposition 103, which was passed back in the 1980s.

One of those things that has improved since 1988 is statistical modeling of wildfire risk. Because that technology basically did not exist in 1988, it is not included in California’s insurance regulatory regime. California’s insurance authorities have in the past few years begun to incorporate some aspects of wildfire catastrophe modeling, but it is still not allowed to be used as justification for rate-hike requests. “This has essentially meant that California—a state that has long prided itself as being on the leading edge when it comes to its response to climate change—is effectively telling insurers to ignore the science,” the paper says.

Even if much of California’s increased fire risks owes more to poor forest management and failures to establish a far more effective preventive regime, the point still holds.

Pino:

After decades of strict price controls, the average price of insurance in California is well below the market rate. California’s rate suppression, the difference between the fair actuarial rate and the rate allowed by regulators, is 29 percent for homeowners insurance, the highest of any state. As economist Brian Albrecht put it, California “forces the biggest gap between rates and risk in the nation.” . . .

Many homeowners insurance companies have left the California market. They have refused to issue new policies and refused to renew existing ones. If the only price they are allowed to charge is a price that is almost guaranteed to lose money, there’s no point in issuing the policy in the first place.

The state has established an insurer of last resort, FAIR.

Pino:

The San Francisco Chronicle estimates that FAIR could be on the hook for $24 billion worth of property after these wildfires. FAIR is not publicly funded, but if it lacks the money to pay claims — which it almost certainly will after these fires — the state compels private insurance companies to pay for it, which will force higher costs on the rest of their customers and give them yet another reason to get out of the California insurance market.

And now there is this tweet from Governor Newsom:

The first sentence is welcome, although the changes to the code should be permanent, not just confined to the aftermath of this tragedy.

But the talk of “extending key price gouging protections to help make rebuilding more affordable” is more worrying, however unattractive the implications conveyed by the word “gouging.”

The Guardian has more on the sort of thing that is envisaged:

“We’ve seen businesses and landlords . . . jack up the price,” Bonta said at a press conference. “It’s called price gouging. It is illegal. You cannot do it. It is a crime punishable by up to a year in jail and fines.”

Prices should only be going up 10% or less from before the fire, Bonta added. “This is California law [and] it’s in place to protect those suffering from a tragedy,” he said.

Bonta added: “Some of our hotels and some of our landlords use algorithms based on demand and supply to set their prices.” If those prices lead to prices higher than before the emergency by 10%, that’s against the law. Ignorance, he added, “is not an excuse”.

The warnings come amid reports of landlords hiking rents for rental properties by thousands of dollars as demand for properties soars.

California governor Gavin Newsom previously announced that state price-gouging laws would be implemented on 7 January after he declared a state of emergency.

I wrote on the topic of gouging after Kamala Harris raised the matter of extending price controls (under certain circumstances) during her campaign. Many states have anti-price-gouging laws. They are understandably popular (no one wants to be “gouged”), but they also tend to be counterproductive. In California’s case, the 10 percent limit does have some wiggle room (there’s an exemption if businesses can “validate” the fact that their costs have increased, but few will want to go through with that). The 10 percent limit will thus be an effective cap, and there’s a good chance that it will discourage businesses coming to offer their services to those in L.A. who will need it. That will reduce the help available, not increase it. Moreover, an anti-gouging law depresses competition. Scrap the law, and more sellers of goods and services will come in, forcing gougers to cut prices.

I quoted economist John Cochrane on the topic:

If people are facing real difficulties, he would rather give everyone $100 to pay for, say, the $10 gallon gas (or use for other purposes). This is, he points out, “mostly, what our government did during Covid.” That might be the way to respond to a disruption as prolonged and widespread as the pandemic. When the emergency is likely to pass quickly, directed targeted assistance would, assuming the mechanism to arrange it was in place, be preferable. But such assistance should work with prices, not against them. “Rule number one of economics,” writes Cochrane, is (his emphasis) not to “distort prices in order to transfer income.”

Writing in Capital Matters last year, Amity Shlaes discussed a pamphlet from 1946 by Milton Friedman and George Stigler, two future Nobel laureates, titled Roofs or Ceilings? In it, they discuss “the current housing problem” and find a lesson in the aftermath of the 1906 San Francisco earthquake, a time long before rent control took up permanent residence in the city.

Shlaes:

Those families who still had homes invited the homeless into their residences, for free and for rent. Rents for empty apartments still standing rose dramatically, by some measures, 350 percent. The higher rents, note Friedman and Stigler, forced “some people to economize on space” — a single shared bedroom for a family, not two or three rooms. The economists’ point: “Shortage” is a term we use when we don’t like a high price. When we insist on affordability, and defining what is affordable, we try to moralize our way out of the iron parameters of life, supply, and demand.

Especially supply.

Shlaes continued:

Absent the “complex, expensive and expansive machinery” of rent regulators, landlords felt free to raise rental charges. “The rationing was done by rents,” note the punctilious Friedman and Stigler. Profits from those rents inspired investment in new housing. Motivated builders began clearing rubble and laying foundations at a pace we today associate only with China, and continued to do so for decades.

San Francisco then is not Los Angeles now, but there are some lessons to be learned from the earlier experience nonetheless. It seems unlikely that Newsom is willing to learn them. Despite all the contrary evidence provided by these fires, he still believes that government knows best.