Economic Elitism Thought Experiment
By Arnold Kling
In this interview for The American, Tyler Cowen speaks of many things. I believe he uses a term like “idea junkie” to describe the type of person who reads books by Gladwell, Levitt, and so on. He talks about the New York Times nonfiction best-seller list in general as being driven by idea junkies. That is partly true, but I think that the best-seller list tends to be larded with ideological hackery, which is a less uplifting market.
In the American interview, Tyler tries to articulate the difference between his views and those of Bryan by suggesting a thought experiment. In this thought experiment, the President and Congress take advice from economists much more than they do today. Tyler predicts that the economic outcomes would be somewhat better for a while, but social cohesion would tend to wear out and in the end we would be worse off.
I look at his thought experiment this way: It is not realistic to propose an experiment in which everybody’s beliefs about economics are held constant, but political power is transferred to economists. Those are two mutually inconsistent events. The reason that social cohesion breaks down under this thought experiment is that if more market-oriented policies were thrust on a dubious public, then this would create a political opportunity for populist politicians to exploit anti-market beliefs. For example, economists probably would allow much freer movement of foreign labor into the United States, and this would likely cause backlash.
Speaking of anti-market bias making economic outcomes worse, Lawrence B. Lindsey describes the potential chilling effects of new legislation designed to make mortgage lenders more liable for trying to promote homeownership among subprime borrowers.
The bill requires that each mortgage originator act with “reasonable skill, care, and diligence” and in “good faith and fair dealing.” It also requires that all loans are “reasonably advantageous to the consumer.” Surely these are noble sentiments. But they are also vague and ill-defined legal requirements that open up the mortgage industry to endless litigation in an environment where juries comprised of homeowners must decide between families in the process of losing their homes and mortgage brokers, investment bankers and other financial intermediaries.
…The legislation also prescribes some regulatory tightening that will block access to mortgages for some key segments of the population, or at least make those mortgages more expensive and less appropriate. The bill would require that all borrowers qualify for a mortgage at the fully indexed long-term rate that would apply when a variable-rate mortgage converts to its long-term level.
Lindsey describes accurately how this sort of legislation will make matters worse for the housing market.
One of the reasons that we may tend to get better economic policy under Democrats is that Democrats have more incentive to engage in anti-market demagoguery when they are out of power. It may be easier to sneak good economics, such as deregulation and lowering of trade barriers, past the beliefs of the American people under a Democratic Administration than under a Republican one. The risk is that a Democratic Administration will come along (e.g., Franklin Roosevelt) that believes and acts on its anti-market rhetoric. I worry that we may be headed for that in 2008.