Efficiency is not just a good idea, it's the only ethical policy
By Scott Sumner
Here’s Neil Irwin of the NYT, expressing some rather unoriginal views that you might see in 100 other media outlets:
What lesson should a card-carrying member of the economic elite take from the success of Donald J. Trump, and British voters’ decision to leave the European Union?
Voters in large numbers have been rejecting much of the underlying logic behind a dynamic globalized economy that on paper seems to make the world much richer. For the bankers, trade negotiators, international businesspeople and others who make up the economic elite (including journalists like me who are peripheral members of it), this is cause for introspection, at least among those who aren’t too narcissistic to care what their countrymen think.
Here is an overarching theory of what we might have missed in the march toward a hyper-efficient global economy: Economic efficiency isn’t all it’s cracked up to be.
That’s all rather vague, so let’s look at one of his specific examples:
You can see versions of this play out in a wide range of areas. For example, economists almost uniformly argue that rent control laws are a terrible tool to try to make housing more affordable. As Paul Krugman once wrote, “the analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial.”
Yet among people grappling with soaring rents, the policies are persistently popular — even, recently, in the free-market-oriented boomtowns of Silicon Valley.
It’s easy for an economist to chalk up support for rent control as idiocy that depresses the home construction that might reduce housing prices for everyone. I have thought of it that way.
But maybe it is really important for people who live in a place to be able to stay there indefinitely. Maybe the idea that things should stay the way they are, without new people moving in and new buildings going up, is not as inherently irrational as Economics 101 would suggest. Yes, rent control is a bad idea if you’re worried about the long-term prospects for economic efficiency. But maybe the people who advocate these policies know exactly what they’re rooting for, and that’s not it.
The rent control debate can be viewed as a microcosm of the debate about globalization and international trade.
I find this sort of analysis to be rather annoying. Let’s start with his assumption that economists view rent control supporters as idiots. If you follow the link in this quote you find an article on the push for rent control in Silicon Valley:
“Rent control exists for a reason, and it’s because someone gains from it,” said Daniel Fetter, an economics professor at Wellesley College in Massachusetts. “The question is, ‘Is that really the best policy for achieving those ends?'”
I suspect about 95% of economists would agree with Daniel Fetter. And now do you see how misleading the Neil Irwin’s quote is? We don’t view supporters of rent control as idiots; we view them as selfish. Irwin’s entire piece is premised on the assumption that economists don’t understand why people support policies (such as rent control, protectionism, and minimum wages) that reduce efficiency. But we do. (That’s not to say that ignorance isn’t also part of the story, it is, but it’s not a necessary assumption.)
This is also a bit misleading:
Maybe the idea that things should stay the way they are, without new people moving in and new buildings going up, is not as inherently irrational as Economics 101 would suggest.
I’ll wager that 90% of my readers didn’t notice at first how he snuck that NIMBY defense into a paragraph defending supporters of rent control. I do understand why whites might not want poorer blacks moving into their neighborhoods. I do understand how Americans might oppose Hispanic immigrants moving into their neighborhoods. I do understand why environmentalists might oppose tall new building in their neighborhoods. But I don’t like any of those attitudes.
It’s highly misleading to sneak that sentence into a rent control paragraph, as new apartment building would help renters by increasing supply and lowering costs. Irwin is a bit coy about his own views on these issues, but he muddles the issue by including policies that directly conflict with one another. If we are to believe that low income renters having to move elsewhere is a horrible problem, then how can we defend NIMBYism?
It’s also a bit dishonest to tie this in with Trumpism. Trump is all about “Making America Great Again” by going back to the 1960s, when there were lots of jobs for blue collar Americans building interstate highways and shopping centers and housing developments. He’s the world’s biggest fan of using eminent domain so that he can build as many Trump Towers as possible. So if people really are opposed to change, then Trump should be absolutely the last person they would want to support, he’d like to bulldoze right over their house. Just like omelets, Making America Great Again is impossible with breaking a few eggs.
Only two of 40 leading economists, surveyed by the University of Chicago Initiative on Global Markets, agreed with the statement that a country can improve citizens’ well-being by increasing its trade surplus or cutting its trade deficit, an idea that is a hallmark of populist rhetoric.
I certainly agree with the 38 out of 40 economists who view anti-trade deficit arguments as reflecting ignorance of the most basic ideas in EC101. And yet, according to the Council on Foreign Relations, guess who else is ignorant of EC101?
Since April, Treasury has been applying a quantitative framework to determine if a country is managing its currency inappropriately for competitive advantage–that is, keeping it undervalued. Japan already meets two of the three criteria–a bilateral trade surplus with the U.S. over $20 billion, and a current account surplus greater than 3 percent of GDP–and will meet the third if intervention exceeds ¥10 trillion in a twelve-month period. This is not a high threshold historically–Japan sold ¥14 trillion in 2011 and ¥35 trillion in 2003-4.
So apparently those highly educated bureaucrats at the Treasury, with their 6 figure incomes and their posh DC lifestyles, are actually a part of the ignorant masses that are pushing Trump-style populism. And in fact they are pushing nonsense, the “quantitative framework” has no more support in economic theory than astrology has in high-level physics. So if the public has been reading articles for decades and decades about how our Treasury officials valiantly try to protect us from evil Asian exporters, is it any wonder that the now are susceptible to the arguments of right and left wing populists?
Irwin’s article is no worse than 100 others. Lots of clichés that tell us little about why this is happening here and now. Is it the poor performance of the economy in recent decades? Then why is South America moving toward neoliberalism, and away from populism? And why is right wing populism on the rise in Australia, despite their economy performing brilliantly over the past quarter century? And why did Trump do so well in Massachusetts, which is booming? (There are poor people in Massachusetts, but they are mostly Democrats.) Would Trumpism go away if we enacted nationwide rent controls and trade protection and $15 hour minimum wages, and as a result went into a recession? And when discussing how neoliberalism did over the past several decades, how about a comparison with anti-neoliberal policies in Venezuela, Greece, Russia, Argentina, Burma, Cuba, Italy, Brazil, the Arab world, and many other places. How are those populist policies working out so far?
And how do we know it’s not some factor other than neoliberalism, such as immigration and Islamic terrorism? After all, that would explain outliers like South America where (AFAIK) immigration is not a big issue, and Australia, where it is.
Is it stagnating real wages? Then why is nationalism on the rise in China, where real wages (even for the lower classes) have been soaring at double-digit rates in recent decades?
I don’t claim to have any answers for the rise of nationalism, but I do think we need to try to avoid easy explanations that have little predictive power.