consensus

Home price targeting

PNRJ inequality, public policy , , , , , , , , , , ,

Jan 29 JDN 2459973

One of the largest divides in opinion between economists and the general population concerns the question of rent control. While the general public mostly supports rent control (and often votes for it in referenda), economists almost universally oppose it. It’s hard to get a consensus among economists on almost anything, and yet here we have one; but people don’t seem to care.

Why? I think it’s because high rents are a genuine and serious problem, which economists have invested remarkably little effort in trying to solve. Housing prices are one of the chief drivers of long-term inflation, and with most people spending over a third of their income on housing, even relatively small increases in housing prices can cause a lot of suffering.

One thing we do know is that rent control does not work as a long-term solution. Maybe in response to some short-term shock it would make sense. Maybe you do it for awhile as you wait for better long-term solutions to take effect. But simply putting an arbitrary cap on prices will create shortages in the long run—and it is not a coincidence that cities with strict rent control have the worst housing shortages and the greatest rates of homelessness. Rent control doesn’t even do a good job of helping the people who need it most.

Price ceilings in general are just… not a good idea. If people are selling something at a price that you think is too high and you just insist that they aren’t allowed to, they don’t generally sell at a lower price—they just don’t sell at all. There are a few exceptions; in a very monopolistic market, a well-targeted price ceiling might actually work. And short-run housing supply is inelastic enough that rent control isn’t the worst kind of price ceiling. But as a general strategy, price ceilings just aren’t an effective way of making things cheaper.

This is why we so rarely use them as a policy intervention. When the Federal Reserve wants to achieve a certain interest rate on bonds, do they simply demand that people buy the bonds at that price? No. They adjust the supply of bonds in the market until the market price goes to what they want it to be.

Prices aren’t set in a vacuum by the fiat of evil corporations. They are an equilibrium outcome of a market system. There are things you can do to intervene and shift that equilibrium, but if you just outlaw certain prices, it will result in a new equilibrium—it won’t simply be the same amount sold at the new price you wanted.

Maybe some graphs would help explain this. In each graph, the red line is the demand and the blue line is the supply.

Here is what the market looks like before intervention: The price is $6. We’ll say that’s too high; people can’t afford it.

[no_intervention.png]

Now suppose we impose a price ceiling at $4 (the green line). You aren’t allowed to charge more than $4. What will happen? Companies will charge $4. But they will also produce and sell a smaller quantity than before.

Far better would be to increase the supply of the good, shifting to a new supply curve (the purple line). Then you would reduce the price and increase the amount of the good available.

[supply_intervention.png]

This is precisely what we do with government bonds when we want to raise interest rates. (A greater supply of bonds makes their prices lower, which makes their yields higher.) And when we want to lower interest rates, we do the opposite.

Of course, with bonds, it’s easy to control the supply; it’s all just numbers in a network. Increasing the supply of housing is a much greater undertaking; you actually need to build new housing. But ultimately, the only way to ensure that housing is available and affordable for everyone is in fact to build more housing.

There are various ways we might accomplish that; one of the simplest would be to simply relax zoning restrictions that make it difficult to build high-density housing in cities. Those are bad laws anyway; they only benefit a small number of people a little bit while harming a large number of people a lot. (The problem is that the people they benefit are the local homeowners who show up to city council meetings.)

But we could do much more. I propose that we really use interest-rate targeting as our model and introduce home price targeting. I want the federal government to exercise eminent domain and order the construction of new high-density housing in any city that has rents above a certain threshold—if you like, the same threshold you were thinking of setting the rent control at.

Is this an extreme solution? Perhaps. But housing affordability is an extreme problem. And I keep hearing from the left wing that economists aren’t willing to consider “radical enough” solutions to housing (by which they always seem to mean the tried-and-failed strategy of rent control). So here’s a radical solution for you. If cities refuse to build enough housing for their people, make them do it. Buy up and bulldoze their “lovely” “historic” suburban neighborhoods that are ludicrous wastes of land (and also environmentally damaging), and replace them with high-rise apartments. (Get rid of the golf courses while you’re at it.)

This would be expensive, of course; we have to pay to build all those new apartments. But hardly so expensive as living in a society where people can’t afford to live where they want.

In fact, estimates suggest that we are losing over one trillion dollars per year in unrealized productivity because people can’t afford to live in the highest-rent cities. Average income per worker in the US has been reduced by nearly $7000 per year because of high housing prices. So that’s the budget you should be comparing against. Keeping things as they are is like taxing our whole population about 9%. (And it’s probably regressive, so more than that for poor people.)

Would this destroy the “charm” of the city? I dunno, maybe a little. But if the only thing your city had going for it was some old houses that are clearly not an efficient use of space, that’s pretty sad. And it is quite possible to build a city at high density and have it still be beautiful and a major draw for tourists; Paris is a lot denser than far-less-picturesque Houston. (Though I’ll admit, Houston is far more affordable than Paris. It’s not just about density.) And is the “charm” of your city really worth making it so unaffordable that people can’t move there without risking becoming homeless?

There are a lot of details to be worked out: How serious must things get before the federal government steps in? (Wherever we draw the line, San Francisco is surely well past it.) It takes a long time to build houses and let prices adjust, so how do we account for that time-lag? Where does the money come from, actually? Debt? Taxes? But these could all be resolved.

Of course, it’s a pipe dream; we’re never going to implement this policy, because homeowners dread the idea of their home values going down (even though it would actually make their property taxes cheaper!). I’d even be willing to consider some kind of program that would let people refinance underwater mortgages to write off the lost equity, if that’s what it takes to actually build enough housing.

Because there is really only one thing that’s ever going to solve the (global!) housing crises:

Build more homes.

Why will no one listen to economists on rent control?

PNRJ current events, inequality, market failure, public policy , , , , , , , ,

Sep 22 JDN 2458750

I am on the verge of planting my face into my desk, because California just implemented a statewide program of rent control. I understand the good intentions here; it is absolutely the case that housing in California is too expensive. There are castles in Spain cheaper than condos in California. But this is not the right solution. Indeed, it will almost certainly make the problem worse. Maybe housing prices won’t be too high; instead there simply won’t be enough homes and more people will live on the street. (It’s not a coincidence that the Bay Area has both some of the world’s tightest housing regulations and one of the highest rates of homelessness.)

There is some evidence that rent control can help keep tenants in their homes—but at the cost of reducing the overall housing supply. Most of the benefits of rent control actually fall upon the upper-middle-class, not the poor.

Price controls are in general a terrible way of intervening in the economy. Price controls are basically what destroyed Venezuela. In this case the ECON 101 argument is right: Put a cap on the price of something, and you will create a shortage of that thing. Always.

California makes this worse by including all sorts of additional regulations on housing construction. Some regulations are necessary—homes need to be safe to live in—but did we really need a “right to sunlight”? How important is “the feel of the city” compared to homelessness? Not every building needs its own parking! (That, at least, the state government seems to be beginning to understand.) And yes, we should be investing heavily in solar power, and rooftops are a decent place to put those solar panels; but you should be subsidizing solar panels, not mandating them and thereby adding the cost of solar panels to the price of every new building.

Of course, we can’t simply do nothing; we need to fix this housing crisis. But there are much better ways of doing so. Again the answer is to subsidize rather than regulate.

Here are some policy options for making housing more affordable:

  1. Give every person below a certain income threshold a one-time cash payment to help them pay for a down payment or first month’s rent. Gradually phase out the payment as their income increases in the same way as the Earned Income Tax Credit.
  2. Provide a subsidy for new housing construction, with larger subsidies for buildings with smaller, more affordable apartments.
  3. Directly pay for the construction of new public housing.
  4. Relax zoning regulations to make construction less expensive.
  5. Redistribute income from the rich to the poor using progressive taxes and transfer payments. Housing crises are always and everywhere a problem of inequality.

Some of these would cost money, yes; we would probably need to raise taxes to pay for them. But rent control has costs too. We are already paying these costs, but instead of paying them in the form of taxes that can be concentrated on the rich, we pay them in the form of a housing crisis that hurts the poor most of all.

The weirdest thing about all this is that any economist would agree.

Economists can be a contentious bunch: It has been said that if you ask five economists a question, you’ll get five answers—six if one is from Harvard. Yet the consensus among economists against rent control is absolutely overwhelming. Analyses of journal articles and polls of eminent economists suggest that over 90% of economists, regardless of their other views or their political leanings, agree that rent control is a bad idea.

This is a staggering result: There are economists who think that almost all taxes and regulations are fundamentally evil and should all be removed, and economists who think that we need radical, immediate government intervention to prevent a global climate catastrophe. But they all agree that rent control is a bad idea.

Economists differ in their views about legacy college admissions, corporate antitrust, wealth taxes, corporate social responsibility, equal pay for women, income taxes, ranked-choice voting, the distributional effects of monetary policy, the relation between health and economic growth, minimum wage, and healthcare spending. They disagree about whether Christmas is a good thing! But they all agree that rent control is a bad idea.

We’re not likely to ever get a consensus much better than this in any social science. The economic case against rent control is absolutely overwhelming. Why aren’t policymakers listening to us?

I really would like to know. It’s not that economists have ignored the problem of housing affordability. We have suggested a variety of other solutions that would obviously be better than rent control—in fact, I just did, earlier in this post. Many of them would require tax money, yes—do you want to fix this problem, or not?

Maybe that’s it: Maybe policymakers don’t really care about making housing affordable. If they did, they’d be willing to bear the cost of raising taxes on millionaires in order to build more apartments and keep people from being homeless. But they want to seem like they care about making housing affordable, because they know their constituents care. So they use a policy that seems to make housing more affordable, even though it doesn’t actually work, because that policy also doesn’t affect the government budget (at least not obviously or directly—of course it still does indirectly). They want the political support of the poor, who think this will help them; and they also want the political support of the rich, who refuse to pay a cent more in taxes.

But it really makes me wonder what we as economists are even really doing: If the evidence is this clear and the consensus is this overwhelming, and policymakers still ignore us—then why even bother?

Fake skepticism

PNRJ cognitive science, heuristics and biases , , , , , , , , ,

Jun 3 JDN 2458273

“You trust the mainstream media?” “Wake up, sheeple!” “Don’t listen to what so-called scientists say; do your own research!”

These kinds of statements have become quite ubiquitous lately (though perhaps the attitudes were always there, and we only began to hear them because of the Internet and social media), and are often used to defend the most extreme and bizarre conspiracy theories, from moon-landing denial to flat Earth. The amazing thing about these kinds of statements is that they can be used to defend literally anything, as long as you can find some source with less than 100% credibility that disagrees with it. (And what source has 100% credibility?)

And that, I think, should tell you something. An argument that can prove anything is an argument that proves nothing.

Reversed stupidity is not intelligence. The fact that the mainstream media, or the government, or the pharmaceutical industry, or the oil industry, or even gangsters, fanatics, or terrorists believes something does not make it less likely to be true.

In fact, the vast majority of beliefs held by basically everyone—including the most fanatical extremists—are true. I could list such consensus true beliefs for hours: “The sky is blue.” “2+2=4.” “Ice is colder than fire.”

Even if a belief is characteristic of a specifically evil or corrupt organization, that does not necessarily make it false (though it usually is evidence of falsehood in a Bayesian sense). If only terrible people belief X, then maybe you shouldn’t believe X. But if both good and bad people believe X, the fact that bad people believe X really shouldn’t matter to you.

People who use this kind of argument often present themselves as being “skeptics”. They imagine that they have seen through the veil of deception that blinds others.

In fact, quite the opposite is the case: This is fake skepticism. These people are not uniquely skeptical; they are uniquely credulous. If you think the Earth is flat because you don’t trust the mainstream scientific community, that means you do trust someone far less credible than the mainstream scientific community.

Real skepticism is difficult. It requires concerted effort and investigation, and typically takes years. To really seriously challenge the expert consensus in a field, you need to become an expert in that field. Ideally, you should get a graduate degree in that field and actually start publishing your heterodox views. Failing that, you should at least be spending hundreds or thousands of hours doing independent research. If you are unwilling or unable to do that, you are not qualified to assess the validity of the expert consensus.

This does not mean the expert consensus is always right—remarkably often, it isn’t. But it means you aren’t allowed to say it’s wrong, because you don’t know enough to assess that.

This is not elitism. This is not an argument from authority. This is a basic respect for the effort and knowledge that experts spend their lives acquiring.

People don’t like being told that they are not as smart as other people—even though, with any variation at all, that’s got to be true for a certain proportion of people. But I’m not even saying experts are smarter than you. I’m saying they know more about their particular field of expertise.

Do you walk up to construction workers on the street and critique how they lay concrete? When you step on an airplane, do you explain to the captain how to read an altimeter? When you hire a plumber, do you insist on using the snake yourself?

Probably not. And why not? Because you know these people have training; they do this for a living. Yeah, well, scientists do this for a living too—and our training is much longer. To be a plumber, you need a high school diploma and an apprenticeship that usually lasts about four years. To be a scientist, you need a PhD, which means four years of college plus an additional five or six years of graduate school.

To be clear, I’m not saying you should listen to experts speaking outside their expertise. Some of the most idiotic, arrogant things ever said by human beings have been said by physicists opining on biology or economists ranting about politics. Even within a field, some people have such narrow expertise that you can’t really trust them even on things that seem related—like macroeconomists with idiotic views on trade, or ecologists who clearly don’t understand evolution.

This is also why one of the great challenges of being a good interdisciplinary scientist is actually obtaining enough expertise in both fields you’re working in; it isn’t literally twice the work (since there is overlap—or you wouldn’t be doing it—and you do specialize in particular interdisciplinary subfields), but it’s definitely more work, and there are definitely a lot of people on each side of the fence who may never take you seriously no matter what you do.

How do you tell who to trust? This is why I keep coming back to the matter of expert consensus. The world is much too complicated for anyone, much less everyone, to understand it all. We must be willing to trust the work of others. The best way we have found to decide which work is trustworthy is by the norms and institutions of the scientific community itself. Since 97% of climatologists say that climate change is caused by humans, they’re probably right. Since 99% of biologists believe humans evolved by natural selection, that’s probably what happened. Since 87% of economists oppose tariffs, tariffs probably aren’t a good idea.

Can we be certain that the consensus is right? No. There is precious little in this universe that we can be certain about. But as in any game of chance, you need to play the best odds, and my money will always be on the scientific consensus.

What is socialism?

PNRJ core principles, public policy , , , , , , , , , , , , , ,

JDN 2457265 EDT 10:47

Last night I was having a political discussion with some friends (as I am wont to do), and it became a little heated, though never uncongenial. A key point of contention was the fact that Bernie Sanders is a socialist, and what exactly that entails.

One of my friends was arguing that this makes him far-left, and thus it is fair when the news media often likes to make a comparison between Sanders on the left and Trump on the right. Donald Trump is actually oddly liberal on some issues, but his attitudes on racial purity, nativism, military unilateralism, and virtually unlimited executive power are literally fascist. Even his “liberal” views are more like the kind of populism that fascists have often used to win support in the past: Don’t you hate being disenfranchised? Give me absolute power and I’ll fix everything for you! Don’t like how our democracy has become corrupt? Don’t worry, I’ll get rid of it! (The democracy, that is.) While he certainly doesn’t align well with the Republican Party platform, I think it’s quite fair to say that Donald Trump is a far-right candidate.

Bernie Sanders, however, is not a far-left candidate. He is a center-left candidate. His views are basically consonant with the Labour Party of the UK and the Social Democratic Party of Germany. He has spoken often about the Scandinavian model (because, well, #Scandinaviaisbetter—Denmark, Sweden, and Norway are some of the happiest places on Earth). When we talk about Bernie Sanders we aren’t talking about following Cuba and the Soviet Union; we’re talking about following Norway and Sweden. As Jon Stewart put it, he isn’t a “crazy-pants cuckoo bird” as some would have you think.

But he’s a socialist, right? Well… sort of—we have to be very clear what that means.

The word “socialism” has been used to mean many things; it has been a cover for genocidal fascism (“National Socialism”) and tyrannical Communism (“Union of Soviet Socialist Republics”). It has become a pejorative thrown at Social Security, Medicare, banking regulations—basically any policy left of Milton Friedman. So apparently it means something between Medicare and the Holocaust.

Social democracy is often classified as a form of socialism—but one can actually make a pretty compelling case that social democracy is not socialism, but in fact a form of capitalism.

If we want a simple, consistent definition of “socialism”, I think I would put it thus: Socialism is a system in which the majority of economic activity is directly controlled by the government. Most, if not all, industries are nationalized; production and distribution are handled by centrally-planned quotas instead of market supply and demand. Under this definition, the USSR, Venezuela, Cuba, and (at least until recently) China are socialist—and under this definition, socialism is a very bad idea. The best-case scenario is inefficiency; the worst-case scenario is mass murder.

Social democracy, the position that Bernie Sanders espouses (and I basically agree wit), is as follows: Social democracy is a system in which markets are taxed and regulated by a democratically-elected government to ensure that they promote general welfare, public goods are provided by the government, and transfer programs are used to reduce poverty and inequality.

Let’s also try to define “capitalism”: Capitalism is a system in which the majority of economic activity is handled by private sector markets.

Under the Scandinavian model, the majority of economic activity is handled by private sector markets, which are in turn regulated and taxed to promote the general welfare—that is, at least on these definitions, Scandinavia is both capitalist and social democratic.

In fact, so is the United States; while our taxes are lower and our regulations weaker, we still have substantial taxes and regulations. We do have transfer programs like WIC, SNAP, and Social Security that attempt to redistribute wealth and reduce poverty.

We could define “socialism” more broadly to mean any government intervention in the economy, in which case Bernie Sander is a socialist and so is… almost everyone else, including most economists.

The majority of the most eminent American economists are in favor of social democracy. I don’t intend this as an argument from authority, but rather to give a sense of the scientific consensus. The consensus in economics is by no means as strong as that in biology or physics (or climatology, ahem), but there is still broad agreement on many issues.

In a survey of 264 members of the American Economics Association [pdf link], 77% opposed government ownership of enterprise (14% mixed feelings, 8% favor) but 71% favored redistribution of wealth in some form (7% mixed feelings, 20% opposed). That’s social democracy is a nutshell. 67% favored public schools (14% mixed feelings, 17% opposed); 75% favored Keynesian monetary policy (12% mixed feelings, 12% opposed); 51% favored Keynesian fiscal policy (19% mixed feelings, 30% opposed). 58% opposed tighter immigration restrictions (16% mixed feelings, 25% opposed). 79% support anti-discrimination laws. 68% favor gun control.

The major departure from left-wing views that the majority of economists make is a near-universal opposition to protectionism, with 86.8% opposed, 7.6% with mixed feelings, and only 5.3% in favor. It seems I am not the only economist to cringe when politicians say they want to “stop sending jobs overseas”, which they do left and right. This view is quite popular; but the evidence says that it is wrong. Protectionism is not the answer; you make your trading partners poorer, they retaliate with their own protections, and you both end up worse off. We need open trade. I’ll save the details on why open trade is so important for a later post.

One issue that economists are very divided on right now is minimum wage; 47.3% favor minimum wage, 38.3% oppose it, and 14.4% have mixed feelings. This division likely reflects the ambiguity of empirical results on the employment effect of minimum wage, which have a wide margin of error but effect sizes that cluster around zero. Economists are also somewhat divided on military aid, with 36.8% in favor, 33% opposed, and 29.9% with mixed feelings. This I attribute more to the fact that military aid, like most military action, can be justified in principle but is typically unjustified in practice. And indeed perhaps “mixed feelings” is the most reasonable view to have on war and its instruments.

Since Bernie Sanders strongly supports raising minimum wage and some of his statements verge on protectionism, I do have to place him to the left of the economic consensus. A lot of economists would probably disagree on the particulars of his tax plans and such. But his core policies are entirely in line with that consensus, and being a social democrat is absolutely part of that. Compare this to the Republicans, who keep trying to out-crazy each other (apparently Scott Walker thinks we should not only build a wall against Mexico, but also against Canada?) and want policies that were abandoned decades ago by mainstream economists (like the gold standard, or a balanced-budget amendment), or simply would never be taken seriously by mainstream economists at all (the aforementioned border wall, eliminating all environmental regulation, or ending all transfer payments and social welfare programs). Even the things they supposedly agree on I’m not sure they do; when economists say they want “deregulation” Republicans seem to think that means “no rules at all” when in fact it’s supposed to mean “simple, transparent rules that can be tightly and fairly enforced”. (I think we need a new term for it, though there is a slogan I like: “Deregulate with a scalpel, not a chainsaw.”) Obama has done a very good job of deregulating in the sense that economists intend, and I think in general most economists view him positively as a leader who made the best of a bad situation.

In any case, the broad consensus of American economists (and I think most economists around the world) is that some form of capitalist social democracy is the best system we have so far. There is dispute about particular policies—how much should the tax rates be, should we tax income, consumption, real estate, capital, etc.; how large should the transfers be; what regulations should be added or removed—but the basic concept of a market economy with a government that taxes, transfers, and regulates is not in serious dispute.

Indeed, social democracy is the economic system of the free world.

Even using the conservative Heritage Foundation’s data, the correlation between tax burden and economic freedom—that’s economic freedom—is small but positive. (I’m excluding missing data, as well as Timor-Leste because it has a “tax burden” larger than its GDP due to weird accounting of its tourism-based economy, and North Korea because they lie to us and they theoretically have “zero taxes” but that’s clearly not true; the Heritage Foundation reports them as 100% taxes, but that’s also clearly not true either.) See for yourself:

Graph: Heritage Foundation Economic Freedom Index and tax burden

Why is this? Do taxes automatically make you more free? No, they make you less free, because you have to pay for things you didn’t choose to buy (which I admit and the Heritage Foundation includes in their index). But taxes are how you manage a free economy. You need to control monetary policy somehow, which means adding and removing money. The way that social democracies do this is by spending on public goods and transfers to add money, and taxing income, consumption, or assets to remove money. Even if you tie your money to the gold standard, you still need to pay for public goods like military and police; and with a fixed money supply that means spending must be matched by taxes.

There are other ways to do this. You could be like Zimbabwe and print as much money as you feel like. You could be like Venezuela, and have government-owned industries form the majority of your economy. Or, actually, you could not do it; you could fail to manage your country’s economy and leave it wallowing in poverty, like Ghana. All of the countries I just listed have lower tax burdens than the United States.

Within the framework of social democracy, there are higher taxes so that spending and transfers can be higher, which means that more public goods are provided and poverty is lower, which means that real equality of opportunity and thus, real economic freedom, are higher. It’s not that raising taxes automatically makes people more free; rather, the kind of policies that make people more free tend to be the kind of social-democratic policies that involve relatively high taxes.

Worldwide, US is 12th in terms of economic freedom and 62nd in terms of tax burden. We currently stand at 24%. That’s quite low for a First World country, but still relatively high by world standards. The highest tax burden is in Eritrea at 50%; the lowest is in Kuwait at an astonishing 0.7% (I don’t even know how that’s possible). Neither is a really wonderful place to live (though Kuwait is better).

Indeed, if you restrict the sample to North America and Europe, the correlation basically disappears; all the countries are fairly free, all the taxes are fairly high, and within that the two aren’t very much related. (It’s been a long time since I’ve seen a trendline that flat, actually!)

Graph: Heritage Foundation Economic Freedom Index and tax burden, Europe and North America

Switzerland, Canada, and Denmark all have higher economic freedom scores than the United States, as well as higher tax burdens; but on the other hand, Greece, Spain, and Austria have higher tax burdens but lower freedom scores. All of them are variations on social democracy.

Is that socialism? I’m really not sure. Why does it matter, really?