Arnold Kling  

Economic Elitism Thought Experiment

Numbers to Ponder... Cowenian Advice: The Best and ...

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.

(Note: this is not the same audio as the one where Tyler gets sappy about his George Mason colleagues. Bryan commented on that one.)

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.

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CATEGORIES: Economics and Culture

COMMENTS (5 to date)
Dan writes:
Note: this is not the same audio as the one where Tyler gets sappy about his George Mason colleagues.

Awww, Arnold is jealous that he doesn't get enough attention in sappy.mp3!

TGGP writes:

What? No reference to Caplan's writing on the "idea trap"?

Eric Crampton writes:

Listening to that bit of the podcast reminded me of The Medium Lobster from over at Fafblog (I miss you, Fafblog). The Medium Lobster is a higher being with superior knowledge from beyond time and space who would point out how policies that look silly on the surface, like goading potential terrorists into becoming active terrorists, really reflect a deeper strategy that allows us to fight the terrorists now rather than waiting for them to maybe become terrorists later, when they might have robots and other, more terrifying technologies. Tyler similarly reminds us that policies that are completely economically irrational really serve to bring us together as a nation. Indeed, we need go further: whenever we face any kind of national crisis, that's the time to implement even sillier policies, because the more irrational the policy, the greater the nation-building goodness that comes therefrom. Caplan's idea trap isn't a curse; rather, it's a rational and optimal mechanism to save the country when other forces work to pull it apart. Caplan observes that in times of crisis countries adopt economically irrational policies, complains that these make the economy worse, but conveniently ignores the critically-important parades and flag waving and spontaneous celebrations that the policies also bring about. When oh when will economists stop conspiring against the farm subsidies, the rent controls, the pork-barrel projects, and the regulations that bind us together as a nation? If only sedition laws had some teeth. In the meantime, Homeland Security ought keep a better eye on the economists.

Arnold, you're looking to the surface when there are deeper truths to discover...look to the Medium Lobster...

Matt writes:

Question one, why the backlash? Freer labor movement may imply the draining of U.S. skilled workers to Mexico, but I doubt that is why the economist fears a backlash. He fears a backlash for the very obvious reason that labor would all drain up here.

The economist, evidently, seeks the policy changes that cause the most backlash in the voter, and this quality makes him unqualified for anything except advice.

Pedro Bento writes:

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