Scott Sumner  

Sympathy for the devil?

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In my view, rent seeking is the great evil of the modern world, largely explaining the poverty of countries like Iraq and India. The main problem in the world today is people who put the self-interest of their narrow special interest group ahead of the well-being of society. I also believe that a relative lack of rent-seeking largely explains the success of the Nordic countries.

I thought about this when reading a recent post by David Henderson:

Kay does make a good point and it's one that the late public choice economist Gordon Tullock made in a famous article titled "The Transitional Gains Trap." Tullock pointed out that although many economists can agree that it's inefficient (and, I would add, wrong) to give monopolies or subsidies to various industries, after those monopolies and subsidies have been around for a while, many of the "gainers" are people who paid for their gains.
This is a good observation. On the other hand I don't think Tullock's point has any normative policy implications. Even if some rent seekers paid for their current position, and thus are not earning excess profits, they are still engaged in an evil enterprise. When Amazon drives Borders out of business, we don't shed any tears for Borders, even though they had previously earned their success fairly. If Uber drives the traditional taxicabs out of business, we certainly shouldn't shed any tears for the medallion owners, as they did not fairly gain their current position, they earned it by getting the police to arrest competitors.

(Just to be clear, I'm disagreeing with Kay, not Henderson).

This also explains my objection to Steve Waldman's critique of zoning reform:

Existing homeowners bought into particular neighborhoods in large part because of their "character", which includes nice-sounding things like walkability or "charm", as well as not-so-nice-sounding things like access to exclusionary education. Newer residents have bought and paid for those amenities, while older residents may feel they have earned them by helping to create them. Economists describe houses as a form of capital that provides a stream of services, rather than a cash flow, to owner-occupants. We should also describe the arrangement of neighborhoods as a form of capital that provides services people value. Property owners have disproportionate use of, and, informally, enjoy substantial control rights over this "neighborhood capital", and these benefits have been capitalized into residential real-estate prices. (Location, location, location!) "Zoning reform" is an anodyne way to describe an expropriation of those customary rights. It amounts to diminishing residents' ability to preserve or control the evolution of their neighborhoods, in order to challenge the exclusivity on which the value of existing neighborhood amenities may be based.
Money spent on housing is a sunk cost; zoning policy should be forward looking--relentlessly trying to make the world a better place. Homeowners should buy property with their eyes wide open, with the knowledge that zoning policy will evolve over time in a way that society thinks is optimal.

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COMMENTS (21 to date)
Emily writes:

You may not be personally sympathetic to homeowners who buy into a neighborhood under certain expectations regarding the services it will provide (and who are willing to defend what they perceive as their property rights.) But if you want them to keep building appealing public neighborhoods and public schools (as opposed to, say, decamping for gated communities and sending their kids to private school), it may still be a good idea to preserve stability in zoning policy. (Exactly how much is certainly open to debate, but I don't think what attitude you feel they ought to have should play a role.)

ThaomasH writes:

I largely agree, but at the margin:

We might want to compensate some rent-holders if they are are relatively disadvantaged. [I have considerable sympathy for the Ethiopian taxi driver; I just don't what that sympathy to slow Uber. If we compensate, it should be by taxing "everybody" not Uber passengers]

I'd make the same argument about removing minimum wages; I'd want to compensate minimum wage earners with a higher EITC or wage subsidy.

We might have to compensate some rent-holders to be able politically to move toward a Pareto optimum. In general this means that reforms very seldom achieve a Pareto optimum. Was replacing farm price supports with a phony subsidized price "insurance" the improvement it was supposed to be?

Aaron J writes:

Completely agree about zoning policy.

I think you overplay the importance of rent seeking in countries like India and Iraq. And I think to a certain extent rent seeking is a symptom of those country's problems, not a cause.

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Jim writes:

The average IQ's of the Indian and Iraqi populations are 83 and 89 respectively. So their relatively low economic performance is no great surprise quite aside from the effect of rent-seeking.

Njnnja writes:

Although I am sympathetic to this view, there appear to be times when we want the government to recognize and protect "imaginary property rights," such as "character of a neighborhood" or "future rent stream from a taxi medallion." We have patents, copyrights, and trademarks to cover a wide array of this sort of thing, and while one can argue that a 100+ year copyright is too long, few people argue that a writer should have no control over their creation, both on moral and efficiency issues. So it is really just a matter of calibrating the amount of those protections reasonably well, so that the people who turned vacant wilderness into a community can control (or even monetize) their interest in the externalities that they have created, without completely turning into a NIMBY nation.

Also, there is a practical argument for allowing governments to enshrine these "imaginary property rights." People, rightly or wrongly, *feel* like they are entitled to these sorts of things. And if the government doesn't do something to protect those "rights," it is likely that people will create their own extrajudicial "justice" system for actors who don't obey the unwritten rules of the community. For example, before laws that forced employers to recognize certain unions, the way that a union got employers to recognize them was through violence. And employers visited violence in return. Hypothetically, if someone wants to build a giant hotel in someplace that wants to be single family residential, it is not outside the realm of possibility for people to commit crimes such as theft, assault, or even arson to stop the project.

So yes rent seeking is evil. Mankind has a lot of evil in it, and maybe government supported rent seeking is the lesser of two evils.

Mark Bahner writes:
If Uber drives the traditional taxicabs out of business, we certainly shouldn't shed any tears for the medallion owners, as they did not fairly gain their current position, they earned it by getting the police to arrest competitors.

I don't "shed tears" for medallion owners, but I think a person who bought a medallion assuming the system would continue per previous history, and finds the situation has suddenly changed, deserves some empathy or even sympathy. In many cases, it was a major investment, probably one of the largest in their lives. It's not like they invented the system...they were just taking the world as it existed, and trying to make a buck.

Scott Sumner writes: The main problem in the world today is people who put the self-interest of their narrow special interest group ahead of the well-being of society.

For contrast I might argue that the main problem in the world today is that some people flatter themselves with belief that they know how to act so as to advance the well-being of society. Adam Smith said something similar, as I take it, when he wrote about the butcher et. al.

Sadly my own choices perjure me in that way. So I would favor a more careful examination starting with the way libertarians understand "coercion". This leads also, I believe, into a question of how much right-of-property should be given to a long-term squatter.

TM writes:

Let's make this really fun and substitute zoning and taxi medallions with slavery and see what conclusions we come to. I'll start:

1. Slaveowners, after accounting for the price paid for slaves, were not the primary beneficiaries of slavery - that goes to the slave traders who were first able to take slaves into bondage.

2. The civil war illustrates the wisdom in the idea that compensation may be the lesser evil practically and politically, however morally contemptuous it may be, if the total cost of the war, to all parties involved, greatly exceeded the value of slave stock.

Kevin Erdmann writes:

Interesting point. It is interesting how we seem to have these arbitrarily different reactions to progress's losers, depending on whether that progress was political, technological, from trade, or moral/social.

I think this is an area where looking at things with a labor vs. capital framework instead of an old capital vs. new capital framework is problematic. Progressive attempts at raising labor income above the market level tend toward the creation of economic rents, with the intention of politically moving those rents to labor. Without rents, pushing for wages above the market clearing level is not likely to be sustainable.

So, progressive policies seem to be very rent friendly. Some people support the taxis because Uber has lower wages, for instance. Seems pro-labor, but it has to be pro-rents to get there. Housing is similar, and the policy preferences there become so peculiar. Locals take a strong moral position that they have a right to below-market rents, because, basically, they were there first, and that gives them a claim on the local "flavor", which not only includes low rent but also obstacles to new building. This is such an affront to reality, that they end up in a constant struggle of economic and political stress to keep the levees from bursting from the flood of people who want in. This is happening, ironically, in cities that have historically served as way stations for immigrants, and were hardly symbols of stability.

If only they could recognize that the important distinction is old capital vs. new capital, and that the important winner from the externalities of that battle is the consumer, what a difference it would make. The odd thing is that old capital loses big under policies that build on that distinction. You would think this would please progressives who, above all, seem bothered by the power of old capital. But apparently being pro-labor is more rhetorically powerful than being pro-consumer.

Kevin Erdmann writes:

TM:

Lincoln, and many others around the world, apparently liked your idea.

Aaron J writes:

Jim says:

The average IQ's of the Indian and Iraqi populations are 83 and 89 respectively. So their relatively low economic performance is no great surprise quite aside from the effect of rent-seeking.

Even if you think IQ matters, its not destiny. Indian Americans have the highest income of any ethnicity in the US. Selection bias, perhaps. But the squalid conditions of many of the Indians poor and the miserable education hundreds of millions of Indians receive is undoubtedly affecting their IQ.

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Scott Sumner writes:

Emily, I agree that frequent changes would be disruptive, and should be avoided. But I also don't want to see things frozen in stone, as they are in the area I live (Boston suburbs.)

Thomas, How many Ethiopian taxi drivers own $1,000,000 medallions? And if they do, they are rich enough not to need compensation. Yes, there may be cases where compensation makes policy change easier, but I'd try to avoid it wherever possible.

Aaron, I suppose wherever you find causes, there are always deeper causes that makes the initial hypothesis seems like symptoms.

Jim, Of course to some extent those low IQs reflect the poverty of the countries (no one knows exactly how much, according to Garett Jones.) I suspect their IQs would rise considerably with better polices.

Njnnja, Zoning reforms generally raise property values, so I don't buy that argument. Again, any zoning reform that makes the world a better place should be embraced, even if it hurts some existing property owners.

I don't buy the second argument at all, it's not an issue where I live. We are about to build an apartment project that is opposed by neighbors, and it won't be burned down.

If you are looking at intangible arguments, I'd add that there are many that cut the other way. For instance, because lots of market reforms are seen as hurting people at the bottom, it's especially important for free market advocates to embrace those reforms that are seen as hurting GOP voters. Otherwise you end up looking like that right wing farmer that wants price supports for his crops, but no "welfare".

Mark, I strongly disagree. If you are going to profit from a corrupt system, I shed no tears if reform to end the corruption takes away your investment. People should buy that sort of thing with their eyes wide open. Suppose I bought a sugar farm, knowing its value was propped up by corrupt trade policies. And suppose the trade barriers went away, and I started whining in my blog that my sugar beet farm had lost most of its value. Would you feel sympathy for me? Or would you point out that it was a bad policy to begin with?

Richard, You said:

"For contrast I might argue that the main problem in the world today is that some people flatter themselves with belief that they know how to act so as to advance the well-being of society."

Does that include Adam Smith? Did he think that his preferred policies would be beneficial to society?

Kevin, Good points.

jseliger writes:

Homeowners should buy property with their eyes wide open, with the knowledge that zoning policy will evolve over time in a way that society thinks is optimal.

Which is true. They should. I think Waldman's point, especially from a political perspective, is that they don't. That's the problem. The problem is between "should" and "is."

James writes:

"Homeowners should buy property with their eyes wide open, with the knowledge that zoning policy will evolve over time in a way that society thinks is optimal."

This kind of thinking is correct but all too rare. Every transaction is executed under circumstances that might change and the parties to those transaction should know this.

I see a similar example of this kind of thinking in macroeconomics when people speak of contracts with fixed nominal payment terms as a sort of market failure. The parties to those contracts know that mortgage payments and monthly paychecks, while fixed in nominal terms, vary in real terms. There are some economists who regard nominal shocks as something that governments ought to correct via monetary policy. But Scott's view is the right one here. People should enter into contracts with the knowledge that what they are exchanging may increase or decrease in value.

Rajat writes:

I think Emily has a point. There are consequences to making initial expectations disposable and a person/rent-seeker's own attitude should be irrelevant to how far society goes down that path. There is a big gap between zoning policy being 'frozen in stone' and 'optimal'. Hence, it's not an easy problem.

I don't know much about Boston zoning rules, but in Melbourne, Australia, most house blocks within 5 km of downtown are in the range of 160-400 sqm (about 190-500 sq yards). It's usually not too hard to add a second storey and there are plenty of apartment blocks going up on main roads. Yet dwelling prices are still high. What's Boston like?

Mark Bahner writes:
Suppose I bought a sugar farm, knowing its value was propped up by corrupt trade policies. And suppose the trade barriers went away, and I started whining in my blog that my sugar beet farm had lost most of its value. Would you feel sympathy for me?

You're supposing that you knew that the value was propped up by corrupt trade practices. I don't think most people can see what the value of things would be absent corrupt practices. I think most medallion owners just see, "A medallion costs X...if I drive umpteen bazillion miles a year, I can make a living."

You also wrote, "Homeowners should buy property with their eyes wide open, with the knowledge that zoning policy will evolve over time in a way that society thinks is optimal."

I think that's also putting a lot of burden on people to try to figure out what "true" values are.

I empathize and even sympathize with people who end up being burned by changes in market manipulations (like zoning)...because I know it could also happen to me.

Scott, I don't know Adam Smith's Wealth of Nations well enough to comment upon Smith's preferred policies. But, since I understand policies to be acts by states, I am suspicious of all policies, perhaps especially when people who enact the policies feel benevolence in their hearts.

ThomasH writes:

"Progressive attempts at raising labor income above the market level tend toward the creation of economic rents, with the intention of politically moving those rents to labor. Without rents, pushing for wages above the market clearing level is not likely to be sustainable. So, progressive policies seem to be very rent friendly."

I think this is a keen observation.

Perhaps this rent friendliness is a holdover from a time when we did not have better ways to transfer income to low-income people, facilitated by inadequate economic analysis of the distortions that create the rents. Now that we do, Libertarians can educate and then join with Progressives to substitute transparent income transfers, such as a higher EITC, for rent-creating distortions, such as minimum wages. Both blades of the scissors are necessary; just pointing out to Progressives that the rent-creating distortion in "inefficient" will be insufficient if the objective sought with the distortion is not recognized.

Scott Sumner writes:

jseliger, Yes, and how do you fix the problem? I suggest that you do optimal policy, and people eventually figure out that you are doing policy changes, when appropriate.

James, Good comment. On this point:

"There are some economists who regard nominal shocks as something that governments ought to correct via monetary policy."

Let's me emphasize that I'm not in that camp. I want the government to refrain from causing nominal shocks. I don't want them to put out fires, I want them to refrain from causing fires.

Rajat, An optimal policy already accounts for the costs of policy changes. As far as Boston is concerned, there are very strict rules on development, which largely explain why Boston is far more expensive than places like Houston. I'm told by people in Australia that the strict zoning rules there explain why property is much more expensive than in Germany.

Tom West writes:

With respect to housing, wouldn't knowing the true volatility in the absence of zoning laws strongly reduce the investment (both monetarily and emotionally) that people would put into their houses.

It's quite possibly selection bias, but my observation is that neighbourhoods where houses are just places to reside seem to have many more problems than neighbourhoods where the residents are emotionally (and illogically) invested in their houses.

I do think that "be it ever so modest, there's no place like home" is an idiom derived from humanity's experience.

Jose Romeu Robazzi writes:

@ Kevin Erdmann
Brilliant comment. Supposedly "progressive" policies end up creating rent seeking behavior, and inadvertently indirectly hurting consumers (i.e. labor) and helping old capital. True progressive ideas should always support consumers and new capital. Apparently, this is just another one of the non-intuitive characteristcs of the economy that a lot of people don't seem to understand.

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