Scott Sumner  

Efficiency is not just a good idea, it's the only ethical policy

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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.

Irwin continues:

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.


Comments and Sharing






COMMENTS (27 to date)
foosion writes:

I thought the argument for trade was that, while it may produce winners and losers, it increases total GDP, such that the winners could compensate the losers and everyone is better off.

And that the argument against trade was that the winners don't compensate the losers, who end up worse off and that there could be a whole lot of losers. Also, that a minor price decrease for many people would not balance the loss of jobs for some, as the loss of a job has a much larger effect due to declining marginal utility or the like.

Aren't these the major narratives?

Emerson writes:

While reading this post I had a flashback to 1975.

No, not that kind of flashback.

In 1975, Arthur Okun wrote his book "Equality and Efficency- The Big Tradeoff".

He makes the case that economic equality can only be achieved by sacrificing economic efficiency. The net result being that everyone would be more equal, but much poorer.

An example is the elimination of free trade. Everyone would be more equal...but poorer.

Unfortunately, the case that he failed to make was that there is also a Tradeoff between Equality and Liberty.

MikeP writes:

(That's not to say that ignorance isn't also part of the story, it is, but it's not a necessary assumption.)

I think you give far too little credence to ignorance.

These people honestly believe that they are supporting the greater good for the greatest number when they promulgate what looks like complete illiteracy or downright evil from an economic perspective.

I'd wager that fewer than 5% of people in general, fewer than 10% of people in state legislatures, and fewer than 15% in the federal legislature have any concept whatsoever of what "economic efficiency" is. To them economics isn't a science with theories and findings: it is merely a language used to promote political and policy positions. One needs to master the language enough to push his positions, and that is the extent of economic understanding they think anyone requires.

So one takes a position on pure emotion, concern signaling, or political posturing, and then one brings to bear the economic language required to support it. Of course a column that highlights a number of these positions will look ridiculous and self-contradictory from any objective perspective: the economic language required to support the plethora of different postures necessarily varies wildly because they diverge so wildly from the nexus of economic efficiency.

Matthew Moore writes:

This most important point is that, even if (lots of) individuals may lose out from a specific instance of efficiency-enhancement (like abolishing rent controls), it remains the case that 99.9% of people benefit on aggregate from these measures in total.

So an individual may want rent control. But if that rent control is packaged with massive protectionist tariffs, producer subsidies, labour regulation, high minimum wages etc. etc. that individual will be worse off.

So, the options are: we always aim for efficiency (everyone wins), we never aim for efficiency (no one wins), or we aim for efficiency in specific instances (the politically powerful win).

jc writes:

Sometimes there's a seed of truth buried within pseudo-scientific (or even full-baloney-based) belief systems.

I wonder if there's a seriously unrefined (yet present) seed within the Socionomics/Social Mood/Elliot Wave stuff that might help reconcile why we see angry populist sentiment across such a wide range of environments (with local explanations sounding perfectly plausible until you quickly look outward and see that they don't generalize).

Krugman, for instance, has mentioned that one reason he became an economist was Asimov's writings on psycho-history, where the law of large numbers was successfully applied to the intersection of aggregate social responses/moods and historical actions (including policy changes).

For whatever reason (perhaps it drove us to explore and find new resources, e.g., a new field of berries or a new hunting ground), we do seem to have an evolved preference for changing cultural norms. Many norms are enduring, but some are constantly changing (think pop culture, where afros on white guys and bell bottoms were the best thing in the world in the 70s but now aren't).

Can social moods, or gestalts, change in any sort of predictable way, even in a very general sense? We may not be able to predict, for example, which specific hairstyle will be popular tomorrow, but we can predict that it will *not* be the one that's popular today. Maybe aggregated social mood is similar? Maybe we simply don't stay "happy" forever. Maybe that state is naturally followed by a neutral state, and then a "less happy" state, and so forth. External shocks can temporarily jolt us out of a given state. But sometimes, maybe it's the state that drives the shocks, e.g., maybe angry people are more likely to want war (trade wars or maybe even literal ones).

I've got little doubt that, right now, this is all just hokey-pokey conjecture that's not worth much more than, say, astrology. But I wonder if there is a seed there that may someday blossom, maybe when we finally have powerful enough computing techniques to forecast far more complicated and dynamic systems than we're capable of analyzing today.

Silas Barta writes:
I do understand why environmentalists might oppose tall new building in their neighborhoods

Wait, what? An environmentalist should love urban densification, since it's less ecologically harmful per unit of consumption -- i.e. less transportation costs, returns to scale in providing goods, etc.

(Interestingly, there was a recent movement to have pro-urban development people flood the Sierra Club based on this logic, since the local SC was, contrary to the national SC, opposing such efforts.)

To be sure, a person-who's-also-environmentalist can understandably oppose *specific* building plans based on disliking what it does to their neighborhood, and feeling that it outweighs the global environmental benefits, but mentioning that this person is an environmentalist is distracting and orthogonal to their opposition.

Lorenzo from Oz writes:

Wouldn't read too much into One Nation getting a Senate seat in Australia, especially scoring 4% of the national vote. There has been rising willingness to vote for other than the major Parties (ALP or Coalition): a willingness that floats around across potential vehicles. This cycle, Pauline Hanson (who has some celebrity status) scored as former try-out vehicles (notably the Palmer United Party) burnt out.

Australian politics has a tendency to revert to "state as vast utility": yet we still have government spending down the lower end of the OECD countries (lower than the US).

Lorenzo from Oz writes:

Also remembering that Australia's preferential voting system actually makes it easier to register "protest" vote, because you can still express a preference for one major Party over another without "wasting" your vote.

I suspect that concern over prospects, sense of not being listened to, disorientation from change -- these factors have power in themselves, they just get more power the greater the economic stress.

Weir writes:

Let's split this up, because if rich people don't want poor people moving in next door, that's not irrational.

What's irrational is if environmentalists are fighting tall buildings. Cities are good for the environment, compared to the alternatives. Nuclear power plants are good for the environment, compared to the alternatives. New York's the greatest if you get someone to pay the rent.

What's irrational is driving around in an electric car that needs a coal-burning power plant to keep it moving. An electric car that uses rare earth minerals, driven by an "environmentalist" living out in the countryside: That's irrational. But there's nothing irrational about rich people shutting out poor people who want to move down their street.

There's nothing irrational about the New York Times shutting out their competition by trying to overturn Citizens United. There's nothing irrational about a Canadian actor, for example, a luvvie and a bien pensant, an impeccably anti-racist, cosmopolitan citizen of the world, shutting out foreign actors from local productions. Or a novelist who wants readers to pay higher prices for his books by making bookstores stock the locally manufactured edition instead of being allowed to import a cheaper version from overseas.

So populists are everywhere. It just depends on whose ox is being gored. Scottish nationalists don't want British nationalists breaking free from the diktats of the European Commission. People who just celebrated America's independence from Britain can't imagine any arguments supporting Britain's independence from Jean-Claude Juncker. They can't conceive of how other people might be so retrograde.

John B. writes:

I think Bryan Caplan might have something to say about this...

Ever read the Myth of the Rational Voter?

Nathan writes:

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engineer writes:

The trade deficit has been an issue nearly my entire adult life in every election. I don't see a big shift in public opinion. Obama ran on renegotiating NAFTA 8 years ago. It is all talk. TPP has aspects that even free traders are a little apprehensive about.

Technology is quickly taking the labor rate differential out of manufactured goods. The future trade deficits will be more about professional services. The fact that the US employs a lot fewer manufacturing jobs means that this transition will be a lot easier than in some countries.

The Brits have always felt a little special and not wanting to be just another European country. What is wrong with independence from Europe. Isn't that what the US fought for 240 years ago?

The US has nearly the highest percentage of foreign born citizens in it's history, so a reaction would be expected. The last time it happened we had the "know nothing party". History repeats itself. Take a deep breath.

Mike Freimuth writes:

Scott,

I'm so glad you finally let go of the misguided dogma of utilitarianism. Also, Kudos to foosion for pointing out (in the very first reply no less!) that if, for some reason, you still were adhering to that as the ultimate ethical code, you could easily overcome all of the arguments made here.

[For the record, I'm being snarky but this is a great article and I agree with every word of it wholeheartedly!]

Mike Freimuth writes:

Emerson,

BTW, you don't need to flashback to the seventies to experience that argument, my principles book still makes it just like that.

Josiah writes:

I followed the link but I didn't see anything about the rise of right-wing populism in Australia. The parties there seem to be run by squishy centrists.

Benjamin Cole writes:

Well, nice blogging, but…

Tyler Cowen does occasionally address that cities with amenities are becoming more successful…

David Henderson, for example, lives in Pacific Grove, a town heavy with socialist amenities (extensive property zoning, parks, libraries, etc), and not Houston. I assume he could move to Houston if he wants.

In fact, many people praising free enterprise-libertarianism choose to live in single-family detached neighborhoods, utterly devoid by law of any commercial activity, be it retail, office, agricultural, push-cart vending etc. I never hear of these libertarians organizing local drives to wipe out single-family detached zoning.

So do socialist amenities have a role in the success of a city?

Should Pennsylvania Station go under the bulldozer?

Or should we go to the most efficient model?

And what of brothels with plate-glass windows at the airport?

Your neighbor changes his house into an opium-gambling den.

These are issues that are best not discussed.

Scott Sumner writes:

foosion, You said:

"And that the argument against trade was that the winners don't compensate the losers, who end up worse off and that there could be a whole lot of losers. Also, that a minor price decrease for many people would not balance the loss of jobs for some, as the loss of a job has a much larger effect due to declining marginal utility or the like."

I think the more likely result is a tiny number of losers, and a large number of winners, similar to the case for technological progress. Net effect is positive.

MikeP, I agree that there is a lot of ignorance out there, but it's worth noting that polls show that most Americans support trade.

Matthew, That's exactly my view.

jc, That might be right, but of course those changes are hard to forecast.

Silas, Good point, I actually meant someone who thinks of himself as an environmentalist, not an actual environmentalist. I've talked to these people, and thus I know they are out there.

Lorenzo, Thanks for that info. I wondered whether the guy I quoted had overreacted a bit. That's common when the party one supports turns in a disappointing performance.

Weir, You said:

"Let's split this up, because if rich people don't want poor people moving in next door, that's not irrational."

I did not say I thought their views were irrational, I said I opposed their views.

James, Yes, I've read it. I still think that democracy is better than all other alternative systems.

Mike, Sorry to disappoint you, but I'm a big supporter of utilitarianism.

Josiah, You said:

"I followed the link but I didn't see anything about the rise of right-wing populism in Australia."

Here's what the link said:

"Far from being scarred by minority government as a result of 2010, voters are actively courting populists and fringe parties, seemingly to tear up the orthodoxy; particularly economic orthodoxy.
Trump and Brexit are indications of a new alignment forming on the right – socially conservative but leaning more towards economically nationalism than smaller government, with a healthy protest vote chucked in. Our election suggests this movement has significant backing here."

You may disagree with that view, but I can't imagine how you could say you "didn't see anything about . . ." Isn't that quote about exactly that?

Nathan W writes:

Efficiency is often considered in terms of one or two simplistic objectives. It's hard to argue with "efficiency", but before discussing "efficiency" we should discuss objectives.

Among other absurd outcomes, excessive obsession with "efficiency" could lead us to prefer a quasi-cyborg AI-controlled ultra-"efficient" hive-mind group-thinking global culture.

I know you're talking more about trade, and in economics the logic is relatively solid for a strong majority of situations that we'd normally expect to encounter. However that somewhat recent piece on AI and "maximizing paperclip production" gets me thinking about how the field of economics may tend to be insufficiently interested in debating the notion of "efficiency", more in the sense of how it relates to objective functions of "efficiently" achieving what we actually want (in a simultaneously collective and non-collective sense) as opposed to counting the inputs and outputs of various goods and services and declaring efficiency to have improved if more widgets can be had with lower energy input.

Some would think that the utilitarian framework would have to be abandoned to enter into such a debate of how "efficiency" and "social objective functions" are related. I think is not at all necessary. As much as I believe that markets are generally quite good at efficiency in production of market goods and services, many of the things that really matter to us are not easily traded.

So I have a BMW, iPhone and 3000 sq ft house. But cannot walk out the front door without being monitored by the state? That does not serve my objective function very well at all. It is not efficient.

Weir writes:

This is what Neil Irwin said:

"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."

Whatever the word "irrational" means to Neil Irwin, Econ 101 does actually have an explanation for people trying to stop new people moving in somewhere.

Mike Freimuth writes:

Nathan W,

"Some would think that the utilitarian framework would have to be abandoned to enter into such a debate of how "efficiency" and "social objective functions" are related. I think is not at all necessary. As much as I believe that markets are generally quite good at efficiency in production of market goods and services, many of the things that really matter to us are not easily tra.ded."

It's not so much that you have to abandon it but they the two things (efficiency and social objective functions) are separate things. A "social objective function" could be anything. (It might even be efficiency.) It's far from being clearly defined. Efficiency, in an economic sense IS clearly defined and it doesn't mean more widgets from more energy input. It also doesn't necessarily align with any notion of utilitarianism (although it probably does in most of the instances Scott mentions here which is why he can be so dismissive of this detail.)

guthrie writes:

FWIW, I did catch the NIMBY argument in the highlighted sentence, but I didn't necessarily read it as 'NIMBY'. I have a friend here in LA who is a land use and management consultant who adopted a different acronym from a former LA council member: IGMSU ('I Got Mine, Screw U').

He used this phrase when talking about how passionately residents of Santa Monica resist *any* new construction, no matter how strong the case was for direct or marginal benefits to those very residents.

For example, he said this attitude (as well as NIMBY) was largely responsible for killing housing construction near a new light-rail stop, ensuring that 'employees of Santa Monica businesses will continue to commute long distances and increase traffic'. He also is of the opinion that Santa Monica won't likely see any real change to this attitude 'until it gets a generational turnover'.

I think it's a more useful term in some cases than NIMBY, which seems rooted more in 'fear' (of the 'unknown', of change, of the 'other', etc.), whereas IGMSU highlights selfishness--as you mentioned--and what I see as the human tendency to institutionalize preferences.

foosion writes:

Scott,

I think the more likely result is a tiny number of losers, and a large number of winners, similar to the case for technological progress.

Numbers of winners and losers would seem an empirical question.

Loss of a job or major hit to income and hurts the affected individual a lot. Somewhat cheaper prices for many are not as noticeable.

BTW, if we're talking about TPP or the like, there's probably a net increase in protectionism - barriers to trade are already low, while increased IP protection is increased protectionism on a large scale.

foosion writes:

I'd add that loss of some jobs, or reduced compensation for some, from trade matters not just for the directly affected employees, but a larger part of the labor market. Simple supply and demand pushes down compensation for others, at least if we are not at full employment.

Mr. Econotarian writes:

US real wages for those employed full time are not stagnating, they are at all-time highs. Real total compensation per hour is also at all-time highs.

However real household income has stagnated. There are probably many forces at work, including reductions in household size, a significant drop in labor force participation, demographic changes, etc. This agrees with the data that a good percentage of poverty households have earners making much more than the minimum wage, but being in poverty due to not working enough hours.

Thomas B writes:

This word, neoliberal - what IS that? Mostly, I see it used in "progressive" contexts, to mean anything other than "progressive" - especially if it involves the use of markets. But in context that's unlikely to be what you mean.

Do you mean "liberal" or "classically liberal"?

If so, why use "neo" in place of "classical"? Progressives use it, I think, because it reminds people of "neo-Nazi" - but why are you using it?

pyroseed13 writes:

"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."

But this is sort of the reason why I think the public is distrusting of economists in general. They pretend they are doing "science," but they are often slipping their own values into their analyses. This is particularly troubling when it comes to issues such as immigration, where I don't think the evidence weighs in favor of the view that more of it is always and everywhere a positive thing.

pyroseed13 writes:

Sorry for the double post, but one more point here: Nowhere is this disconnect between public and economists more clear than on the issue of legal vs. illegal immigration. From the perspective of economists, immigration is immigration. But the public values more than just increases in GDP. They presumably think that by having to go through a process to receive citizenship, you can distinguish between immigrants who are likely to assimilate and those who are unlikely to assimilate. They may wish to preserve a local culture, or are concerned about the voting patterns of newcomers. Again, it becomes a question of values, not just economics.

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