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Archive for June, 2010

A Wall Street Journal article derisively titled “Are You Smarter Than a Fifth Grader?” has been making rounds of the blogosphere lately, with its premise that, based on a 2008 survey of economic knowledge, the left wing would flunk Economics 101. Supposedly, the left fumbles the most basic economic concepts.

Well, I am a Chomsky-reading, bleeding-heart leftist, and an economics major. I’ve never received a grade lower than an A in any economics course. So I feel I’m in a unique position to offer criticism from the left.

Firstly–and this is a criticism I have for economics in general–I disagree with the notion of breaking complex political issues down to simple cost-benefit calculations. Any policy assessment should be considered in the context of our values as a society. For example: it’s true that taxation is distortionary and may create disincentives toward work. For Chicago school economists, this in itself is a crime. However, in a broader social context, our society has chosen to value a more even wealth distribution and greater social services. We have made a trade-off, valuing social equality slightly more than economic efficiency.

So, it upsets me when survey respondents are deemed “unenlightened” for not playing along with the cost-benefit analysis of complex issues presented in a single sentence. The answer format of “strongly agree/agree/unsure/disagree/strongly disagree” is extremely shallow for those that see a more human element in those issues, who would prefer to answer, “Yes, but…” In other words, the bleeding-heart liberals.

Daniel Klein kindly supplies all eight of the questions that were asked in his survey and his idea of what constitutes an “unenlightened” answer; all the better to provide all the “Yes, but…” responses that I, if I had been a participant, would have liked to respond with.

1. Restrictions on housing development make housing less affordable. (unenlightened answer: disagree)

It’s true. If urban areas aren’t allowed to sprawl forever, housing will be more scarce and thus more expensive. This concept is extremely well understood in my hometown of Vancouver, Canada, where height and sprawl limits have made Vancouver the most “severely unaffordable” housing market in Anglophone countries, according to a recent study by the Frontier Centre for Public Policy in Winnipeg.

However, Vancouver is also a darling of international urban design circles for its sustainable and varied infrastructure. It is consistently ranked among the top five most liveable cities in the world, partly for its preservation of green spaces in the city at the expense of housing development. The survey statement is a very loaded question. The answer is yes, restrictions on housing development make housing less affordable, but I feel that it’s unfair to leave it at that.

Yes, but, restrictions on housing development have consequences beyond housing prices, like the nurturing of a more pleasant and sustainable urban infrastructure and a greater quality of life for a city’s residents. To end simply with the assertion that it makes housing less affordable is to leave out the real story.

2. Mandatory licensing of professional services increases the prices of those services. (unenlightened answer: disagree)

Yes, it does. But it also increases the quality and reliability of professional services, and any good economist should know that a good and reliable service is more valuable than a mediocre or uncertain level of service. One can receive a lower quality service at a lower price, or a higher quality service at a higher price; they move together. Furthermore, it is well-established in economics that consumers prefer certainty over uncertainty, and that customers will pay a premium to make an uncertain situation less risky; this is the basis for the insurance industry. By forcing professionals to obtain licenses, it reduces the risk to consumers of hiring someone substandard.

This question is misleading and poorly phrased from an economic point of view. Consumers are not paying higher prices for the same services; consumers are paying higher prices for higher-quality services with an increased assurance of hiring someone competent. It is not the same product.

3. Overall, the standard of living is higher today than it was 30 years ago. (unenlightened answer: disagree)

This one I will give to the authors; in general, standards of living around the world have risen in the last 30 years. There are a few arguments to the contrary with some countries (Chad, Sudan, etc) facing deep civil war and others that have been particularly exploited, but overall it’s hard to deny that living standards have risen.

4. Rent control leads to housing shortages (unenlightened answer: disagree).

Yes. Every economics textbook and its mother points to rent control in New York City to demonstrate the effects of a price ceiling on supply. The argument is that at a lower-than-market price, more units of housing will be demanded than supplied, mutually-beneficial transactions will be prevented, and there will be a housing shortage. People who want housing will not be able to find it.

While the above is true, I think that it understates the alternative: the equilibrium rental rate pricing many potential consumers out of the market entirely. This is another serious problem facing my local housing market here in Vancouver, where the market price leaves many on the streets. Rent control or not, many people will find themselves outside the housing market. The question is whether we would prefer to cheap but high-in-demand housing, inefficient by economic standards, or expensive and efficient housing. Either way, some potential consumers are left out.

5. A company with the largest market share is a monopoly. (unenlightened answer: agree)

This question is very fuzzy in terms of its accuracy; either answer has legitimate justifications. A monopoly is usually thought of as a firm that occupies an entire market–in other words, they are the only producer supplying a particular good. The strictest economic definition characterizes it as such. In practice, what we refer to as “monopolies” in the real world are very rarely absolute. More liberal (pun intended) and just as legitimate definitions within economics characterize a monopoly market as a market in which one particular firm holds significant market power to set higher prices, arising in markets with little substantial competition. In economic theory, only a company that is the sole supplier of a good can be a monopoly; in practice, one particular firm with substantial market power can form an effective monopoly.

6. Third World workers working for American companies overseas are being exploited. (unenlightened answer: agree)

I’m not sure what definition of “exploited” the survey authors are using, but I find this assertion just shocking in its lack of empathy. Supporters of sweatshops argue that child labour is unavoidable in countries with populations so poor that children must work or their families will starve; that they are popular in poor communities because they offer higher wages than other options; that we can’t expect the labour standards of industrialized countries to apply to poorer countries quite yet.

I have many concerns about the ethics of paying a child $0.15 cents an hour to produce t-shirts that sell for $30 in developed countries. Surely there is room for a higher wage in that mark-up, at least enough to reduce a working day from 12 to 6 or 8 hours, or for investment in humanitarian aid and social programs that help families avoid depending on their childrens’ wages.

How is it not exploitation to not only expect long hours at low pay, but without the freedom to form unions, in ill-ventilated factories, and without access to clean water at work? Or with chained fire exits that have already led to several deaths? Or workers that are physically abused by their superiors? Or being forced to work mandatory 19-hour shifts?

Anyone who seriously argues that overseas workers for American factories are not being exploited is either ignorant or in denial, or has a serious flaw in their definition of exploitation.

7. Free trade leads to unemployment. (unenlightened answer: agree)

Economists will argue to death that free trade will lead to the loss of jobs that weren’t efficient anyway and will be more than redeemed by the creation of newer, better (more efficient) jobs in other industries. I am extremely skeptical.

NAFTA, for instance, has been devastating for poor Mexican farmers, who find their products priced out of the market by a flood of cheap imports from the heavily subsidized agricultural industry in the United States. Furthermore, many of the jobs in heavy industry created to balance the loss in agriculture have since been lost to China, where wages and production costs are even lower. Furthermore, some evidence points to a lowering of real wages and greater income inequality in Mexico since NAFTA. Overall, job creation estimates were exaggerated and job loss estimates were understated.

8. Minimum wage laws raise unemployment. (unenlightened answer: disagree)

Yes. In contrast to the issue of rent control, which forms a price ceiling, economists argue that the minimum wage forms a price floor, at which there will be a surplus of labour. More people will want to work at minimum wage than employers are willing to hire, and as the cost of hiring a worker increases (minimum wage goes up), employers will hire even less. It sounds very reasonable in theory.

Real-world measurements of this effect are split. Some studies show a minor effect of a decrease in employment with an increase in the minimum wage. Others argue that the overall effect of a substantial increase in the minimum wage forms a net force that is overwhelmingly positive. Recently, there has been strong consensus by many economists that a higher minimum wage does more good than harm for lower-income workers.

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If I had been given this survey, I don’t know what I would have scored. I am familiar with the economic concepts behind all of these questions and how they work; working from what is technically correct at the conceptual level, I suspect that I would have correctly answered every question except numbers six and seven, on which I refuse to relent.

Yes, it’s true, most of the answers that the author gives to those questions are “correct” in the economic sense. But I, like many on the left, have difficulty circling “Agree” to an assertion that housing restrictions raise prices and leaving it at that. We are too busy thinking about everything else: “I agree that the statement is technically accurate, but I feel that it misrepresents the issue by reducing it to efficiency and there is so much more to the case at hand.” As an economics major and a leftist, I understand these concepts and how they work, and I have made a value judgement, a trade-off–that social equality means more to me than efficiency.

Is that unenlightened?

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