June 7, 2000 / New York TIMES
RECKONINGS / By PAUL KRUGMAN
A Rent Affair
>Economists who have ventured into the alleged real world often quote
Princeton's Alan Blinder, who has formulated what he calls "Murphy's Law of
economic policy": "Economists have the least influence on policy where they
know the most and are most agreed; they have the most influence on policy
where they know the least and disagree most vehemently." It's flip and
cynical, but it's true. <
I think that PK's endorsement of Blinder's "Murphy's Law of economic
policy" fits only if one defines "influence on policy" in very specific
terms, i.e., public debates of a very specific sort. In general, I'd say
that the powers that be pay a lot of attention to orthdox economists,
especially in an era when the spirit of laissez-faire is ruling, since even
the self-described "liberals" among orthodox economists have a visceral
laissez-faire streak.
But let's be specific. In the private debates that take place within the
Federal Reserve, the consensus among orthodox economists -- i.e., where
economists think they know the most and are most agreed -- has the most
influence on policy. The viewpoint of dissident economists is not heard
there. In fact, reports trickling down from the Fed suggest that when Alan
Blinder was on the board of governors of the Fed, Alan Greenspan cut him
out of the loop, even denying him relevant data, because Blinder was less
of a hawk in the war against inflation. He wasn't part of the economic
consensus and didn't have influence even though he disagreed.
Further, in the one of the most prestigious places for debate about
economic policy, the op-ed pages of the New York TIMES, the viewpoint of
the consensus of the most elite economists (i.e., those at the
Massachusetts Institute of Technology) is put forth twice a week, in PK's
own column. This venue is more likely to attract the attention of the elite
policy-makers at the Fed or the U.S. government than almost any other
place. It attracts many upper-crust and upper-educational-acheievement
readers, including most professional "opinion-makers."
PK goes on to turn to a case where economists' conventional wisdom is
ignored, i.e., rent control.
>... consider an article that appeared in yesterday's New York Times, "In
San Francisco, Renters Are Supplicants." It was an interesting piece, with
its tales of would-be renters spending months pounding the pavements, of
dozens of desperate applicants arriving at a newly offered apartment,
trying to impress the landlord with their credentials. And yet there was
something crucial missing -- specifically, two words I knew had to be part
of the story.
>Not that I have any special knowledge about San Francisco's housing
market -- in fact, as of yesterday morning I didn't know a thing about it.
But it was immediately obvious from the story what was going on. To an
economist, or for that matter a freshman who has taken Economics 101,
everything about that story fairly screamed those two words -- which are,
of course, "rent control." <
Note that PK brings up another counter-example to Blinder's Murphy's Law:
the consensus of economists on this issue dominates the vast majority of
textbooks on this issue. Also, why does he assume that his readers agree
that the words left out are "rent control"? Because they have been highly
influenced by economists.
Looking at the story, he finds large numbers of phenomena which he sees as
totally "predictable" results of rent control.
One problem with PK's assumption that one can take the phenomenon of rent
control and come up with such easy predictions is one seen by
empirically-oriented economists all the time: there may be all sorts of
other causes of bad results in rental-housing markets besides rent control,
so that he may (or may not) be misidentifying rent control as the cause.
For example, examine the typical working of the supply of housing for the
poor in places without rent control. Housing for the poor is typically
supplied by breaking the housing code (safety and fire regulations) or by
letting the housing stock of the middle-class and rich deteriorate over
time until they become affordable to the poor. This does not completely
succeed, as seen in the existence of the homeless population (in one of the
richest countries in the world). The people at the low end of the income
distribution end up facing all or most of the negative effects that PK
attributes to rent control.
Similar effects hit further up the income distribution in areas that enjoy
rapid growth of employment and incomes, like San Jose (also in California).
It is this kind of event that encourages political support for rent control
in the first place. By ignoring this kind of phenomenon, PK simply assumes
that people are stupid, calling for rent control for no reason.
He ends by saying:
>So now you know why economists are useless: when they actually do
understand something, people don't want to hear about it. <
One reason why people don't want to hear about what economists say is that
economists so often follow PK's approach in this column. He lambastes rent
control and its advocates without presenting an alternative, just as
economists favoring free trade �ber alles don't want to talk about aid to
those who suffer from the consequences of the transition free trade.
I don't favor rent control (since I see it as usually merely a band-aid
covering a more severe wound). But if economists are to oppose it, they
have to present an alternative beyond "trust in us and the market, since
everything will work out fine in the long run." The alternative is public
building of housing, especially for the poor. But recent years have seen
cut-backs in government funds for this purpose.
Finally, I note that PK ignores what economists call the "theory of the
second best." That is, there are all sorts of imperfections in markets that
cannot simply be wished away, so that it's possible that adding a new
imperfection -- rent control -- could counteract those other imperfections.
I haven't seen that argued, but I'd like to see if anyone has done so.
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~jdevine
