When Economists Agree, Part 1

Recently, I’ve been doing a bit of spring cleaning, and I came across my old microeconomics book.  (In case you are curious, it’s Principles of Microeconomics by Mankiw.)  Being the packrat that I am, I ended up keeping more than a few of my textbooks from college, rather than selling them back.  I’ve been re-reading the book since I found it, and I’m being reminded of all the interesting economic information contained therein.

One thing I am particularly struck by is a list, early on in the book, that covers ten propositions where the majority of economists agree.  I find it fascinating as to just how few things there are that the bulk of economists can agree on.  Part of it is because, as a biochemist, I’m used to most issues in my professional life being well settled and seldom debated.  Another reason is that I’m attempting to become a professional PF blogger, and it’s interesting to see just what professional economists think.

Therefore, I’m going to be sharing these points of agreement (and the percentage of economists who agree) today and on Wednesday.  Here are the first five:

1) Rent control reduces the quality and quantity of available housing (93% agree) – I can understand this principle pretty well.  Rent control decreases the amount of profit a landlord or other building owner can make, thus providing a disincentive for them to put as much money and effort into maintain the building or apartments.  At the same time, the chance to obtain housing at less than fair market prices increases demand, which further decreases the incentive to make improvements to the building.  (Why invest in upgrades to a building if there’s already a line of people clambering to get an apartment?)  It’s a vicious cycle, too many people fighting over too few properties, most of which probably are declining in quality.

2) Tariffs and import quotas usually reduce general economic welfare (93% agree) – This is also a pretty easy one to follow.  If there is a disincentive to buy foreign cars, in the form of a tariff or other increased charge, the domestic auto industry would benefit, but the buying public would suffer from less selection and potentially higher prices.  Furthermore, the industries that supply the foreign auto companies with raw materials or other items needed to make cars would take a hit.  And all this is before there’s any response from the foreign country in question in the form of counter tariffs or quotas.  While barriers to trade may help some people (those in the protected industries), it’s far from advantageous for the country (and world) as a whole.

3) Flexible and floating exchange rates offer an effective international monetary arrangement (90% agree) – In a perfect world, all exchange rates would be completely free to adjust to the movement of money around the world; so if money flows into a country like China and out of the US, then China’s money will become more expensive and the United States’ currency will become cheaper (that is, a Chinese yuan will buy more more dollars when exchanged).  This would have the effect of making imported goods more expensive, leading to either a decrease in imports or an increase in exports (either of which would help to correct the trade deficit).  One of the reasons for the vast trade deficit between the US and China is that until recently, the yuan was fixed to an artificially low value against the dollar, making Chinese imports comparatively inexpensive.

4) Government policy (tax cuts and/or spending increases) has a significant effect on a less than fully employed economy (90% agree) – The caveat about a ‘less than fully employed economy’ might seem a bit odd, so here’s the short version: if there’s zero unemployment, it’s harder for companies to hire or fire people.  If a company is the recipient of a federal grant and wants to expand its work force, it will have to work much harder (and offer higher salaries) to pull employees away from its competitors.  Similarly, if taxes are raised and the company is feeling an economic pinch, they will think twice about downsizing, as there is not a pool of unemployed workers to draw from when they try to expand again.  In a less than fully employed economy, of course, there is more slack in the system, in the form of us unemployed folks, and the company can add or remove workers from its payroll with some confidence that it can hire replacements for essentially the same cost.

5) If the federal budget is to be balanced, it should be done over the business cycle, not yearly (85% agree) – Essentially, this means that, rather than ensuring that each yearly budget spends only the income from that year, we instead allow defecit spending when the economy is poor, to be recuperated when the economy picks up again.  The goal, of course, is to not hit the economy with a double whammy: lowered government spending (as a result of less tax revenue) and business decline, occurring at the same time.  Similarly, such a policy would lead to higher tax rates and/or lowered government spending in boom times, to recover the excess spent during the bad years.  The end result would hopefully be a smoother economic cycle, with the booms being tamped down a bit and the busts being countered.

There you have it; the first five principles with which most economists agree.  Turn in on Wednesday to discover what else meets the approval of most economists.

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