Progressive’s views on supply restrictions

Robert Waldmann

I don’t agree with the title of this post and one sentence, but the rest of the post is reasonable, and the data it discusses are very alarming.

Todd Zywicki wrote

Some of the results in this new article by Zeljka Buturovic and Dan Klein in Econ Journal Watch (a peer-reviewed journal of economics) are startling:

67% of self-described Progressives believe that restrictions on housing development (i.e., regulations that reduce the supply of housing) do not make housing less affordable.

51% believe that mandatory licensing of professionals (i.e., reducing the supply of professionals) doesn’t increase the cost of professional services.

Perhaps most amazing, 79% of self-described Progressive believe that rent control (i.e., price controls) does not lead to housing shortages.
Note that the questions here are not whether the benefits of these policies might outweigh the costs, but the basic economic effects of these policies.

Those identifying as “libertarian” and “very conservative” were the most knowledgeable about basic economics. Those identifying as “Progressive” and “Liberal” were the worst.

It would be hard to find a set of propositions that would meet with such a degree of consensus among economists to rival these propositions–which boils down to supply restrictions raise prices and price controls create shortages.

The sentence with which I disagree is the one that ends “basic economics.” In that sentence and the title, it is assumed that it is only basic economics if almost all economists agree. This gives the large group of reality denying free market fanatic economists a veto.

More thoughts after the jump

I think these results are part of a pattern in which people refuse to concede anything anything at all to ideological opponents when polled. People say a statement is false to express their opposition to arguments which begin with that statement. That is, if the poll doesn’t allow people to answer “yes, but …” they answer “no”. To put it a bit more harshly, people will often claim that a statement is false if they don’t agree with the conclusions of the policy makers who most enthusiastically make that statement.

Via Matthew Yglesias who wins an Yglesias award for intellectual integrity.

Now the examples present me with a bit of a challenge. I have claimed that I can get any result I want out of an economic model in which people are rational. I will try in these cases, but first stress I am not criticizing Zywicki’s post. The questions don’t include qualifiers as in “must in all imaginable worlds” They refer to actual policies in the real world. Zywicki does not rely on simple theory to argue that progressives are wrong. He mentions extensive empirical evidence (I didn’t quote quite the whole post as that wouldn’t be fair use).

So lets see if I can make economic theory jump through those hoops. The rest of this post is not at all serious and mostly for my amusement.

1) Restrictions on housing

The claim includes an editorial comment by Todd Zywicki. I’m sure this wasn’t part of the question asked of progressives and others, still I accept it as part of the challenge. So let’s see. OK sure. How about this restriction of housing construction — minimum density requirements. Housing must be built so that there is *at least* N independent residences per acre. There is a maximum normal number of rooms and normal number of square feet in a residence corresponding to minimum crowding requirements times 4 people per household. The fraction of residences in any developement of N or more houses larger than this maximum normal size, must be no greater than twice the fraction of households with more than 5 members.

I mean basically take the rules which make housing less affordable and turn them on their heads. A good libertarian will know that only bad things can come from restrictions on building, but an open minded economist can see how preventing builders from building large houses for rich people tends to reduce the price of land and make housing cheaper for the non rich.

If I can’t do this one, Atrios sure can.

2) Mandatory licensing.

OK first assume that people just won’t go to a professional who is not certified in some way — say the profession is brain surgery. This means that the alternatives are a standardized licensing procedure or some other screen. My claim will be that, in some cases, standard legally mandated procedures allow freer entry than the feasible alternative. What would it be ? One possibility is that people only go to a brain surgeon who has a long record of success (as attending surgeon) so long as there are any such brain surgeons. The first brain surgeon in history can get started, but once the very first co-hort build up their record, no entry at all is possible until they simultaneously retire. The result is extremely limited supply.

Alternatively, a credible mandatory test can be applied to all surgeons and people find that *some* newly trained surgeons are just as good as the old experts. The old experts would never voluntarily take this test, since unless and until others prove they are as good, the old experts can exclude new entrants. This means that there is no point in taking the test unless enough surgeons have taken the test that performance as a function of score can be estimated. This means that if some new entrants deviate from the Nash equilibrium and take the test they have wasted their effort.

The informal reputational equilibrium (in a world in which voluntary test participation is possible) is more restrictive than the system with mandatory testing, because people demand the best and have perfectly rational greater faith in a proven record than in a new test.

To get even harder core about rational expectations and Nash equilibrium assume that there are a variety of potential tests (provided by nature in the model) and only by making brain surgeons with proven records take them can one tell which test is correlated with good results in actual surgical practice (this is I can make a model of rational learning a model of Nash equilibrium by saying something is stochastic and even people who know it’s distribution must learn its realization).

3. rent control. This is easy. There is imperfect competition in the supply of rental housing. As a minimum wage law can cause increased employment with monopsony in the labor market, a maximum rent law can cause increased supply of rental housing.

I suspect a few years ago, the corresponding blog post would have noted that progressives don’t believe that minimum wage laws cause reduced employment and that almost all economists agree that it does. That was true of almost all economists a while ago, but isn’t any more.

update: really in the weeds here, but I was thinking about my argument that mandatory licensing can increase supply of professionals. That argument was taken seriously once by John Stuart Mill in “On Liberty” which should be the libertarian bible. OK so Mill was a progressive and a liberal, but he was a classical liberal and believed in free markets in the same way he believed in free speech.

He also was wildly wildly enthusiastic about written exams. He wanted access to all sorts of positions to depend on the score on written exams. His aim was not to restrain entry and drive up the return to those positions. It was the opposite. He believed, based on massive empirical evidence, that the alternative to admission based on writen exams was admission based on belonging to the right social class.

His aim was to make entry criteria objective and anonymous (I don’t think he came up with the idea of having the exams identified only by a number and graded double blind but he was getting there). His advice was followed. In the event, the mandatory exams were often pretty pointless in themselves (having a lot to do with Latin and such). The point was that the mechanical admissions process was less closed than the alternative.

I just add that if customers are not willing to go to Joe’s discount brain surgery, that the same reasoning applies to certification of self employed professionals.

Recall, there is certification, because consumers prefer there to be certification. The mandatory licensing procedure selects the competent, and is less exclusive than any available alternative. I think this argument is actually not just economic theory but a reasonable description of a possible alternative world.

I am also sure that really existing mandatory licensing requirements generally drive professional incomes up, but that’s because of the empirical evidence and not because “economic theory” implies that or anything.