Saturday, July 17, 2010

Economics vs. Politics

In Applied Economics: Thinking Beyond Stage One, Thomas Sowell illustrates the major difference between economic and political mindsets:
"Politics offers attractive solutions, but economics can offer only tradeoffs. For example, when laws are proposed to restrict the height of apartment buildings in a community, politics presents the issue in terms of whether we prefer tall buildings or buildings of more modest height in our town; economics asks what you are prepared to trade off in order to keep the height of buildings below some specified level. In places where land costs can equal or exceed the cost of the apartment buildings themselves, the difference between allowing ten-story buildings to be built and allowing a maximum of five stories may be that rents will be much higher in the shorter buildings, because land costs are now twice as high per apartment.

"Nor are money costs the only costs. With twice as many shorter buildings now required to house the same number of people, the community must spread outward since it cannot spread upward, and that means more commuting and more highway fatalities. The question then is not simply whether you prefer shorter buildings, but how much do you prefer shorter buildings, and what price are you prepared to pay to mandate height restrictions in your community. A doubling of rents and three additional highway fatalities per year? A tripling of rents and ten additional highway fatalities per year? Economics cannot answer such questions — it can only make you aware of a need to ask them.

"Economics was christened 'the dismal science' because it dealt with inescapable constraints and painful tradeoffs instead of more pleasant, unbounded visions and their accompanying inspiring rhetoric, which many find so attractive in politics and in the media. Moreover, economics follows the unfolding consequences of decisions over time, not just what happens in stage one, which may indeed seem to fulfill the hopes that inspired these decisions. Nowhere are the consequences more long-lasting than in housing, where a community can have an aging and shrinking supply of apartment buildings with accompanying housing shortages for decades, or even generations, after passing rent control laws which have a track record of leading to such consequences in countries around the world.

"The passage of time insulates many political decisions from public awareness of their real consequences. Only a small fraction of New Yorkers today are old enough to remember what the housing situation was there before rent control laws were introduced during World War II. Only a dwindling number of Californians are old enough to remember when that state's housing prices were very much like housing prices in the rest of the country, instead of being some multiple of what people pay elsewhere for a home or an apartment. These and other consequences of particular political decisions in the past are today just facts of life that new generations have grown up with as something as natural as the weather or other circumstances of their existence which are beyond their control.

"The vast numbers of frustrated California motorists who endure long commutes to and from work on congested highways are unlikely to see any connection between their daily frustrations and attractive-sounding policies about 'open space' or 'farmland preservation.' Nor are economists who point out that connection likely to be as popular with them as politicians, who are ready to offer solutions to rescue these motorists from their current problems using the same kind of one-stage thinking that created those problems in the first place."1
1. Thomas Sowell. Applied Economics: Thinking Beyond Stage One.
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