If all economists in the world were laid end to end, they would not reach a conclusion - George Bernard Shaw
It is a national past time to criticize economists for disagreeing on basic policy. These disagreements are expected because economics tries to make sense of irrational and fickle human behavior. What is astonishing is that there is consensus on anything at all. This blog post lists the 14 policies agree on and BrainStorms reasons on why they make sense.
1. A ceiling on rent reduces the quality and quantity of available housing (93% of economists agree)
Landlords will stop buying new rental property or attending to renters' needs if they do not get paid enough.
Landlords are businesspeople who invest their hard earned savings into an asset that they hope will earn them a good living. The asset is the home to be leased and their income is the monthly rent.
If landlords believe that they will be able to charge a high enough rent to earn a good living in real estate, they will choose to buy more rental homes instead of investing in less profitable ventures such as opening a restaurant or buying stocks.
Renters lease homes bough by landlords. The more homes that landlords buy and lease, the easier it is for renters to find one, and the harder it is for landlords to find renters. If there are many rental homes on the market, in order to lease their property, landlords have to keep renters happy by undertaking major improvements and by attending to their needs.
On the other hand, if landlords believe that they will not be able to charge a high enough rent to earn a good income in real estate, they will choose to not buy more rental homes but instead invest in more profitable ventures such as opening a restaurant or buying stocks.
A ceiling on rent tells landlords that, in the long run, they will be less likely to earn a good living on real estate.
As a result, when governments impose a ceiling on rent, landlords stop purchasing homes. The fewer rental homes that are on the market, the harder it is for renters to find one, and the easier it is for landlords to find renters. In order to lease property, renters will have to accept crumbling homes and tolerate landlords who do not attend to their needs.
Landlords invest in real estate based on expected future rent. If governments unexpectedly place or raise a ceiling on rent, rents would fall immediately fall while the supply of housing will remain stable. In the long-run however, the supply of rental housing will fall, and renters will have to accept crumbling homes and tolerate landlords who do not attend to their needs.
2. Tariffs and export quotas reduce economic welfare (93% of economists agree)
Everything that is produced is consumed. Workers produce more if they focus on just one task.
Everything that is produced is consumed. The more consumption, the higher the economic welfare as people gain access to more products and services.
Based on the availability of local resources and skill sets, workers in any given region are able to produce more of a specific good than workers in another region. For instance, a worker in a country that has plenty of trees and trained woodworkers might be able to produce far more chairs than a worker living in a region with iron ore and plenty of metallurgists. That worker, on the other hand might be able to produce more metal pots.
If every worker specializes on what they do best, production and economic welfare will be maximized. In our example, if the woodworker focuses on making chairs while the metallurgist produces metal pots, the world will have access to as many chairs and pots as it is humanly possible to make.
Now, if the woodworker wants pots instead of chairs, she can exchange chairs for pots in a voluntary and mutually beneficial transaction to both parties.
If the government puts in place policies that restrict voluntary mutually beneficial transactions, such as tariffs and exports quotas, the woodworker will be forced to take time off from producing chairs in order to make poorly made pots, and vice versa. As a result, the global supply of both chairs and pots will fall and economic welfare will decline.
By allowing workers to focus on what they do best, free trade increases the available supply of goods and thus increases global welfare. The problem is that not everybody has equal access to the extra supply. For instance, if a worker who once fetched water in rural India figures out that he is much better at programming software, he will undoubtedly become a competitor to a software developer in Silicon Valley.
If more software is made than society is willing to buy and the Indian programmer makes better and/or cheaper software, the Silicon Valley programmer will lose his job. As a result, although society as a whole benefits from better/cheaper software, by not being protected by tariffs and export quotas, until he retrains in a new field, the Californian programmer's production as well as his economic welfare will be reduced to zero.
3. Flexible and floating exchange rates offer an effective international monetary arrangement (90% of economists agree)
A floating exchange rate regime is cheaper and allows prices to adjust automatically.
Although countries have different currencies, their citizens are still able to trade with each other. If a person in the Congo wants to buy maple syrup from Canada, he has to exchange Congolese Francs (Francs) for Canadian Dollars (Dollars) to pay Canadian merchants. The rate at which the currencies are exchanged is called the exchange rate.
Governments can implement two types of exchange rate policies: a floating exchange rate where it lets the market determine the rate and a fixed exchange rate where it commits to keeping a constant rate. Imagine that there is a sudden craze for maple syrup in the Congo. The demand for Francs will fall as many Congolese people will try to get rid of them to buy Dollars in order to pay maple syrup merchants.
In a floating exchange rate regime, since so many people want to get rid of their Francs, Congolese, through banks, will have to trade more Francs in order to convince holders of Dollars to sell Dollars. At a certain point the amount of Francs needed to be traded to buy Dollars, in order to pay Canadian merchants, becomes so high that Congolese stop buying maple syrup.
On the other hand, Canadians, who can now exchange fewer Dollars to buy Francs, in order to pay Congolese merchants, find Congolese fruits less expensive and increase their purchases. This leads to the value of imports and exports equalizing and to Congo paying for its imports by selling fruits.
In a fixed exchange rate regime, the Congolese government buys the excess Francs that Congolese do not want by selling its reserves of Dollars, gold or any other asset to pay for the purchase. By buying the Francs that Congolese no longer want at the pre-determined rate, the amount of Francs needed to be traded to buy Dollars, in order to pay the Canadian merchant, remains low, and Congolese continue to buy large quantities of maple syrup by borrowing or trading ever more dollars.
As a result, because the price of Dollars never rises, Congolese fruits remain expensive and Canadians do not increase their purchases. This leads to the value of imports being higher than exports and to Congo paying for its imports by borrowing.
Economists do not like fixed exchange rate regimes because the resources used by government to buy back their own currency could be better used building schools or hospitals. It also encourages debt financing by creating one sided trade patterns.
In a floating exchange rate regime, the price that merchants receive on their foreign sale is impossible to know in advance, and this may discourage trade. For instance, a Congolese fruit farmer may commit to selling bananas to Canadian customers in Dollars. If at the time of delivery the value of the Canadian dollar falls, the Congolese fruit farmer will obtain fewer Francs per Dollar exchanged and he will bring back less money than expected back to his family in the Congo.
4. Fiscal policy (e.g. tax cuts and/or government expenditure increases) has significant stimulative impact on a less than fully employed economy (90% of economists agree)
Companies only produce what they can sell. When workers curb consumption, the government can borrow to spur consumption.
Society is able to produce a certain quantity of goods based on available tools such as machines and computers, and the size and skill of the labor force. However, the quantity of goods that society actually produces is only based on businesses' ability to sell their production. If they do not think that they will be able to sell all their production at a profitable price, they will manufacture less by putting machines off-line and by firing workers.
Purchases can be bought privately (i.e. cars, television, or food) or collectively by pooling money (i.e. roads, schools, or sewers). Private purchases are mostly bought by workers, the pooling of money is raised through taxes, and collective purchases are bought by governments.
When workers curb consumption either because their wages are too low, not enough are employed or, they save too much, businesses shut off machines and lay off workers to reduce production.
The government can spur private consumption by putting more money in the pockets of consumers by lowering taxes, increasing transfers or raising the wage of public sector employees. This policy only works if beneficiaries use the extra money to consume instead of saving it. Low wage earners, who live paycheck to paycheck and rarely have savings accounts are great candidates for these transfers. The government can also increase collective consumption by building infrastructure.
Finally, to finance spending, governments have to take on debt, increase taxes or decrease spending. Since increasing taxes and decreasing spending is counter-intuitive, to finance this policy governments have to borrow.
This policy may result in unplanned increases in debt levels because after the economy becomes once again fully employed, it is politically difficult to increase taxes and decrease spending to their pre-recession levels since people get used to low taxes and more programs.
5. The United States government should not restrict employers from outsourcing work to other countries (90% of economists agree)
The time of Americans, who have access to a great education system, is better used doing high value work rather than competing with low-skilled workers from emerging countries.
Companies outsource tasks when they believe that they can be better or more cheaply done by a third-party. For instance, restaurant owners, instead of hiring employees to grow food, usually buy it from grocery stores. The objective is to outsell competitors by cutting costs and passing those savings to customers. Outsourcing tasks to other countries, although controversial, makes economic sense for countries with a strong education system like the United States.
Tasks such as assembling electronics or sowing shirts can be done by workers with very little schooling. Instead of doing this mundane work, Americans are better off outsourcing it and focusing on much more demanding and productive tasks. This would give American workers access to much cheaper goods, and give them time to do more lucrative work.
In fact, due to outsourcing, American customers can now buy much cheaper electronics and tube socks from Asia, while Asian customers have now access to more appropriate financial products and safer planes. As a result of freer trade, the productivity of American workers has increased tremendously, but this productivity has mostly translated into higher corporate profits instead of higher wages.
Outsourcing is disliked because it resulted in millions of Americans losing their jobs and being unable to find something new because it takes time for the economy to reabsorb so many workers. Another complaint is that the gains from outsourcing are disproportionately tilted towards corporations. Due to higher worker productivity, corporate profits have increased considerably, while many workers have not seen their wage rise.
Instead of forbidding outsourcing, which has very real economic benefits, it might be better to use targeted measures to speed up the transition into the workforce. This may include providing courses to retrain employees or encouraging companies to offer internships and apprenticeship to mature workers.
The government can also encourage them to start small businesses. Workers who have been laid-off are familiar with the production process and how to perform certain tasks more efficiently. By giving them loans to start small businesses that would exploit inefficiencies, they may be able to re-enter the workforce quicker and with higher earnings.
6. The United States should eliminate agricultural subsidies (85% of economists agree)
Growing industries should not curb their expansion plans for millionaires to have cheap bread or for struggling companies to have cash that they won't be able to use productively.
The government imposes taxes to pay for programs and build infrastructure. Out of these taxes, it also gives subsidies. Subsidies are gifts of cash to industries and include direct transfers of money, but also tax credits, which are cash transfers to help companies pay their tax bills.
Through subsidies the government pitches in on the costs of production, and because of lower costs, companies are able to sell their goods cheaper. It also allows industries to keep operations and jobs in the home country by out-competing foreign competitors on price.
For instance, the United States government gives subsidies to certain types of farmers (i.e. corn, wheat, and soy), and because of these subsidies, not only is the price of bread cheap in the United States, which helps low income families, but it also allows some American farmers to stay in business by out-competing foreign farmers, who do not receive subsidies.
Although providing cheap food to low-income families and protecting jobs are noble objectives, economists believe that there are better ways to achieve these goals. Through subsidies, tax money is used to lower the cost of food for everybody, including those who are wealthy enough to afford market prices. If the goal is to provide affordable food to low-income families, a cheaper approach is to increase their welfare payments.
On the other hand, if the goal is to protect jobs, subsidies acts as cash transfers from prosperous sectors who can use that money to grow and hire more workers, to sectors where there are few opportunities to expand. As a result, in the long run, industries which are most likely to hire won't, and the economy will create fewer jobs.
Some economists argue that agriculture is a strategically important industry. Without subsidies, the United States might become a net food importer since farmers, who would now have to support the full cost of production, might significantly scale down their operations. Food crisis may then occur if imports are reduced either through a trade embargo or logistical problems.
7. Local and state governments should eliminate subsidies to professional sports franchises (85% of economists agree)
True fans should and would pay the market price to watch their favorite team play.
The government imposes taxes to pay for programs and build infrastructure. Out of these taxes, it also gives subsidies. Subsidies are gifts of cash to industries and they include direct transfers of money, but also tax credits, which are cash transfers to help companies pay their tax bills. Through subsidies the government pitches in on operating costs, and because of lower costs, companies are able to sell their services cheaper, allowing them to lower the price that consumers pay.
For instance, professional sports franchises often receive cash from local and state governments to finance the construction of stadiums and arenas. Those cash transfers to the franchise owners are paid by every taxpayer, whether or not they are sports fan, and allow for cheaper tickets.
Society collectively pays for programs such as education because having doctors and engineers benefits society, or for the maintenance of roads because it is prohibitively expensive to put tolls on every street. However, since the joy of attending a sports game is personal and it is easy to charge a toll to enter a stadium, economists believe that true fans should and would be able to pay the market price to see their favorite team.
Detractors argue that stadiums and arenas attract businesses in depressed neighborhoods. If the goal is to attract businesses, it is cheaper to implement measures that directly target the issue such as improving transit, reinforcing security, or simply planting trees and building parks.
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly (85% of economists agree)
By making the tax rates and expenditures predictable, balancing the federal budget over the business cycle promotes economic growth.
The economy goes through periods of optimism when business-owners, thinking that consumers will purchase more of their goods, buy additional machines and hire new workers in order to increase production. This leads to expansions as production increases and unemployment falls. During these expansions, government revenues, which are raised by taxing production and wages, increase.
It is, however, impossible to perfectly predict the future, and those forecasts are sometimes too optimistic. When consumers fail to buy the additional goods, business-owners put machines off-line and fire workers in order to decrease production. During these recessions, government revenues, which are raised by taxing production and wages, decrease.
Taxes are raised to buy infrastructure and pay for programs, and governments' budget are balanced when these expenditures are fully paid for by tax revenues. If governments balance the budget yearly, during periods of expansions, when revenues rise, they decrease tax rates and increase expenditures. On the other hand, during recessions, when revenues fall, they increase tax rates and decrease expenditures.
This unpredictability impedes economic growth as citizens, not knowing their future tax rates or the size of programs (i.e. education, garbage collection, road maintenance...), are unable to make long-term plans and investments.
Some economists prefer that governments maintain stable tax rates and expenditures notwithstanding the business cycle. As a result, during expansions, when revenues rise from increased economic activity and expenditures stay constant, they would post a surplus. During recessions, on the other hand, when revenues fall from decreased economic activity and expenditures stay constant, they would post a deficit.
Businesses curb production during recessions because they do not believe that they will be able to sell their goods at a profitable price. To increase business confidence in their ability to sell goods during recessions, other economists even argue that governments should post large deficits by decreasing tax rates, to raise customers' disposable income, and by increasing expenditures to buy the goods that consumers are not purchasing.
It is impossibly hard to balance the deficit over the business cycle because governments cannot forecast the magnitude or length of expansions or recessions. As a result, not having a target of yearly balanced budgets might lead to irresponsible governments saving too little during expansions, by forecasting unrealistically long periods of growth.
9. The gap between Social Security funds and expenditures will become unsustainably large within the next 50 years if current policy remains unchanged (85% of economists agree)
Demographic trends suggest that Social Security funds and expenditures will become unsustainably large.
In the United States, Social Security primarily consists of cash transfers to support retirees. These transfers are funded by workers through Social Security contributions. Currently, Social Security cash-flows are positive as contributions are greater than disbursements, but because of changing demographics, analysts predict that they will soon be negative.
Due to better health care, for the first time ever, the average American is living well beyond the legislated retirement age. As a result, the number of retirees and the cost of providing them with Social Security are growing rapidly. On the other hand, due to low fertility rates, the number of young workers who pay for the additional Social Security transfers is growing much slower.
Having negative Social Security cash-flows does not mean the end of the program. Transfers can still be financed by increasing taxes and cutting back on other programs (i.e. education, health care, parks and recreations...). However, there is a limit on how much taxes can be raised and how much programs can be cut without inflicting major economic hardship. The majority of economists believe that if policies are not implemented to lower the amount of Social Security transfers, that limit might be reached.
Some economists think that Social Security deficits can be funded by issuing debt. They argue that when it comes time to repay, the debt burden per worker might have fallen. For instance, if fertility and immigration rates rise, increasing the number of workers, the debt will be shared among more workers. On the other hand, if technological innovation makes workers productive, the debt would represent a smaller share of their individual income.
10. Cash payments increase the welfare of recipients to a greater extent than do transfers-in-kind of equal cash value (84% of economists agree)
Individuals know better than governments or charities what they need.
To support low-income families, governments hand-out transfers-in-kind such as vouchers (i.e. education or food stamps), or basic necessities (i.e. subsidized housing or school supplies). International charities also tend to give beneficiaries goods, including food, seeds, or schools, but since families have unique needs and preferences these standardized transfers-in-kind may not be what they truly need.
For instance, a low-income American father may prefer to live in a cheaper house, but have his child eat fresh fruits more often, or a Peruvian farmer may find that planting potatoes is more lucrative than the corn seeds given to her by a charity. To increase the welfare of recipients, economists believe that they should be given the cash equivalent of benefits to individually buy goods that would best fit their unique needs.
Some economists think that families of meager means cannot be trusted to make responsible choices, and as a result, a third-party should make their spending decisions. Others believe that through transfers-in-kind, although beneficiaries may not receive the ideal basket of goods, they receive goods at a much cheaper price. Due to their large orders, third parties can buy goods at a significant discount and they pass those savings to beneficiaries.
11. A large federal deficit has an adverse affect on the economy (79% of economists agree)
The burden of repaying a large federal deficit, which falls on households who did not lend to the government, might be so high as to curb consumer demand.
Taxpayers can purchase goods individually from the proceeds of selling their production, or collectively by handing part of their production to governments through taxes. When tax revenues are lower than collective purchases, society is running a deficit. To finance these deficits, the government borrows from lenders, and promises to repay them from future tax revenues.
For instance, imagine a village that wants a new bridge. The village government asks the village engineer to build that bridge and promises to pay her back from future tax revenues. The engineer, acting as a lender, invests money that she would otherwise use for private consumption to buy tools and hire workers.
After the completion of the bridge, villagers' welfare increase significantly as they have a new bridge and their private consumption does not change since taxes have not risen. On the other hand, the engineer's welfare falls because, although she benefits from the new bridge, she curbed her private consumption significantly to buy tools and hire workers. When it comes time to repay the loan, the government raises taxes and the private consumption of villagers falls, whereas the welfare of the engineer increases, even if her taxes also rise, because she receives money from all the other villagers.
If governments run large deficits, when it comes time to repay, taxes might be so high as to significantly curb the consumption of borrowers. Since everything that is produced must be consumed, if lenders do not use the repayment money to increase their own consumption but instead save it, businesses, forecasting a fall in demand for their goods, may put machines off-line and fire workers to curb production, leading to a recession.
Since the vast majority of the United States' federal debt is owed to Americans, some economists believe that large deficits are inconsequential because repayments are collected from taxpayers and are paid back to taxpayers. They are, however, more precisely collected from one group of taxpayer, those who did not lend money to the government, and paid back to another group, those who lent money to the government. As a result, the burden of repayment solely falls on the former, while the benefits are reaped by the latter.
Other economists argue that governments can simply print money to reimburse their debt. Printing money, however, devalues the debt and may be seen as unfair to lenders who sacrificed their own consumption so that taxpayers may have a higher welfare.
12. A minimum wage increases unemployment among young and unskilled workers (79% of economists agree)
Employers will not pay to a worker a wage greater than the value of his production.
Employees are workers who sell their production to their employers for a wage. As a result, the more that they produce, the more employers are willing to pay them. On the other hand, to avoid making losses, employers will not pay to a worker a wage greater than the value of his production.
Much like experienced fishermen are able to catch more fish, and thus receive a higher wage, highly-skilled and experienced workers are also more productive. These skills are acquired through education, while experience comes with hours worked.
Young and unskilled workers are the first to be laid-off when a minimum wage is imposed because the legislated wage might be higher than the value of their production. In the long run however, a minimum wage increases production, and thus consumption, by encouraging workers to pursue their education.
Some economists argue that since a minimum wage affects all the businesses in a jurisdiction, instead of firing workers, employers will pass the higher costs to consumers by raising prices, effectively increasing the value of workers' production.
Although this may be the case for service jobs that have to be done locally (i.e. restaurants, retail, barbershops), it is not true for manufacturers whose production can be traded internationally. In the latter case, businesses will outsource tasks that can be done by worker with minimal schooling to countries with no minimum wage.
13. The government should restructure the welfare system along the lines of "negative income tax" (79% of economists agree)
Individuals know better than governments what they need.
To support low-income families, the welfare system currently gives assistance through vouchers (i.e. education or food stamps), or provides basic necessities (i.e. subsidized housing or school supplies), but since families have unique needs and preferences these standardized transfers-in-kind may not be what families truly need.
For instance, a father may prefer to live in a cheaper house, but have his child eat fresh fruits more often. To increase the value of welfare programs, economists believe that families should be given the cash equivalent of benefits to buy goods that would best fit their unique needs.
With negative income taxation, instead of the transfers-in-kind, low-income families would receive cash transfers. The higher their income, the lower the cash transfers. When family income passes a threshold, instead of receiving transfers, it would start paying taxes.
Negative income taxation also encourages heads of households to work since benefits decrease gradually. Under the present system, benefits are taken away abruptly, and as a result workers may decline a part time job because that small increase in income may mean losing important welfare benefits such as housing.
Some economists think that families of meager means cannot be trusted to make responsible choices, and as a result a third-party should make their spending decisions. Others believe that through transfers-in-kind, although beneficiaries may not receive the ideal basket of goods, they receive goods at a much cheaper price. Due to their large orders, third parties can buy goods at a significant discount and they pass those savings to beneficiaries.
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than the imposition of pollution limits (78% of economists agree)
Effluent taxes and marketable pollution permits ensure that the least expensive ways of reducing pollution are used.
Pollution is a by-product of production and as a result, government policies limiting pollution represent a cost to businesses. To comply, businesses either have to purchase new equipment, or if the equipment is too expensive or unavailable, they have to cut production. That equipment is tailored to each industry and depending on its price, reducing pollution might be costlier to certain businesses.
For instance, reducing emissions at a courier requires gradually replacing old vehicles with readily-available but slightly more expensive hybrid versions, which is much cheaper than reducing emissions at a steel plant which requires buying expensive new machines. Economists believe that there should be a mechanism that ensures that the least expensive ways of reducing pollution are employed.
If the price of polluting, or in other words the tax on pollution, is higher than the cost of upgrading to hybrid vehicles, the courier will upgrade to avoid paying the tax. On the other hand, if that "high" tax is still lower than the cost of buying new machines, the steel plant will choose to pay it instead of replacing its equipment. With this policy, emissions fall and government revenues rise by the amount of the tax.
In a cap and trade system, companies are entitled to emit a set amount of pollution. The steel plant, instead of buying expensive new machines to meet its quota, might purchase the courier's emission permits. The courier will then have to further reduce pollution by buying even more hybrid vehicles. As a result, the steel plant effectively buys the less expensive hybrid vehicles to meet its own quotas. With this policy, emissions fall but government revenues stay stable.
The alternative, which economists dislike, is the imposition of non-marketable pollution permits. Under that policy, the courier can only meet its quota by buying hybrid vehicles and the steel plant by only buying expensive machines. Although emissions also fall with this policy, the least expensive ways of reducing pollution are not exclusively employed.
Some economists are against imposing a tax on emissions because they believe that corporate tax rates are already too high. Others are against the cap and trade system because the allocation of permits, which is prone to political lobbying, might be unfair to some companies.
By Kasole Nyembo