Brad DeLong's Semi-Daily Journal: A Weblog

The real question is not whether machines think but whether men do.

You're sure - REALLY sure - that there are no questions that 1) should be asked, and 2) that economists might not think to ask? That, unlike all others, economists have no blind spots which might make the input of non-economists valuable?

I think he's noting a pattern of failure in the thinking on certain subjects of people who cannot think like economists (whether or not they are officially so designated), or who cannot conceive of either market or government failures. I'll suggest that there are a lot of people in the Bay Area who qualify as neither economists, left-leaning or ex-bureaucrats who would be able to think through the economic, market and bureaucratic issues surrounding rental market regulation. In this particular ferment, all it takes is having eyes to see.

Ah yes, one always thinks kindly of free market economists when taking a call from your friendly long distance service solicitor, contemplating the details of a hundred or so cell calling plans, seeking a electron provider to be delivered by the same local utility which is now split into a hydra and just last week outsourced the billing to Madras to support Indian post office workers who will now not be mad at us, YES.

The fault in all this is that the economist thinks that people place no value on their time except time spent minimizing costs. Efficiency is not only a cost issue. Having more time to do things we enjoy, such as abusing economists, is a much more socially valuable good.

When those things that are mandated contribute to the public good, such as making sure that buildings don't fall down and are liveable, even better. The problem with free markets is that they are a paranoid's dream and no one has the time or money necessary to protect themselves against all the mischief that is out there. While you are saving all that money, factor in the cost of making sure that the hot water works. Atrios makes a good point.

Atrios wrote that there are costs of obtaining information and writing contracts. The costs of obtaining information are pretty low now a days. There are plenty of Internet sites which lists apartments, houses and their features. Pretty simple search on google will also help.

It is pretty simply to list set of features available in any apartment on the contract. Where is the cost of writing contract here?

Now, let's come to cost of resolving disputes. Here if Govt. (a provider of Law and Order services) does not want to provide service resolving complex contracts (a reasonable decision) they can always charge higher for individualized contracts and charge standard rate of taxes for normal contracts.

They can also allow tenants and landlords to resolve their disputes through privatized arbitration system.

A wee bit self-serving, maybe. Are there any blind spots characteristic of economists? Are any of them present even in left-of-center economists with bureaucratic experience? We seem to be having some reevaluations of, for example, shock therapy and Clinton's free trade initiatives. Might these have been done better if economists had listened to selected non-economists?

I'm confused. I agree with the post, but only count two questions:

"What, exactly, is the market failure here?"

"How, exactly, does this policy reduce the magnitude of the market failure without causing bigger government failures?"

Is it not amazing to see people who (I suspect) never in their whole life had to shower (or in the absence of a shower, wash themselves) with cold water (on a daily basis, a half-week of hot water failure won't do it) wax how the market is only "perfect" if you cannot take basic amenities for granted.

I think we could add public health concerns to the reasons why governments have mimimum standards for apartments. The top ten list of causes of death in 1900 is far different than the top ten list of causes of death in 2000. Sanitation improvement is part of that equation. There are well known links between bathing-lice-typhus, rats-plague, sewage-several diseases. There are threats to "homeland security" that kill far more people every year than terrorists. Ensuring that conditions are not conducive to spread of disease is a traditional government/community function.

BRAD: APPARENTLY YOUR SOFTWARE DOES NOT INCLUDE <BR> TAGS AT THE END OF LINES, AND EVERYTHING WRAPS INTO ONE. I DO SEE LINE BREAKS IN THE HTML SOURCE HOWEVER.

Hot water is a health issue, not a contract issue, something important to the neighbors as well as the tenants.

paul

bush-haters.blogspot.com

You realize there are probably a lot of people on this site who like making pronouncements about policy so much thay they'll now get economic degrees and government jobs just to keep bitching about it? I know I am!

IMHO - Atrios did a better job with this piece than Kevin Drum's critique. And your point is very well taken.

I don't have any problem with regulating minimum housing conditions, but I doubt that a dyed in the wool libertarian would accept them on the basis of avoiding repetitive contract language. Couldn't the market provide all the boilerplate language needed to guarantee that a standard apartment includes a toilet and so on? A tenant would just have verify that they are signing essentially the same contract that all their friends are signing (e.g. it would be certified by a non-government standards organization). If they really wanted to pay less for a substandard apartment, they'd have to do a lot of extra work in determining the contract language. Most people would opt for the standard.

I think the idea of regulating minimums is to make it impossible to negotiate the substandard contract rather than making it less costly to negotiate the standard one. There is a public good to making sure that everyone has indoor plumbing, for instance, and that the landlord is responsible for repairs, etc. even if the landlord and tenant disagree because significant population living in substandard conditions will create a nuisance for everybody else. (Libertarians of course disagree with that justification.)

So I think that the argument about simplifying contract writing, while appealing, is probably a red herring.

Well, I rather like safety and comfort standards for apartments. Try talking to a tenant who is praying for heat in the winter in a New York apartment before you pay attention to Milton Friedman. The only hope for the tenant is immadiate legal assistance and a court order involking the wonderful standards that allow us warmth when warmth we need.

Conservative economists live in a world of imagination. I live in a world where heat in winter is a lovely standard on which to rely.

I'm speaking as a right-of-center economist here. Non-economists could potentially have a great contribution to public-policy debates. Maybe not so much in terms of economic analysis but in terms of values or the assumptions to be fed into a model. The hyperspace of possible assumptions or preferences is so vast that a bit of outside guidance can't hurt. Think of cognitive scientists and the attempts at experimental economics for one example, or of ethicists who help to place weights on different outcomes that affect people. It doesn't take an economist to outlaw murder for instance, and economists can get notoriously nutty when outside our own fields of expertise.

The problem is putting non-economic contributions to economics into perspective. I don't expect a nutritionist to have much useful to say about rent controls or trade. But many interesting economic models have come from outside the profession--sharecroppers inventing the modern theory of human capital, for instance, or evolution providing an explanation for intergenerational altruism. There's a role for both deduction and induction in life. Who knows, even a sociologist may say something sensible sometimes.

Speaking as another non-economist, here are some questions I wish economists (especially free-market enthusiasts) would ask when confronted with morality tales like the hot-water story:

1. What is special about hot water? Alex Tabarrok claims to be talking about it, but his entire logic would be the same if you said "widget" or even "17th century antique writing desk" in every spot he says "hot water" -- except that no governments regulate antique writing desks and pretty much every government regulates hot water or other basic amenities. There must be something different about basic amenities in the real world that is not present in his story, and economists too often ignore minor differences like those between hot water and antique writing desks.

2. Do you really think that governments are all malevolent and/or stupid? He argues that governments everywhere are taking actions that go against the interests of all concerned, so I presume he thinks they are one or the other. Which? And why?

3. Do you really buy and sell hot water? No you don't. When it comes down to it, he is really talking about is a reliable hot water service (as many places actually meter hot water, so you are not paying for a fixed quantity of the stuff).

Reliability is an expensive quality to check, and the low-income market where this is an issue has little extra money, so there is a big incentive for landlords to supply badly-maintained hot water. The market for reliable hot water is a little lemon-flavoured, to say the least; and the consequences of market failure are large. Perhaps governments worldwide are not quite as stupid or malevolent as Alex Tabarrok apparently thinks they are.

This is all wrong! Obviously, the only people competent to express opinions on public policy are: 1. lawyers, 2. who practice in the area of civil rights, 3. on the side of the individual. Luckily, by one of those strange, cosmic coincidences, I happen to be just such a person!

"Well, I rather like safety and comfort standards for apartments" I agree, and also for nursing homes facilities, and the like. Without such standards, old and sick residents will continue to perish in fires, while children unfortunate enough to have low income parents will continue to enjoy the burst of satisfaction that comes with an ice cold shower or bath. There is just no end to the amenities suppliers will provide to their low income renters or occupants if we just have sense enough to not set any minimum standards.

I echo Mr. Yomtov. I see two questions (the ones he lists) but the third question is unclear. Could someone spell it out?

"Well, I rather like safety and comfort standards for apartments. Try talking to a tenant who is praying for heat in the winter..."

The typical tenant will have arranged for heat already. Why didn't this particular hypothetical tenant arrange for heat? Was he too stupid to do so? In that case the standard is there to save him from his own stupidity. Was he too poor to do so? In that case the standard could price him right out of the housing market entirely, leaving him homeless. And how would that be an improvement?

"The only hope for the tenant is immadiate legal assistance and a court order involking the wonderful standards that allow us warmth when warmth we need."

If the tenant is not poor and not stupid, then the first line of defense for the tenant is to simply get some heat and pay for it, either directly or in his contract with the landlord. If the tenant is either stupid or poor, then if the court says "you must give tenants heat", the landlord can say, "okay, he's no longer a tenant". If the court forces the landlord to keep his tenant and furthermore to keep the rent down - well, that's a totally different set of issues now isn't it.

New York City Legal Aid attorneys file numerous actions on behalf of tenants through the year to enforce proper landlord care. A landlord who allows too little heat to tenants in winter, can not easily be countered by tenants. But, the standards allow for countering by Legal Aid attorneys. Of course, if you are affluent in New York City there will be little problem with affording an apartment where heat will never be an issue but even here there may be all sorts of subtle safety issues to determine.

Ah yes, now the free market economists have all gone out and bought stock in paper companies. If we follow their path all contracts incorporate a plumbing, electric, heating code (remember you killed off the evul government ones), and if you point me to some private one, well the landlord will obviously pick the one with the boilerplate most favorable to landlords.

As to information being cheap to inquire, well put the word reliable in front and you have a whole different ballgame.

"1. What is special about hot water? Alex Tabarrok claims to be talking about it, but his entire logic would be the same if you said "widget" or even "17th century antique writing desk" in every spot he says "hot water" -- except that no governments regulate antique writing desks and pretty much every government regulates hot water or other basic amenities. There must be something different about basic amenities in the real world that is not present in his story, and economists too often ignore minor differences like those between hot water and antique writing desks."

What's different that hot water, even given the bump in rent, is a good deal to almost everyone. This is why the regulation seems to make a lot of sense, and it is why a regulation about antique writing desks would make little sense - since few people would want to spend the money necessary.

But the very things that are the most likely to seem to make a lot of sense to require, are precisely the very things that the market is most likely to supply in the vast majority of cases even without regulation, and for precisely the same reason - i.e., because it's a good deal to almost everyone. Since it's a good deal to almost everyone, it's a deal almost everyone will freely make.

Let me recap: regulation is most reasonable-seeming in precisely those matters where regulation is least required. It is most reasonable-seeming in those matters where regulation is least likely to make an impact, because it's what people are doing anyway.

Almost everyone will think that hot water is a no-brainer, and will pay for it. So, almost everyone will remain unaffected by the regulation. The regulation will affect only a few very unusual cases. Cases where, for example, people are so poor that they are seriously considering taking an apartment without hot water. But in these special cases, it ceases to be obvious that regulation is going to help these people - because it's possible that it will price them right out of the market. These people are precisely the people that the regulation aims to help - i.e., these most helpless people, the ones who are seriously weighing the value of hot water to them versus the cost of the hot water to them. Only those who are really having a tough time making financial ends meet are likely to even consider such a move as giving up hot water in exchange for the savings. But the very difficulty of their decision (whether to pay for hot water) means that in their case, the regulation has a significant chance of hurting them, because it will take that difficult decision right of of their hands, in effect forcing them to make a choice that they might prefer not to make - i.e., a choice that might harm them.

"2. Do you really think that governments are all malevolent and/or stupid? He argues that governments everywhere are taking actions that go against the interests of all concerned, so I presume he thinks they are one or the other. Which? And why?"

Nobody has made that claim. Neither malevolence nor stupidity has anything to do with the point.

"Perhaps governments worldwide are not quite as stupid or malevolent as Alex Tabarrok apparently thinks they are."

That's not the point that was being made.

"Ah yes, now the free market economists have all gone out and bought stock in paper companies."

Have you never rented? There are already lengthy contracts involved.

"If we follow their path all contracts incorporate a plumbing, electric, heating code (remember you killed off the evul government ones), and if you point me to some private one, well the landlord will obviously pick the one with the boilerplate most favorable to landlords."

Actually that's not true and is easy to refute. "Most favorable to landlords" would be something like "the tenant agrees to pay his entire salary to the landlord, and also agrees not to actually occupy the apartment". In the real world, competition between landlords, and competition between tenants, bring the standard boilerplate contract - such contracts do exists by the way - to some balance between the interests of the landlord and the interests of the tenant.

This is really nothing more than a simple generalization of any market transaction. Competition between (say) canned tuna fish sellers, and competition between tuna fish buyers, bring various factors into a balance (factors like price, quantity of tuna, and quality of tuna). A can of Starkist tuna will not cost a hundred dollars, because people simply would not buy it - they would buy Bumblebee tuna instead.

Basic economics here, nothing else.

It is not the case that economists, commenters, and pundits from the libertarian perspective don't believe in market failures. It is true that libertarian types would argue that:

1) The term is over-used. "Bob doesn't get free drugs," or hotwater, or whatever, is not a market failure. Neither is, "I want X and the market didn't invent it for me."

2) Failures of government are more pervasive than failures of market. Market decisions that produce what you deem to be negative consequences are almost never effective over as wide a swath as a bad regulation. Challenges to market 'preferences' occur at every transaction, while challenges to regulation by individuals lands them in jail. Regulations also stick around forever due to public choice considerations.

3) Regulations always have the cost of making dynamic solutions impossible, making them less 'wise' compared to prevailing markets as time progresses. They replace expressed preferences a billion times a day with the opinion of a few self interested regulators responding to select special interests in a single voting session.

Brad, or anyone, I would be extremely interested in getting a reaction to my post on this topic, available here: http://tinyurl.com/69ves.

Because of the insularity of much academic legal dispute, the controversies that play out in law reviews have not, until recently, been very integrated with other social science debates. Taborrak is blithely passing over decades of significant debate with his simplistic models.

http://fugop.blogspot.com/2004/08/warranties-of-habitability.html

Dave Meyer

What a splendid argument. I highly recommend it and will return often to you blog.

Anne

Dave Meyers -

- My argument is as follows: According to the "filtering model" of low income housing supply, poor people are likely to live in neighborhoods where building values are declining, even when housing conditions are improving. Under conventional neo-classical microeconomic assumptions, we would expect landlords to undermaintain, or "milk," buildings in declining slum neighborhoods. The degree of undermaintenance is theoretically indeterminate. Enforcing a code or warranty should prevent it, prolong building life, and increase housing supply. Contrary to the conclusions of "mainstream" analysis, the effect of comprehensive code or warranty enforcement on the price and quantity of slum housing is therefore indeterminate. Selective enforcement could increase supply more than it decreases it, and depress rent levels for the poor. Institutional conditions make it likely that slum landlords will sometimes seriously rather than trivially undermaintain, and that neighborhood effects will amplify individual landlord decisions into large scale trends. -

bakho: Good point about public health issues.
Paul Callahan: Public nuisance, libertarians disagreeing
anne: "Conservative economists live in a world of imagination."

All of this appears to be in line with the "free market yes, but please not in my backyard" theme (where the second part is rather implied than ever explicitly stated).

There are good reasons to have some housing codes and not others. A code requiring space heating and hot water is a good idea because in its absence tenants might do something dangerous to provide these things for themselves. On the other hand, a code requiring sound insulation is probably not a good idea because it would raise costs. I would like a quiet place, and I would pay more to get quiet, but many people would rather save money and put up with some noise.

The main argument seems to be that we need regulations because the contract and torts system is too complicated, slow and expensive a system to rely on. I think there is some merit to this idea, but it assumes that “The Ministry of Housing” will provide the appropriate relief for tenants who have been wronged by their landlords, and do it better cheaper and faster than the current legal system. Of this I am not convinced having been witness to how New York’s own “Ministry of Housing” operates. Many tenants who have had the city take over their units complain that the city is a worse landlord that the former private owners (who can be very bad). Then there was the infamous (but award winning) Pruitt Igo city housing project in St. Louis. According to Robert Hughes in his art history series “The Shock of the New” the housing was so bad, the tenants finally cried: “blow it up!” And that’s what happened.

In constant terms the landlord wants all of my money so obviously the free market works because she didn't get it. In reality (and yes we have lived in such hutches) the problem is exactly the same as the issue of unionization. Theoretically you and Bill Gates are equals and can set up your own employment contract. In reality Bill has you by the short ones.

The same thing up and bites those with more money, if it were not for codes, how many of those shiny houses would be falling down?

Do you think that the owner of the house next to yours should be permitted to rent out a shack behind his house? Oh, and by the way, it has no no toilet, so that the tenants have to shit and piss in the yard. If you think this should be illegal then you agree that housing codes are necessary. All there is to argue about is what they should provide.

Constant:

On the first question, I think we just need to disagree, given the space available in comments. I think that asymmetric information and externalities are important when it comes to things like reliable hot water supplies, you don't.

On the second question, however, note that (a) I was addressing earlier points in the comments (eg, Jonathon Goldberg's first comment) that asked what kind of questions economists should ask, but tend not to. Still: I wrote

"2. Do you really think that governments are all malevolent and/or stupid? He argues that governments everywhere are taking actions that go against the interests of all concerned, so I presume he thinks they are one or the other. Which? And why?"

And you replied:

"Nobody has made that claim. Neither malevolence nor stupidity has anything to do with the point."

Why, then, do _you_ think governments at all levels have implemented minimal standards legislation of so many kinds, including habitability standards, if they really damage all parties involved, as Alex Tabarrok thinks they do? It is true that Alex T. never directly suggested malevolence or stupidity, but what other reason (apart perhaps from imitation) could there be, unless Mr. T's simple story actually does miss something important in the real world, as other commenters here (eg Dave Meyer in his fine post) argue.

One, left-of-centre carries a whole freight of other things with it. In particular, someone like that doesn't just have the charitable attitudes you are looking for, he or she also has a previous commitment, a prejudice, in favour of the approaches to adopt - a prejudice about the solutions. But we need only look at Chesterton and Belloc to see that one can be charitable and against the servile state. (I'm not offering up solutions here.)

Two, it's possible - indeed, common - for people to go native, to adopt the culture of their workplaces. One need only look at the many examples of bureaucrats working in the tax area who have convinced themselves that they are part of the solution - again, I am not asking whether they really are or not - not because of the soundness of the arguments but because it is psychologically the only way they can stay right with themselves. So it doesn't necessarily follow that experience working for a bureaucracy will show people that government failure can happen; it is more than possible that it will simply push them into psychological denial about such things. You know, like Bushites...

PM, you really are a wonder worker in strawmen, how do you do with the ladies?? For giggles why don't your try to defend either of your assumptions.

“In constant terms the landlord wants all of my money ...”

You could also say that the tenant wants the apartment for free. Yes there is a market for housing as there are lots of independent suppliers and lots of renters. In those places where housing is in sort supply it seems as though the landlord has a lot of power because he can get a big rent for a small place. But that’s because so many people want to live there and can come up with the bucks to pay it. When demand turns down then tenants can get all sorts of concessions as they did in NYC during the 1930s. Another problem is supply. In places like New York and San Francisco the supply has not kept up. And we get back to excessively strict building codes, which increase costs. It’s not really the result of an asymmetrical power relationship, except it’s pain to move, to that gives the tenant less flexibility in negotiating a new rent.

I think Constant misunderstands the issue re the cost of contracts. Constant states that they are easy to write these days. I suppose so... word processors and cheap copyng services and all... But it can still be very expensive to resolve conflicts and enforce contracts in a meaningful way. And a long detailed contract can mean more expense in enforcement as well as less. I think any economist that has worked as a consultant in a civil suit would confirm this. And imperfect enforcement maybe especially expensive when there may be third parties involved. For example, the neighbors Zarkov mentions, who have to put up with the privy in the backyard, or whose house is damaged when the jury-rigged space heater burns the place down. Or the whole neighborhood, if there is pest problem from lack of sanitation.

It also may not be simple if the landlord may be a corporation, with limited liability, and who is, in the US, a legal person with remarkable powers -almost paradoxical superhuman powers, combining limited liability with the ability to commit suicide and rise from the ashes of legal death like a pheonix -until it is convenient to surrender it's legal immorality... oops... immortality, again.

And a rental contract is NOT as simple as buying a can of food. It is a complex contract for provision of a flow of services from a capital good called a building. I think the intro textbooks discussion of rental and housing regulations, and rent control, are a bunch of hooey that does nothing other than alienate half the class. A big reason for this is because the comparison is wrong. Agreements for renting or selling capital services between businesses should be comparison point, not contracts for buying snow-cones or widgets that are consumed and disappear as soon as convenient. This is why anne's comments are interesting. Of course, when regulations and restricitons in contracts between business are discussed, the we can talk about fancy theories of efficient market regulation, etc.

The Tabarrok example is just a simple case of an in-kind transfer, in the same way a government can require that employers have to shoulder some of their employees' health insurance costs. Even though the employer/landlord is technically burdened with the bill, the actual split of the cost will be determined by the parties' respective bargaining powers (in econospeak by something called the pass-through fraction).

There is nothing in this example that presumes that at least one side (especially the tenant/employee) should profit from the legal remedy. But the implication that this was the intention of the law, and that it failed in it is also wrong. (Note that Tabarrok doesn't actually state this, even though most commentators take him up on it.) The goal of the law is simply to keep those tenants/employees who would spend their marginal dollar rather on other, less socially useful goods than hygiene and health from doing so.

The reason why it makes more sense to hold landlords or employers culpable than tenants or employees is that the former have assets which can be seized, so enforcement has more punch. They essentially take on the role of adults which are held accountable for their offspring.

While I think most of the criticism of Tabarrok misses the point he could have asked better questions to steer the students to that point. E.g., if hot water and cable tv are amenities for which the tenant might be willing to pay less than what it would cost the landlord to provide them why do we see legislation mandating hot water but not cable tv? The answer is the former has public health implications which, as a form of negative externalities on the public at large, are at the core of economic explanations of the law.

ER, isn't the "need only look..." part of each paragraph a reference to supporting material? Also, the first paragraph presented my own understanding of "left of centre", and then used it as a tautology - one needn't prove anything to support what is implied. If you have another definition, by all means offer it in clarification. We would then be able to see if (say) everybody with charitable impulses gets counted as left of centre, ruling in people like Chesterton, Belloc and even me.

You can think of housing codes as collective bargaining - not for better housing, but for better employment.

There is a large population that tolerates subsistence wages: they are paid the bare minimum amount of money they need to survive. They cannot demand more, because there is always somebody else willing to work for subsistence wages.

If you force everyone to buy hot water, that forces the subsistence employee to go to his boss and say "I need a raise to pay for this newly-mandated hot water." The employer can no longer just fire them and look for somebody who is willing to live without hot water, because all of a sudden, there is nobody living without hot water. Effectively, this is like collective bargaining. Technically, you haven't mandated that the employer pay for hot water, but in effect, it comes to the same thing.

Josh Yelon:

Or in the alternative the employer moves his company overseas where the workers are used to not having hot water. If it were simply a matter of mandating things, why not increase the minimum wage to $25 per hours and create prosperity? Then the workers could have better housing. I don’t see the difference according to your argument.

Zarkov: it comes down to what you want from your economy. There are tasks to be done that only produce $3.00 per hour worth of value. If you raise the minimum wage to $4.00, then people will stop hiring employees to do those tasks. So the question is, is this a good thing or a bad thing? The answer is - if there's somebody so unskilled that the only task he can do is the $3.00 task, then we've hurt that guy. On the other hand, if there's somebody out there who's producing $5.00 per hour in value but he's only receiving $3.00 in pay because his negotiating leverage is poor, then we've done that guy a favor. How do you know which group is larger? Simple - raise the minimum wage. If after doing so, you still have full employment, the former group was negligible.

Zarkov - but you're right, there's not much difference between raising the minimum wage and raising the minimum cost of living. Nobody will accept a wage less than they need to survive, so effectively, by raising the minimum cost of living, you've set a minimum on wages.

"I think that asymmetric information and externalities are important when it comes to things like reliable hot water supplies, you don't."

I don't think that's a fair summary. It paints you as thoughtful, the other guy as thoughtless, while conveniently leaving out the details of the dispute.

"Why, then, do _you_ think governments at all levels have implemented minimal standards legislation of so many kinds, including habitability standards, if they really damage all parties involved, as Alex Tabarrok thinks they do? It is true that Alex T. never directly suggested malevolence or stupidity, but what other reason (apart perhaps from imitation) could there be"

Stupidity and malevolence are not the only to bring about bad results. In probably thousands of literary works, fitting under the category of "tragedy", we can observe intelligent people, with the best of intentions, bringing about bad results.

"I think Constant misunderstands the issue re the cost of contracts."

That's not really fair. I answered some specific points - I didn't intend to answer everything that was said about contracts in this entire discussion. As for much of the rest, here's a relevant link:

http://cafehayek.typepad.com/hayek/2004/08/tabarrok_delong.html