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Erik Craft column: How an economist thinks about economic policy
Economic Issues

Erik Craft column: How an economist thinks about economic policy

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As we approach another general election and political parties share their platforms, it is worth reminding voters what economists do. We don’t identify the right policies; we identify the trade-offs and consequences of policies so voters and policymakers can make more informed choices, given their values.

For example, one goal is to make housing more affordable, especially for low-income families. A traditional approach is to impose rent controls. Price controls lower housing costs for those already living in apartments.

But rent controls lead to many other problems that economists predict and identify. They create shortages of housing by discouraging new construction; they waste a person’s time when searching for apartments; they discourage people from moving to apartments that better suit their job or situation; they encourage discrimination against prospective tenants; they discourage maintenance of pre-existing housing; and they encourage black markets.

There is no perfect method to add up the costs and benefits of rent controls to present and future tenants. But economists can suggest different approaches that might reduce the identified harms and still achieve the key elements of the original goal.

One possible solution is to target assistance via housing subsidies to low-income households or families with many children. Such an approach limits several problems while assisting whoever society identifies as most deserving. Another response to high housing costs is to reduce zoning restrictions, especially near public transportation stations. That increases housing density and is a green solution.

Let me outline how this approach of seeking alternative ways to achieve common goals could be applied to other policy questions.

Global warming: Instead of the Green New Deal (government subsidies to alternative energy sources, and increased mandates and regulations), impose a carbon tax on products according to their contribution to global warming. Refund the tax revenue to families.

The Green New Deal depends on the government having the ability and the self-control to identify the most appropriate clean energy sources of the future and methods of conserving energy. Alternatively, higher taxes on carbon emissions force all products that use energy to include the full social cost of those products. They encourage markets to identify the best alternatives, such as wind power, solar power, more insulation, more carpooling or moving closer to your job.

Subsidizing electric or mandating extremely fuel-efficient vehicles causes people to drive even more since the cost per mile drops, thereby creating another type of pollution: congestion. Combining carbon/gas taxes with tolls varying by time of day can discourage that type of inefficiency.

By refunding the carbon tax revenue on a per-person or per-family basis, the tax burden does not rise. Inequality is reduced, since low-income families would receive the same refunds as high-income families, while paying less in carbon taxes than wealthier families who use more energy.

Minimum wage: Instead of large increases in the minimum wage, expand funding of the earned income tax credit. This approach targets low-income families for income assistance while avoiding the negative consequences of increased unemployment, mismatched workers and jobs, time wasted searching for jobs, increased discrimination and lower-quality work environments.

Education: Instead of forgiving student loans or making college free, invest in early childhood education. Many would argue we have a social responsibility to provide equal opportunity for all children. Forgiving student loans only helps those who already have their educations, many of whom have or will have high-paying jobs. This would be costly to the government and do little to reduce inequality.

Expanding early childhood education with targeted assistance to low-income families would increase equity and social efficiency. There is a growing body of research suggesting that such investments, while not making people smarter, increase high school and college graduation rates, increase marriage rates and reduce criminal activity — all socially valuable outcomes.

International trade: Instead of tariffs and trade wars that reduce our standard of living, increase support for those harmed or experiencing economic anxiety from increased immigration and trade. While economists are skeptical of large effects on incomes from immigration, many communities have been harmed by increased international trade and a general widening of incomes between people with and without college educations.

If a person’s health insurance were guaranteed, opposition to international trade would be reduced; potential entrepreneurs would be more confident giving up their jobs, founding companies and taking risks.

There often are more creative ways to achieve traditional economic goals that avoid inefficiencies and additional related problems. But one must set aside unrealistic and simple solutions that do not consider unintended consequences.

Erik Craft is associate professor of economics and philosophy, politics, economics and law at the University of Richmond’s Robins School of Business. Contact him at: ecraft@richmond.edu

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