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3 (22) - CHAPTER 2 ECONOMIC MODELS TRADE-OFFS AND TRADE 39...

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Unformatted text preview: CHAPTER 2 ECONOMIC MODELS: TRADE-OFFS AND TRADE 39 example, the proposition that rent controls lead to housing shortages—reporters and editors are likely to conclude that there is no story worth covering. and so the professional con- sensus tends to go unreported. But when there is some issue on which prominent economists take opposing sides on the same issue—for example. whether cutting taxes right now would help the economy—that does make a good news story. So you hear much more about the areas of disagreement with- in economics than you do about the large areas of agreement. It is also worth remembering that economics is. unavoidably. often tied up in politics. On a number of issues powerful inter- est groups know what opinions they want to hear: they therefore have an incentive to find and promote economists who profess those opinions, giving these economists a prominence and visi- bility out of proportion to their support among their colleagues. But although the appearance of disagreement among econo- mists exceeds the reality. it remains true that economists often do disagree about important things. For example. some very respected economists argue vehemently that the U.S. government should replace the income tax with a value-added tax (a national sales tax, which is the main source of government revenue in many European countries). Other equally respected economists disagree. Why this difference of opinion? One important source of differences is in values: as in any diverse group of individ- uals, reasonable people can differ. In comparison to an income tax. a value-added tax typically falls more heavily on people of modest means. So an economist who values a society with more social and income equality for its own sake will tend to oppose a value-added tax. An economist with different values will be less likely to oppose it. A second important source of differences arises from economic modeling. Because economists base their conclusions on models. which are simplified representations of reality. two economists can legitimately disagree about which simplifications are appropriate—and therefore arrive at different conclusions. Suppose that the U.S. government was considering introducing a value-added tax. Economist A may rely on a model that focuses on the administrative costs of tax sys- tems—that is, the costs of monitoring. processing papers, collecting the tax, and so on. This economist might then point to the well-known high costs of administering a value- added tax and argue against the change. But economist B may think that the right way to approach the question is to ignore the administrative costs and focus on how the pro- posed law would change savings behavior. This economist might point to studies suggest- ing that value-added taxes promote higher consumer saving. a desirable result F 0 R I N u U I R I N G M I N D S .....- . |lr'rl'hen Economists Agree lo‘. u'. a a a ..—. o: L‘- d 7 ‘5 s '2 E a. r. s 'i E E 5 u z seer-Jed. rules: invnm Sh'h DIC.'\'|'E.J\L nzhrsr ”If all the economists in the world were laid end to end. they still couldn't reach a : conclusion.” So goes one popular economist joke. But do economists really disagree that much? Not according to a classic survey of : members of the American Economic Association, reported in the May 1992 issue of the American Economic Review. The authors asked respondents to agree or disagree with a number of statements about the economy; what they found was a high level of agreement among profes- sional economists on many of the state- ments. At the top, with more than 90 percent of the economists agreeing, were ”Tariffs and import quotas usually reduce general economic welfare" and ”A ceiling on rents reduces the quantity and quality of housing available." What’s striking about these two statements is that many noneconomists disagree: tariffs and import quotas to keep out foreign-produced goods are favored by many voters, and proposals to do away with rent control in cities like New York and San Francisco have met fierce political opposition. So is the stereotype of quarreling economists a myth? Not entirely: economists do disagree quite a lot on some issues, especially in macroeconomics. But there is a large area of common ground. ............- ...
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