Understand economics to know policy

This paper highlights the importance of instilling knowledge of economics among the public

Published - January 11, 2023 08:30 am IST

Representative purposes

Representative purposes | Photo Credit: Getty Images

Nall, Clayton and Elmendorf, Christopher S. and Oklobdzija, Stan, Folk Economics and the Persistence of Political Opposition to New Housing (November 2, 2022). https://ssrn.com/abstract=4266459

Economists usually blame special interest groups for the prevalence of bad economic policies. The adverse effects of such policies can turn out to be destructive in the long run. In the U.S., for instance, housing policy that restricts supply is estimated to have lowered overall economic growth by more than a third between 1964 and 2009. It is also estimated that housing prices in the most heavily-regulated metropolitan markets are about three times more than what they would have been in the absence of these regulations which restrict the supply of houses. The narrow economic interests of landlords have usually been blamed for the prevalence of bad housing policy. After all, restricting housing supply helps keep housing rents high, which in turn works to the favour of landlords. This is why many economists recommend the abolition of restrictive zoning and land-use planning laws. Further, the fact that local landlords are able to organise better as a group, than migrating tenants, to lobby for their group interests has also been cited as a reason behind bad housing policy. It should be noted that individual landlords, as part of a small and concentrated group, have a lot more to gain from organising to lobby for their interests than individual tenants who are part of a much larger group with diffused benefits to gain from forming a lobby group.

Prices need to rise before they drop

Yet another crucial factor may be behind the widespread prevalence of bad economic policies. In “Folk Economics and the Persistence of Political Opposition to New Housing,” researchers Clayton Nall, Chris Elmendorf, and Stan Oklobdzija document how public misunderstanding about economics can lead to bad housing policy. It is widely accepted by economists that the supply of a good or service has to first rise for its price to drop, thus making the good or service accessible to more people. This means that if policymakers want to make a good or service widely available to the public, they need to implement policies that boost supply. It would be expected that such a fundamental principle of economics would be widely known among the general public. But the authors of the paper found that only about 30 to 40% of respondents actually believed that an increase in the housing stock would cause housing prices to drop. In fact, about a third of the respondents believed that a rise in the housing supply would cause housing prices and rents to rise rather than drop. It would not be a surprise if these respondents actually supported housing policy that restricted housing supply thinking it would help rein in housing prices. Moreover, many people seem to blame real estate developers who play a crucial role in the housing supply chain for high housing prices. This may be due to the common myth that profiteering by greedy developers, rather than insufficient supply, is what causes housing prices and rents to be so high. However, people do not lay any blame on environmentalists and other groups who support policies that restrict the supply of housing in the market. Most importantly, the respondents with a bias against boosting housing supply made it clear that they would prefer housing prices and rents in their cities to be lower in the future. In other words, the respondents wanted houses at affordable prices without a rise in the supply of houses in the market. This highlights the fact that, when it comes to issues of public policy, people can often hold opinions that contradict each other. The results of this study highlight the importance of instilling a basic understanding of economics among the general public. Given that public understanding of economics can play a significant role in shaping government policy, ignorance of basic economics can have a huge impact on economic growth.

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in


Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.