Ignoring people

Are economists - even when they are right - guilty of ignoring people’s real experiences?

I ask because of the row over business rates. Some businesses face a big increase in these. To this, it’s tempting for economists to point out the incidence of rates. This often falls not upon businesses themselves but upon landlords: higher rates lead to lower rents, which means that rates are in effect a cack-handed form of land tax. The IFS has said (pdf):

Much of the burden of business rates is passed on from the occupiers of non-domestic properties to the properties’ owners (if different), via reductions in the properties’ market rental values.

I believe this. But I sympathize with business owners who aren’t convinced. The question is: how is the burden passed on? One way is through rents being renegotiated – a process which favours bigger businesses against smaller landlords. Another way is by firms moving to cheaper premises, or threatening to do so. Even the latter entails costs – of researching rents on plausible premises and being distracted from the tough day-to-day job of running your business.

Even in cases where the burden of rates is passed onto landlords, business owners suffer hassle. Talk about tax incidence – even if it is true – underplays this hassle. Economists’ analysis of comparative statics overlooks the human difficulties of moving from one outcome to the other. Real life is lived in time lags and in disequilibria.

Rates are not the only example of this. I suspect immigration might provide another. Here’s one study of how immigration affects natives:

Native Europeans are more likely to upgrade their occupation to one associated with higher skills and better pay, when a larger number of immigrants enter their labour market. They are also more likely to start a self-employment activity. As a consequence of this upward mobility their income increases or stays the same in response to immigration.

Again, I find this plausible. And again, it neglects the lived experience of those affected. Even those who make the upgrade well face a period of uncertainty: what job can I do? Will I get it? Will my business succeed? And so on.

Now, I stress here that I’m looking at cases where I believe economists to be more or less right. In other cases, some economists are guilty of a bigger error – of over-estimating the likelihood of a benign adjustment. Those who think that jobs lost because of the UK leaving the single market can be offset by ones created by more exports to Australia are making the same mistake Patrick Minford made in the 1980s when he supported pit closures on the grounds that redundant miners would find jobs as supermodels and astronauts*; they are over-stating people’s flexibility.

Instead, I’m making a point with a heavy heart – that even good, empirical economics can overlook real lived experience. Perhaps economists need more ethnography. This might be one reason (of several) why there is a big and regrettable chasm between economists and lay people.

* He didn’t use these examples, but he might as well have done.

Comments

[Bloke in North Dorset]

In some industries, eg mobile operators, its even more complicated.

Most MNOs have long leases as they want stability for their sites and can only break every 5 years or so. Leases also tend to be upwards only eg rising by CPI or RPI whichever is largest.

Even if they do want to move its likely that the landowner owns the area where they would need to move to, in many rural areas there aren't places which match the coverage so they are stuck. Should they find cheaper land/buildings they've then got the hassle of getting planning permission, no easy task nowadays (in one job I did (not MNO) we were turned down planning permission on an existing telecoms mast and had to appeal).

Finally they have to provide a certain level of population and land coverage to meet their licence obligations so they can't just shut sites down.

I know there's little sympathy for MNOs but it does illustrate the real world problems and that in this case the incidence is likely to be on us and not the landlord.

[Mark]

BiND's argument that increased business rates don't depress rents in the short run is also true of shops, offices, warehouses and other categories of commercial property where leases are typically long. And even where they're short - think a shop or restaurant nearing a break point in its tenancy - the friction costs of moving (new fit-out, risk of losing customers) may be high, forcing them to remain on the existing terms, since a threat to relocate would not be believed by the landlord.

I'd argue one reason why economists make this kind of mistake is that it's based on a cognitive bias formed out of a lack of diversity. How many economists of influence have run a small business, and actually had to deal with lease agreements?

Moving briefly further into the Zone of Uncomfortable Debate, the same may be true of some of the shibboleths concerning immigration.

[Luke]

Mark,
"How many economists of influence have run a small business, and actually had to deal with lease agreements?"

Come on. Is there a single economist in the world who is unaware of the existence of leases? In the piece above, renowned economist CD, who I doubt has ever negotiated a commercial lease, spends two paragraphs talking about how tenants don't get a neat and immediate rent reduction, or indeed any at all.

[aragon]

Economists create the Distopia and expect the rest of us to live with the result.

Credited to Jack Welsh, but the Vitality curve has economist written all over it (Unrealistic assumptions and lack of evidence).

https://en.wikipedia.org/wiki/Vitality_curve

"Jack Welch's vitality model has been described as a "20-70-10" system. The "top 20" percent of the workforce is most productive, and 70% (the "vital 70") work adequately. The other 10% ("bottom 10") are nonproducers and should be fired"

Allowing rates (business and residential) not to be revalued on a regular basis introduces distortions, which are subsequently difficult to correct, especially when they favour areas with high asset inflation.

A little understanding of the limits of the cold equations, a little understanding of human nature and real processes would not be out of place for economists.

[aragon]

The cold equations.

https://en.wikipedia.org/wiki/The_Cold_Equations

""The Cold Equations" is a science fiction short story by American writer Tom Godwin, first published in Astounding Magazine in 1954"

http://www.drabblecast.org/2013/07/15/drabblecast-289-the-cold-equations/

The whole X-Minus One series are worth listening to (available legally on the Internet as in the public domain in the USA/UK).

[aragon]

X Minus One at Archive.org

https://archive.org/details/OTRR_X_Minus_One_Singles/XMinusOne55-08-25015ColdEquations.mp3

[Mark]

@ Luke, Chris Dillow is unusual among economists in being of working class origins. And even then, he's not among the establishment of that profession because, perhaps understandably as someone unlikely to benefit from family money, he chose to achieve financial independence through a career investment banking rather than choosing the modestly-paid if prestigious option of academia. Yet even he discusses why commercial property tenants don't react to rate rises by renegotiating rents without making reference to what anyone who has ever run a business in leased property knows, namely that such leases are long.

QED.

[b]

@Mark

Either way, the costs you're discussing are transitional. I expect most economists, if asked, would agree that investigating and mitigating such costs to be good policy.

I'm a civil service economist and transitional costs are always someting we think about in my department - normally we phase things in over a number of years to reduce them.

The reason these rates got shoved as one big changes without warning is, no doubt, political.

[DBonar]

The quoted reaction to immigration seems to need more explanation. Surely it isn't that when more immigrants enter a region those already there suddenly realize they could be earning more in different work. Why don't they have the same realization without the immigration? It sounds too neat and tidy that all it takes is the mental shake for some new faces in the area and suddenly people understand they really wanted to change their life all along.

In the long-run, it may be the right picture, but the transition is a negative effect that often doesn't get measured.

[aragon]

One report that suggest the UK are losing 30 Billion due to cheap EU labour.

http://www.express.co.uk/news/politics/771863/Pensions-EU-migration-economic-catastrophe-cost-Brexit

"He [Bob Lyddon] said: "This is due to the low levels of tax and National Insurance contributions from low paid migrants, instead of contributing to the funding of pensions and benefits their contributions will not be enough to fund what they are drawing down in public services and benefits now, and the UK's liabilities for future pensions that they will be entitled to will grow rather than shrink."

Paper does not appear on site at this time.
http://globalbritain.co.uk/brexit-papers/

[DavidM]

"Perhaps economists need more ethnography."

Wasn't this Elinor Ostrom's point (at least, one of them)?

Ostrom's law: A resource arrangement that works in practice can work in theory.