Economists have shaped the modern world in many ways. Governments make policy choices in response to the data that we produce about things like GDP and inflation. Social media companies use our insights about human behavior to create features that encourage people to use their platforms. And we’re at the heart of everything from incentivizing renewables developers to build more wind farms to regulating the behavior of tech giants likeGoogleorFacebook.
Yet this is only one side of the story. A curious thing about our profession is that when we academic economists largely agree with each other on something important, the rest of the world often completely ignores our conclusions. Are these findings too counter-intuitive, too impractical, or something else? Here are five examples so that you can decide for yourself:
1. A lowest price guarantee means you will end up paying too much
Retailers make these kinds of price pledges all the time: if you find this item cheaper somewhere else, we will match the price. I see it everywhere fromgrocery storestofurniture shopstopharmacies.Yet while such a guarantee seems at first sight to benefit consumers, decades of evidence – fromtire retailerstogrocerystores– shows that they are mostly a subtle way for retailers to collude on maintaining high prices.
When a retailer offers a low price, it mainly does it to attract consumers by being cheaper than its competitors. But by committing to a price match, each time your competitor offers a discount to your price, your customers know they can come to you and benefit from the same price.
The competitor therefore has nothing to gain from offering a discount and prices remain high. Interestingly,it’s illegalfor competitors to collude with one another to fix prices – yet price-matching effectively does exactly that, and it’s legal everywhere.
2. Housing subsidies given to tenants often benefit landlords
One of the first principles a student of economics learns is that people receiving a subsidy are not necessarily the ones who benefit from it. For example, in astudy inFranceback in 2006, property owners were found to be pocketing more than three-quarters of housing subsidies being given to tenants.
The reason was that the subsidies motivated families to move into larger houses, and for students in those families to become independent earlier. Since the number of houses on the market remained fairly constant, the main effect of this extra demand was to increase rental prices both for larger homes and for student accommodation – thus transferring taxpayer money to those who needed it the least.
Compare thiswith a studyof the effects of cuts to housing benefits in the UK in 2011-12. Households renting larger houses – in a reverse of what happened in France – demanded smaller ones, and this drove prices down and hurt landlords the most. On the other hand, the poorest households already lived in rental accommodation that was too small for their needs so could not realistically move to something smaller. For this reason, they had no choice but to absorb the benefits cut themselves.
In both the French and UK examples, instead of housing subsidies, the government should have simply given the renters money and let them decide what to do with it. That way, people would have chosen the most suitable accommodation and spent anything left over on other things, such as better food, education orhealthcare.
3. Cost of living concerns are never a valid reason to avoid taxing pollution
Gas and fuel prices have soared following the Russian invasion of Ukraine. Motorists are having to pay much more to fill their tanks, while many households are struggling with their power bills.
To fight this crisis, European countries such as France have been offeringfuel rebatesto consumers. This helps people, but it is also great news for energy suppliers. In many cases the supplier is Russia, so it feeds directly into Vladimir Putin’smilitary budgetand does nothing to help carbon emissions.
Most economists would instead place new tariffs onRussian oilto price in the cost of financing the war and induce businesses and consumers to switch to other energy sources whenever possible. The revenues raised by the tariffs can then be used tohelp people directly,be it by lowering other taxes or byfinancing social security.
In the UK, we are doing the exact opposite to this. Consumers are having topay more national insurancewhilefuel dutiesare being cut.
4. Politicians are often more credible when they delegate
To convince people to trust you to do something, one solution is to takeout of your handsthe possibility of changing your mind later. This is whycentral banks areindependentof governments: so that investors believe they are not playing with interest rates for electoral gains.
In most matters, however, governmentsare reluctantto delegate decision-making to independent institutions. In France, for instance, several governmentsspent billionsof eurosbetween 2009 and 2017 on the infrastructure needed to implement a tax on trucking, only to back down entirely in the run-up to the presidential election. Had the implementation of the tax been delegated to an independent agency, the fiasco would never have happened.
In another example, the UK recently launched thesharedprosperity fundto replace EU-allocated funds to its poorest regions. The new system ismuch morecentralizedthan before and it ishard to knowhow much previous funding will be matched. Centralized regional development funds can also be prone tofavoritism andpolitical patronage,which in the UK would reduce thecredibility of the governmentin its plans to “level up” the country.
5. Investors consistently beating the market are probably doing something illegal
There isno magic formulato predict short-term changes in the value of a financial asset. Sure, some investments return more money than others, and financial bubbles certainly exist, but anyone asking you to trust them to make more money than the market in the long run is either lying or knows something the rest of the world does not.
If it’s the latter, we call it insider trading. This is illegal, althoughit still happens.During the 2008 financial crisis, for instance, politically connected investors who knew where the government would intervene made much more money than others did. Stories about financial geniuses may bemuch more appealingthan these kinds of realities, but that doesn’t mean they are true.
Author
Senior Lecturer in Economics, Lancaster University Management School, Lancaster University
Renaud Foucart does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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