Dodgy economics is flying around left and right as the new GOP health bill is being piñata-ed from all sides this week. One particular strand is the charge of economism in the political rhetoric around healthcare. I want to talk a little about that since it relates to the teaching of introductory economics. In sum I want to claim that there is no great crisis in econ 101 being reflected here, but that there are reasonable grounds to suspect that marginal changes could have a big impact in how the median econ 101 student absorbs our material.
almost policy analysis
Failures of imagination?
There’s an excellent (long) article on the role and response of academic economists in the current crisis/recession/apocalyse/trendy-noun over at the Boston Globe. Not a lot of it is tremendously surprising, but it does interview a lot of big names in the profession to get their opinions. The rub is this: why didn’t economists see all this coming, and what now for the profession?
There are (at least) two distinct kinds of failure that are possible here. The first one is a failure in reality, a failure to see things coming. The second is a failure of imagination, a failure to imagine what would happen as a result of that unforseen thing. In today’s terms, the first would be a failure to predict that everything would go all to hell, while the second would be a failure to predict the consequences if things had gone to hell.
If you ask me, the first one is forgiveable. The article quotes Laurence Ball as saying “Nobody ever sees anything coming,” he says. “Nobody saw stagflation coming, nobody saw the Great Depression coming, nobody saw Pearl Harbor or 9/11 coming. Really big, bad things tend to be surprises”, which might be a tad extreme but is a sentiment I can agree with. It takes an extreme fatalist to think that we can see everything coming if we just try hard enough.
However, the second might not be forgiveable at all. It represents a failure of contingency planning. One might stem from the other: if I think it’s very, very unlikely to rain, I might not want to waste too much time planning my umbrella strategy. If, however, we believe the article’s claim that “some warned of a housing bubble, but almost none foresaw the resulting cataclysm. An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime”, then we should be a bit perturbed. Again, the failure to see something coming is forgiveable, but to see it coming and fail to imagine the consequences is just plain strange.
This is a little scary, but I confess I have very little idea of how I, an economist, would be able to attack macroeconomic questions. I disagree with the first half of this (though not the second, which is that failure of imagination again):
“We have a very restrictive set of language and tools, and we tend to work on the problems that are easily addressed with those tools,” says Jeremy Stein, a financial economist at Harvard. “Sometimes that means we focus on silly questions and ignore greater ones.”
Similarly, I’m sceptical of this:
“…many of the models used to explain and predict the dynamics of financial markets or national economies have been scrubbed clean, in the interest of theoretical elegance, of the inevitable erraticism of human behavior. As a result, the analytical tools of the trade offer little help in a crisis, and have little to say about the sort of collapses that led to this one.”
I am a believer in the predictive and descriptive power of the abstract model. Instead, the view I relate to is that of Jeffrey Kling:
“What we’re experiencing now is a good old-fashioned financial panic… This is perhaps the biggest scale, but on some level it’s not that different.”
I think the economist’s toolbox – the one that contains no doctrine, no assumption, just method – is well equipped to understand most everything. Unfortunately, the principle of ‘garbage in, garbage out’ applies to economics as much as it does to computer programming; perhaps the real failure is not of the discipline of economics, but the imagination of those who practice it. We are, of course, not rewarded by universities or journal editors for asking questions like “if there is a housing bubble, and if it bursts, then what?” Those questions aren’t “research”; they’re not rewarded and we don’t have time for them. How can we be surprised that we were surprised?
Using economics to talk policy
A few years ago I took a course called “Economics of OECD Countries” with a wonderful teacher, Gavin Cameron, who sadly passed away recently. It was really an economic history course; we took a few big, general, flexible models from macroeconomics and used them to talk about the last hundred years in the rich countries of the world – the Great Depression, oil shocks, the ‘Golden Age’ of growth, the rise of computers, productivity. It wasn’t an especially politicized class, just nuts and bolts economics, but I’ll be forever grateful not just for learning a bit of history but for learning that a little model goes a long, long way.
For instance: the BBC website had a piece a while back about the presidential candidates’ economic policies with this passage:
Mr McCain has endorsed “supply side economics”, calling for more tax cuts for business to boost economic growth and sharp cuts in spending programmes.
Mr Obama, on the other hand, wants more domestic spending, particularly on health care, and has indicated that he is not averse to higher taxes on the rich to pay for it.
Again, I’m not going to start analyzing policy, but I really like – no sarcasm here, I promise – that the same debates that have cropped up again and again through the history of economic policy as an actual thing are still here. A crude characterization would be to call Obama Keynesian, on the strength of what the article is saying; it’s the famous injection of spending by the government to try to prop everything up, the great policy success of the original Keynesian era. That was the one that dragged America out of the Great Depression.
Or did it? Surely a bold stroke to open the government’s wallet when the whole country is broke, but, of course, there’s plenty of wiggle room for debate. One of the many things we talked about in our course was the role of war spending in providing a natural bounce out of the Depression. Same concept, different reasons.
McCain’s being painted in the BBC article as a supply-sider, which is something of a dirty little epithet around the Dem-leaning economics faculties of the world. Paul Krugman made his journalistic bones (as opposed to his impressive academic record) with “Peddling Prosperity“, a big chunk of which was devoted to a critique of what came to be called supply-side economics. Perhaps I’m reaching a bit here, but you could plausibly argue that supply-side policy grew out of monetarism, which was itself the big weapon against the oil-shock driven recession of the 1970s. Keynesianism versus monetarism was the big debate in economic policy, and it lives still into the 21st century.
As a teacher, the beauty of these debates is that they don’t need fancy techniques, or math, or number crunching, to be explained. Naturally some of the academics who’ve spent their careers on policy questions are doing very complicated things, but to explain – in simplified form, but correctly – what was driving the problems of the 30s, the 70s, or whenever, and the logic behind the policies that were tried, is easy. It takes a bit of clear reasoning and is even easier if we are willing to use a few simple diagrams, both commodities that go a long, long way in economics. It’s possible, even, to boil the whole mixture off to a supply-and-demand story. Don’t roll your eyes, though: there’s a reason why that’s the most famous, most reproduced little model in economics, and how awesome that we can use it to talk about the biggest policy issues of the last century.
Many economics courses are ‘tooling up’ courses, where you learn those models, the diagrams, the math; what is even more crucial are those courses like the one Professor Cameron taught me, the ones where we use those tools to think about interesting things. It’s truly staggering how simple the tools are that we used, truly gratifying to learn how far even the simplest little insight can go.
Education, or, What do people do?
David Glenn in the Chronicle asks ‘what explains the growing gap in wages?‘ The arguments covered run that the number of people going to college hasn’t kept pace with the demand for skill by employers, and that the slowing of educational attainment has caused wage inequality to increase. I’m biased towards any argument for universal education, even up to the college level (whether this would really increase the level of ‘skills’ is another matter, but I think that’s secondary), but I’m also a little skeptical that massively expanding higher education would bring down wage inequality in the way Glenn and his cited studies speculate.
First we have to worry about the usual signaling story – is college just an indicator that someone’s smart rather than something that makes them smarter? – but more than that, what would people do? What do people do? The 2000 US census has this (pdf link):
Management, professional and related: 33.6%
Service: 14.9%
Sales and office: 26.7%
Farming, fishing and forestry: 0.7%
Construction, extraction and maintenance: 9.4%
Production, transportation and material moving: 14.6%
‘Production occupations’ on their own make up 8.5%. Now, a potted history of modern development might go something like this:
1) agriculture; we don’t all have to be farmers anymore, let’s start making stuff: industrial revolution
2) cheap global trade in stuff; we don’t all have to make stuff anymore, let’s do professional services
3) now what?
If you are even willing to entertain that kind of a story, you have to wonder what it would really mean in the labor market to hypothetically educate everyone to college level (again, I like it for its own sake; not trying to argue against education). Buying the skills angle from the Chronicle article probably means believing that if we educate everyone they can all get the kind of Wall Street/banking/consulting/legal jobs that are typical of the direction OECD economies are heading in, right? Perhaps some of the scientists can do tech research, but for a bunch of college graduates you’re looking at a lot of things that don’t exactly scream ‘tangible production’.
That’s not quite the same as the argument the Chronicle’s citations are opposing, which is to say that wage inequality has gone up as demand for skilled labor has fallen; it’s more to say that the whole production side of the US economy is just a whole lot different than it was when wages were more equal. We’ve got a chicken/egg problem: if we educated everyone, would
a) everyone, and thus the country, be more productive, and if so in what industry;
b) the wage gap close by bringing the bottom up and the top down;
c) a lot of college graduates work in unexpected places;
d) the breakdown of occupation change in some way, and if so in what way?
The last one would be very interesting, but which way would it go? Would we simply have yet more bankers and consultants, or would there be a more fundamental shift? Is it possible to get by on a smaller service sector, or would we end up with the same service sector populated by college grads?
Jim Campbell 