‘Good’ versus ‘bad’ economics

A peculiar distinction is often made between ‘good’ and ‘bad’ economics when analyzing economic policy. The current hot potato of a gas tax holiday in the US is a case in point – though it might be a trivial issue in the scheme of things, it did provide this absolutely outstanding moment from Hillary Clinton:

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

There are a couple of things going on here. First, it just shows that declaring opposition to economists is just as popular a political strategy as declaring opposition to ‘business’ or ‘the elite’ or ‘greedy oil companies’. This is almost certainly because ‘economics’ is perceived as being one and the same with these things, an ax wielded by the establishment to crush little people under the wheels of capitalism. Again, true economic analysis is valueless, and is subjective only once we evaluate the outcomes or the processes that would lead to or from one thing or another.

The other point, related, is the implicit invocation of a consensus among ‘economists’. It’s related because it is unambiguously true that the majority of economists evaluate things in a particular way – the subjective part is a collective subjectivity rather than a diversity of opinion. Why is that? Are economists molded into a particular normative stance that evaluates policies or outcomes in a particular way? A significant amount of work has been done on the question of which way the causality runs between studying economics and policy opinions: do economists dislike the gas tax holiday because they’ve studied economics or because people who dislike these kind of policies study economics?

The truth is that it’s very easy to identify what ‘good’ and ‘bad’ economics are, because that label can be attached only to the logical, scientific chain of argument – the positive side – that draws the map from cause to effect. Of course we can argue about the validity of the links in the chain, test our assumptions, look to evidence, but the fact remains that ‘bad’ economics is that which fails to acknowledge the true effects of an action.

By contrast, the normative side cannot be labeled ‘good’ or ‘bad’, because it is only opinion. To argue against a normative stance is to argue against an opinion. This is why it is so dangerous for the ‘Principles of Economics’ to include value-loaded statements; this is why it is so dangerous to have a normative consensus among people who call themselves ‘economists’. When that happens, we risk confusing the normative opinions of these people with a scientific conclusion; it is not.

If a politician was to ignore or lie about the tangible consequences of a policy, that is bad, in the sense of being misleading or untrue. However, if a politician acknowledges the best guess of the consequences, whether they argue for or against the policy is neither bad nor good. Economists would do well to remember that they are part of the second group, not the first. It is fine to point out misinformation, but to argue that ‘economics tells us what to do here’ is to assume that their opinion is good, which is a great sin of arrogance.

When one responds to the gas tax stuff with a line like (from Paul Krugman)

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory…

I’m sure they are really pointing out the tangible consequences of the policy, but the line between the positive and the normative is fuzzed, the value-free analysis becomes loaded with subjectivity. The two must be separated.

Getting what you want: when should politics invoke economics?

The health policy exchange during the Democratic debate on Thursday shows exactly where economics should fit into policy, and politics. I’m not in the business of policy analysis, so instead let’s ask how an economist could help Senator Clinton achieve the goal she stated in the debate:

“But if you don’t start by saying you’re going to achieve universal health care, you will be nibbled to death.”

As I said before, I think there are two places for positive economics in the formulation of policy. One is when we ask “what will happen if we do this?”, and the second is when we ask the question Hillary’s statement invites: “how can I achieve that?”. America is no technocracy, so there’s no way positive economics can tell us what to do; that question is for every person and every candidate to decide.

This doesn’t just apply to questions within the rules of the game. If we take the biggest possible economic question, “how should our resources be allocated?”, it’s still the case that positive economic science cannot tell us, for example, which of capitalist markets, socialist planning, or making decisions by rolling dice is “best”. It’s not even difficult – it’s impossible. The furthest positive economics can go is to say that if you want to achieve some particular objective then one of the systems might be the most successful, but that obviously relies on the purely subjective notion of what you want.

Even when our questions get more specific – for example, not “how should our resources be allocated?” but “what should we do about health care?” – exactly the same principle applies. So, with that in mind, Senator Clinton has taken the subjective position in support of “universal health care”. Let’s take a look at the second part of the quotation from the debate:

“But if you don’t start by saying you’re going to achieve universal health care, you will be nibbled to death.”

The argument there is that if you don’t define your normative goal well enough, even getting close to it becomes more difficult, which is probably true. Even more fundamentally, it’s impossible for a politician to be “wrong” when taking a normative position. Like I said, I won’t try a policy analysis asking whether Clinton’s policies will really achieve her goal, and I make no judgment on that question.

With that in mind: unfortunately, actual policy has to be made to try to achieve the normative goal. If there’s significant doubt that the policy will lead to the outcome stated in the goal, then the politician is misguided or, worse, lying. Political campaigns sometimes seem to promote either depressive pronouncements of how we’re all going down in flames, or their ideological counterpart, the Utopian “I can make it all better”, neither of which have much in common with the real goals of the candidate. Realism doesn’t often sell well, but noble aims without realism run dangerously close to fraud.

To put this in a real context, even if I don’t care about your immigration policy, I care about whether or not you are honest in presenting it. Again, positive economics can’t say whether you should close the borders; it can (perhaps) describe some of the likely consequences of doing so, and to convince me that your plan to close the borders is sensible you must convince me that, on balance, the many dimensions (moral, financial, political) of the problem favor your plan. If, in doing so, you fail to acknowledge or deny the consequences your argument is immediately bankrupt. That doesn’t only apply to whatever consequences economic science can help us figure out – it applies to everything.

Even though I believe that economics can be a tool for analyzing more than just financial consequences, it would be wrong to claim that economic science can tell us everything we need to do. If it could, we might as well just cede to a technocracy. What we can do is help set out the means to your chosen end (as in the example of achieving universal health care), or describe the consequences of your policy (as in the example of closing the borders). To argue that other things matter more than what economic science tells us is defensible; to lie about what economic science tells us is wrong.