Turning economics research into policy

Hat tip to the inimitable GoodLiberal for pointing me in the direction of an excellent article I would certainly have missed otherwise. It’s by Noam Scheiber and it’s about Barack Obama’s advisers; in particular some of the economic policy advice he’s been getting. You can find it here, but get it while it’s hot because it might move behind the subscriber’s wall at the New Republic. To be clear, the economic policy parts are most interesting to me, but there’s more to it than that.

It’s interesting both how Scheiber characterizes the type of economic theory that’s apparently fueling some Obama policy, and how the path from one to the other winds. There are so many fun lines I might just go ahead and start quoting. On the distinction between academics and nonacademics:

“In economics, it’s the academics who are first-rate engineers and the nonacademics who are either dreamers or technicians.”

Very well put, though I fear a little harsh on dreamers. Research and teaching in academia are indeed geared towards the sterile positivism; the engineering analogy is well drawn. I do wish we had a bit more dreaming in the dreamy spires of academia though.

The article starts out by describing “behavioral economics”, that field that’s trying to figure out how people act and how to build it into economics.

“Behaviorists like Thaler believed that the perfectly rational, utterly selfinterested maximizers of economists’ imaginations had little in common with actual human beings, who frequently err when making simple calculations, who have trouble with self-control, who often act out of altruism or spite. But what’s really interesting is how Thaler and his fellow behaviorists responded to this fairly critical insight. Though rational self-interest was the central tenet of neoclassical (i.e., modern) economics, they didn’t take a wrecking ball to the field and replace it with some equally sweeping theory of human behavior.”

Behavioral economics is possibly the least revolutionary revolution ever to hit an academic discipline, because, as Scheiber is alluding to, the behavioral school is absolutely not changing or abandoning the methodology of economics. As I’ve noted before, the “perfectly rational” economic man can happily do whatever the behavioralists want him to do to be more “realistic”; it’s therefore not necessary to come up with a whole new way of modeling people.

Instead the behavioral school is writing down models of “perfectly rational, utterly selfinterested maximizers” who act in accordance with the behavioral evidence. That is, writing rationalization of the “irrationality” we observe. Contrast this with the traditional criticism of economic man, which is to throw up ones hands and loudly reject the whole idea of trying to predict what people will do. I prefer the behavioral way.

Anyway, what’s coming from having this type of economist on the Obama team?

“For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama’s savings plan exploits this so-called “status quo” bias.”

Does it take an economist to suggest this? Of course it does not; the article argues, however, that the “engineers” in academia are the ones who can tell you if the opt-out policy will increase saving or not. That’s a nice example of the value of positivist economic science: it gives you the evidence that switching from opt-in to opt-out might increase retirement saving, which is handed off to the policymaker, who says “I want to increase retirement saving”, and proposes opt-out. Presto. Did any part of the economic science at the bottom of the pyramid require esoteric math or have an ideological bias? Doubtful.

Here’s an even better one:

“Obama wonks tend to be inductive–working piecemeal from a series of real-world observations. One typical [economic adviser Austan] Goolsbee brainchild is something called an automatic tax return. The idea is that, if you had no tax deductions or freelance income the previous year, the IRS would send you a tax return that was already filled out. As long as you accepted the government’s accounting, you could just sign it and mail it back. Goolsbee estimates this small innovation could save hundreds of millions of man-hours spent filling out tax forms, and billions of dollars in tax-preparation fees.”

How simple, how wonderfully useful that would be. How fickle am I that I would vote purely on the basis of an easier tax return?

“The Clintonites were moderates, but they were also ideological…. The Obamanauts are decidedly non-ideological. They occasionally reach out to progressive think tanks like the Economic Policy Institute, but they also come from a world– academic economics–whose inhabitants generally lean right.”

Oh really? Aside from the repetition of this common error about economists’ politics, this implies that the positivist approach to academic economics is bleeding into economic policymaking, drastically shrinking the gap between the science and the normative judgment informed by the science. The crucial distinction remains – for example, I could argue that it’s wrong to make people opt-out of a retirement scheme rather than opt-in, a violation of their right to be left alone, and I couldn’t be wrong, despite what the science said would happen – but the information on which the policy is based is very close to the policy itself.

The Cold War revisited; elections and policy

Here’s a third-hand recommendation, with a hat tip to Economist’s View: an interesting Paul Krugman article on why capitalism “won” the Cold War. The thesis is this:

“Communism failed because of an inability to provide a sustaining reason for existance; only under crisis could it work…. [it] failed as an economic system because people stopped believing in it, not the other way around.”

The hybrid system of regulated capitalism alongside a centrally planned public sector dominates the modern world. As far as I can tell, a purely capitalist economy is equally difficult to find in history as a purely communist society; perhaps the hybrid reflects some natural impossibility of living at either extreme. The argument that some resources are best allocated, or some goals best achieved, by one mechanism and some by the other is a strong argument – though of course not one immune to counterpoint.

There isn’t a lot of big economic policy debate these days. The dominance of the hybrid system naturally pushes policy debate into a very small subset of all the possible economic policies. That’s not necessarily a criticism; you could, for example, blame either status quo lethargy or status quo satisfaction for containing the debate.

That makes the Krugman article a bedfellow of a recent mini-debate about whether elections matter for economic policy. Economist’s View also covered that one here; it seems to have kicked off with a Tyler Cowen article in the New York Times with the perfectly descriptive title “It’s an Election, Not a Revolution”.

Cowen says:

“This election is certainly important. But based on the historical record, it isn’t likely to result in a major swing in economic policy. Fundamentally, democracy is not a finely tuned mechanism that can be used to direct economic policy as a lever might lift a pulley. The connection between what voters want, or think they want, and what ultimately happens in the economy, is far less direct…. Shifts in economic policy are usually quite moderate.”

The Economist’s View cites a counterpoint from Kevin Grier:

“I see real differences. I don’t see McCain lifting the cap on FICA earnings. I don’t see McCain going for publicly created “green jobs”. I do see both of them “fixing” the AMT. I don’t see McCain as so anti-trade as Obama.”

I’m sorry, but I think I just went in to an apathy coma. Not to be too obnoxious, but if that’s the best we can come up with, I’m taking Cowen’s side all day long: the big questions are not asked. It could be a product of the political system, of apathy, of satisfaction, of something else entirely. Reflexive defense against attacks on the significance of democracy have grounds far larger than just economic policy, but it’s difficult to deny that, for better or worse, we won’t see any seismic shifts any time soon.

Economists’ political preference

While we’re sitting in the old ivory tower, some economists are out there in the real world. They’re very different from the academics, in their work and their demographics. The Wall Street Journal runs periodic surveys of private-sector economic forecasters; here’s a bit from January:

“On the political front, most of the respondents expect a Democrat to be elected president this year, although they personally prefer a Republican.”

Contrast this with the academic economists; here’s the summary from a 2003 survey of members of the American Economic Association, one of the big “trade groups” of academic economists:

“The responses show that most economists are supporters of safety regulations, gun control, redistribution, public schooling, and anti-discrimination laws. They are evenly mixed on personal choice issues, military action, and the minimum wage. Most economists oppose tighter immigration controls, government ownership of enterprise and tariffs. In voting, the Democratic:Republican ratio is 2.5:1.

The academics seem like “social liberals”, but I’d bet both the academics and the private-sector economists are “fiscal conservatives” (with apologies for possibly bastardizing the political terminology). Perhaps it relates to the liberal-friendly character of academia, the subject of the study I cited here. Here’s another result from the survey of the forecasters:

“Some 56% of the economists disapproved of President Bush’s stewardship of the economy, while 44% approved. That is especially startling considering 59% of the economists said the stock market performs better under Republican presidents, compared with 28% who said it favored Democrats.”

The Republican preference of the private-sector economists does seem to be grounded in their beliefs about the effect of the political climate on the financial sector. Academic economists, by and large, don’t care a lot about what’s happening in the financial sector (or, indeed, about anything that might be identified as “economics” by a layperson). The first-guess potted conclusion is probably that the non-academics care about the financial ship – which is indeed their livelihood – enough that they want a Republican to steward it, while the academics care more about politics that isn’t economic policy, where they prefer Democrats.

Do as I say, not as I do

Another Arts & Letters tipoff today. The teaser for the article reads:

“Do professors indoctrinate students by expressing a political ideology in the classroom?”

Similar to what I was talking about the other day when I was arguing that ideology leaks into economics courses when we start using them as civics lessons. The article being referred is from the Chronicle of Higher Education, asking why academia is liberal. Yesterday I reported a survey that found majority liberal political views among economics grad students; it’s not controversial to suggest that university and college faculties are predominantly more liberal than the population.

The article also mentions the real source of the Arts & Letters teaser quote: a study by Matthew Woessner and April Kelly-Woessner called, delightfully, “My Professor is a Partisan Hack” (you can read the whole study (pdf) here). That study tried to figure out how students perceive the political leaning of their professors, and how similarity with the students’ own views affected their enjoyment and perception of their courses.

The authors asked students to complete course evaluations that, among other questions, asked them to identify their professors’ political and ideological views, and to report their own confidence in their answers. The surveys were all done after political science courses. The Chronicle article summarizes one of the big results:

“their research showed that students were turned off when professors expressed views that were contrary to their own…”

Perhaps not surprising. The article goes on:

“Mr. Maranto asked the Woessners to contribute a chapter to his book on why conservatives don’t pursue doctorates. Typically, he says, there are a few answers to the question. Liberals say conservatives want to make more money than professors earn, while conservatives argue that they get less encouragement from professors than liberal students do.”

I would love to do a similar study for economics courses. Some interesting questions:

  • Can students confidently identify political ideology of economics professors? Should they be able to, given the supposed neutrality of what we teach?
  • Would students correctly guess that the majority of economists identify themselves as liberal? Does the content of economics courses skew this perception of the professors’ beliefs?
  • Are non-conservatives turned off by economics courses?
  • Do students see economics professors as spreading ideology? If so, is the ideology consistent with the professors’ beliefs? Is it consistent with the students’ perception of the professors’ beliefs?

We need to know how the teaching of economics meshes with the students beliefs and opinions. I strongly believe that the economic method is capable of accommodating and being used by people of any political or ideological belief, but I’d be astonished if such a survey of economics students revealed that this was in fact the case.

Here’s my pitch: do economics professors indoctrinate students by expressing ideology in the classroom? If they do, I believe they are committing a far graver sin than political science professors who do the same. We can separate policy debate from opinion in economics; we can separate out method from our beliefs. Do we?

The Woessner article concludes:

“professors may be well advised to strive for political balance—vigorously challenging students’ viewpoints and presenting multiple perspectives without identifying their own political orientations.”

If we could accomplish something like this in economics – value-free and varied economic method, plus lively ideological debate on economic policy – we might get economics courses that are interesting, useful and diverse. That would beat the mangling of positive and normative economics that too often passes for a real economics course.

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.

Is John McCain an economist?

I think John McCain’s being a little too hard on himself:

“They are complicated,” McCain said of economic issues, “and I freely admit I am not an economist.”

It probably depends on whether he’s thinking of economics or economic policy. Senator McCain also says:

“But I know there are some people who have literally immersed themselves on issues of economics, how Congress works on it, the tax code, that sort of thing. I would look for that kind of talent not in a vice president but in close advisers.”

What economist doesn’t like the sound of that? However, studying or doing research in economics is very different from formulating economic policy.

“Economic policy” is simply policy that influences the way we organize our use of resources, and I think Senator McCain is probably a lot better at it than he gives himself credit for.

If Senator McCain asks his advisers “What would happen if I did this?”, we need to figure out the chain of causes and effects that trickle through the whole country’s decisions and their response to the proposed change in policy. If he asks “How can I achieve that?”, we need to do the same thing backwards to somehow ask if there’s any action the policymaker can take to alter the end product. These are positive economics questions: what’s going to happen? I think this is what McCain might be worried about answering.

Deciding what policy is best is where it gets tricky; we have to somehow compare countless options, many of which have outcomes which aren’t even certain. Then we have to deal with the familiar problem of measuring the satisfaction of the people, at least notionally, if we’re to make any headway in choosing the “best” policy. These are normative economics questions, and I think John McCain is just as qualified as anyone to answer these.

In the ideal world where our policymaker – or anyone – has figured out or been appraised of the true and full consequences of a policy, it’s out of the hands of “science” and becomes all about a value judgment. In a democratic society, who better than our elected representatives to make the value judgment on behalf of his constituents?

Being a normative economist is easy: all you need is an opinion. How informed that opinion is relies on the honest work of true positive economists. The study of economics should never confuse the two. The perception of economics might be inescapably tied to capitalism, but economics is not about promoting one system of organizing our resources over another. It’s about figuring out what the consequences of the system would be (positive), seeking a means to compare them (normative) and then asking “what do you want?”.

Of course, it is election season. Maybe McCain, normative economist of the people, is just trying to distance himself from economists – it makes him more likeable, I imagine…