really long quotations

Sensible economic policy is not just found in textbooks

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Standard caveat: I remain apolitical here. Hat tip to Economist’s View, whose discussion of Andrew Leonard’s Salon article on some current trade policy touches on a lot of interesting things.

Apparently there’s a “Trade Adjustment Assistance” program on the Senate radar. Now, this could be considered sensible economic policy, whether or not you agree with it.

“The Trade Adjustment Assistance program is designed to compensate manufacturing sector workers who are displaced by trade. It includes financial support for education and training, a health care credit, wage insurance and other goodies.”

It’s a well-worn argument that long-term benefits from trade with other countries might come with short-term costs for those workers who find employment in industries which produce goods most likely to be imported. Social justice might argue for support for such workers; help the worker, not the industry is not an original maxim. It can be applied equally to “dying” industries. If the typewriter industry is becoming obsolete, do you subsidize the typewriter producers or let them die and use your welfare state to support the people who are affected?

Maybe it’s too harsh to say that this is not a textbook argument, but one certainly can’t gloss over the negatives of any policy, no matter how positive the positives, and, recall, those pesky Principles of Economics said that Trade Can Make Everyone Better Off.

The Salon article refers to this, from The Atlantic, makes the forceful and obvious point (I will paraphrase) that a proper welfare state doesn’t ask why, just helps the needy while they need, and that this trade adjustment business is a band-aid, a facsimile of a real solution for the problems of the consequences of harsh and widespread unemployment in whole communities at a time.

Not to wade into the politics where I don’t belong, but I like this:

“Preaching the benefits of free trade without being willing to take care of the “losers” created by trade isn’t very bright in an election year when workers are feeling squeezed, and the opposition party controls Congress.”

Ignoring the electioneering stuff, the direct analog to an economics class or an economic policy debate would be to actually have a proper debate, an acknowledgment that everything isn’t always super-awesome. Similarly, the Economist’s View take:

“It seems to me that an administration that truly cared about the working class would be eager to find a way to help those who are hurt from trade, that they would make it a high priority and insist it get done, but there’s little indication – through actual action – that helping workers hurt from trade, or from economic conditions more generally, is a priority.”

This is perhaps one of the biggest economic policy questions: how big should your welfare state be? Design is one thing, but we have a fundamental philosophical question here, which is bigger than technicalities. Let’s brawl that one out, historically, globally, politically, morally, economically.

Except for poor old John McCain, who gets kicked again. Hard. I’m on record: I think he is an economist (for a suitable definition of economist). Not Economist’s View.

“I think a lot of people are missing the point about John McCain’s lack of knowledge about economics… Anyone who really cared about economic policy and its effect on households would have taken the time to become familiar with the basics. How will he know how best to help workers if he has no idea about the underlying economics? If he asked, there are very prominent economists who would be happy to spend an hour once or twice a week – kind of like a principles course – explaining how the economy operates. But he never bothered, never took the time, because he apparently doesn’t care enough to give up the time necessary to actually understand the polices he is voting on. I wouldn’t mind the ignorance so much if there was any indication at all that he had tried to over come it, any indication he thought it was important enough to learn about, but there isn’t.”

We’re going to give McCain the Principles of Economics course? I just got chills. Surely not the one we give the poor undergraduates? From me:

“A list of “principles” pregnant with loaded statements is not the right way to present our discipline.”

Let’s not indoctrinate John McCain too!

Relevance

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Making Economics Relevant Again, from David Leonhardt in the New York Times, has been recommended to me by more than one tipster. First of all, the most astonishing thing in the article, to me, is this table that includes an account of the number of economics degrees given every year since 1949: I thought majoring in economics had been on a steady upswing for decades, but apparently a lot fewer people were studying economics in the 90s. The number is just back up to where it was in 1990.

Anyway, the article kicks off:

“It was only a decade ago that economics seemed to be an old and tired discipline. The field no longer had intellectual giants like John Maynard Keynes or Milton Friedman who were shaping public policy by the sheer force of their ideas. Instead, it was devolving into a technical discipline that was even less comprehensible than it was relevant.”

Possible revisionism here, but it’s certainly a tempting argument. It might reflect the sleepy state of economic policy rather than the discipline as a whole, but I take the point. We’re pointed to an old New Yorker article from 1996 which drives the point home in spectacular fashion; forgive the long quotation:

“A few weeks ago, the Nobel Prize in Economics was awarded to William Vickrey, an 82-year-old professor at Columbia, and James Mirrlees, a 60-year-old professor at Cambridge…. the newspapers had some difficulty explaining the prize-winning work, which the Nobel committee referred to as “the economic theory of incentives under asymmetric information.” ..But when reporters tracked down Vickrey, an amiable bear of a man, he refused to play along: instead of expanding on the obscure mathematical theory that gained him world attention, he insisted on talking about his practical ideas for reforming the subways, the electoral system, the budget deficit, and much else besides. A “Times” reporter tried to pin him down, but Vickrey quickly dismissed his prize-winning 1961 paper as “one of my digressions into abstract economics.” And he went on to say, “At best, it’s of minor significance in terms of human welfare.””

What a priceless story. However, it might not just be the abstract math that marginalizes economics: Leonhardt goes on to argue that some economists are disgruntled at what they see as the cause of the “recovery” he perceives in economics. I can’t really argue with this:

“the new research often consists of cute findings — which inevitably get covered in the press — about trivial subjects, like game shows, violent movies or sports gambling.”

It’s like the Christmas stuff I talked about before. It isn’t a true reflection of economics research and it makes economics look ridiculous. To try and figure out what really mattered, Leonhardt decided to survey economists to find out who they thought “was using economics to make the world a better place”. It’s a question begging to reject Vickrey’s digressions into abstract economics. Presumably, to be an economist who actually does some good for the world, your research must be good science and very, very close to a solid and appealing economic policy. And lo:

“there was still a runaway winner…. the Jameel Poverty Action Lab at M.I.T., led by Esther Duflo and Abhijit Banerjee.”

I won’t try to put this any better than the original article:

“They want to overhaul development aid so that more of it is spent on programs that actually make a difference. And they are trying to do so in a way that skirts the long-running ideological debate between aid groups and their critics…. The basic idea behind the lab is to rely on randomized trials — similar to the ones used in medical research — to study antipoverty programs. This helps avoid the classic problem with the evaluation of aid programs: it’s often impossible to separate cause and effect.”

Let’s figure out what’s going on here. The research uses randomized trials to disentangle causality, the ubiquitous problem for figuring out relationships from real-world data; because the method is strong, they can rely less on normative judgment when they make the jump from the science to the policy, thus cutting ideology out. Just like the Obama team I was talking about yesterday, the gap between science and policy is vanishingly small here, but clearly it’s crucial for the success of the whole venture that the science be pure as snow. The science can’t tell you you’re right or wrong to hold the belief that children should be educated – that’s all on your head – but it can perform the true role of positive economics and help you figure out exactly how to improve the quality of education if that’s what you want.

The reason why these development economists are perceived as the most “relevant” is twofold: they have easy to understand, convincing science and they explicitly embrace the normative implications of their science. Their science is as sophisticated as it gets, but they certainly don’t need esoteric math. On that note, the last word goes to that New Yorker article:

“One way to encourage economists to become more worldly might be to abolish the Nobel Prize for economics, which since its introduction, in 1969, has helped foster a professional culture that values technical wizardry above all else. Deprived of the publicity surrounding the annual Stockholm ceremony, economists would actually have to do something useful to get noticed.”

EDIT: Actually I’m not sure that should be the last word. By the merits of, for example, the work Duflo, Banerjee and co. are doing, they would absolutely qualify for a Nobel memorial prize in economic science. The prize does seem to have become at least as much an applied math prize as a “good economic science” prize, which I guess is the problem the New Yorker article is highlighting. The problem isn’t the prize, but the criterion for winning, perhaps.