Strange quotations

I’m scratching my head at this one from Barack Obama:

He added, “Senator McCain – you can’t run away from your words and you can’t run away from your record. When it comes to this economy, you’ve stood firmly with George Bush and a failed economic theory, and what you’re offering the American people is more of the same.”

I struggle to even offer a guess as to what ‘economic theory’ he’s talking about. 

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. 

Ideology, politics, economics

Simply excellent paragraph from Free Exchange:

I have trouble with any ideological reading of the economics, because the two (ideology and economics) so rarely fit well together. I don’t want to elect a free-market supporter or an interventionist. I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on. I want, in short, someone with enough intellectual heft to know the difference between good policy and good politics.

This promotes the idea a kind of cipher-wonk as a political leader, which is an interesting idea – do we want ideology-free politicians? – but I think extrapolating the point to economics in general is worthwhile. Ideology and economics really don’t get on, and perhaps a lot of the misuse and misunderstanding of “economics” in political stumping and election coverage is indeed due to that tension, that ideology infests politics more than it can get into economics.

The very concept of positivist economics is precisely what the Free Exchange quotation is invoking when arguing that we should be electing someone who can do a proper analysis – an objective analysis – instead of someone whose prejudices and ideology biases them consistently in one direction or the other, regardless of the evidence.

Laudable? Probably. The sticking point, again, is that pesky word ought, as in “I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on.” Then we’re back to square one: we can elect our wonk, who does an objective analysis before enacting any policy, but at some point we need to figure out which option to take, and all the objective analysis in the world can’t prescribe; again, there’s no such thing as technocratic economics. Surely that makes it impossible to avoid ideology in politics? Surely, also, that’s why sterilizing economics can’t also sterilize economic policy. We can do that economic analysis, but we always have to answer the normative question of what we want if we are to make use of it.

Close to the ground

Hey, it’s John McCain time again! The Free Exchange blog has this (under the nifty headline ‘Tsk-onomics’), on the familiar topic of McCain’s support for the gas tax ‘holiday’. Congress doesn’t like it, economists don’t like it, so far so familiar.

Apparently McCain’s getting slammed for being rubbish at answering questions on this, and other, policies he’s advocating, but let’s leave that to the analysts. There’s a fun exchange quoted from a George Stephanopoulos chat with McCain:

STEPHANOPOULOS: Not a single economist in the country said it’d work.

MCCAIN: Yes. And there’s no economist in the country that knows very well the low-income American who drives the furthest, in the oldest automobile, that sometimes can’t even afford to go to work.

I think it’s neat that presidential candidates get chips by opposing economists, and I don’t mean that as an offended economist; I think it’s interesting. Anyway, is there any merit in that particular McCain quotation? Or, to paraphrase: is economics too far from the ground? Is it too esoteric to properly understand the actual, real implications of its preditions, its recommendations?

The classic case, I think, might be the globalization debate, the protectionism debate: typical economist’s position might be ‘trade good because it allows specialization based on comparative advantage, cheap stuff, more to go around etc’; the counter-argument could run ‘trade bad, erodes localism which we like, hurts those people whose livelihood depends on those things that their country will stop producing when trade makes it cheaper to get those things from other countries’.

Now, sure, the response to the latter is usually ‘yes, yes, we know some people lose out, compensate the losers’, but is that particularly constructive? Are we blind to the real, tangible content of the disagreement with the ‘economist’s answers’? Do we splutter and get indignant with John McCain because he had bad policies, or because we don’t really get the argument?

When we say ‘your gas tax holiday plan sucks, aha!’, we lose friends and alienate people; could we actually make economists a little cuddlier and meet McCain halfway? How can we deal with the problems he’s referring to, that people feel like they’re struggling to get by? We don’t deal with it by ridiculing, that’s for sure. There’s no need to compromise if you think a gas tax holiday isn’t right, so by all means make that case, but every time an economist is painted into a corner as an enemy of the prosperity of the common man, we must argue our way out double-quick, as a matter of principle and credibility.

‘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.

Irrationality again

I resisted talking about ‘Predictably Irrational’, a book by Dan Ariely, “the Alfred P. Sloan Professor of Behavioral Economics at the MIT Sloan School of Management and director of the eRationality Group at the Media Lab”, when the first wave of columns and reviews appeared about it. I haven’t read it, but it is mining the vein of doing experiments to figure out how people behave.

The title, of course, is not palatable to me. It’s not possible to test rationality. I see why it’s attached to the work that behavioral economists do, but semantically, it’s a real pain. Let me dive right in to this article, direct from MIT News.

“Though Ariely’s book is often compared to the bestseller “Freakonomics”–both certainly share a quirky, hands-on approach to questions of everyday behavior–he says that in fact his research is almost the opposite of that book’s. Those researchers found cases where people’s behavior, even in seemingly irrational contexts, was perfectly rational and followed established economic principles. Ariely’s work, by contrast, shows the consistently irrational ways people behave in situations where traditional economics predicts they would follow a course of rational self-interest.”

Goodness me. Consider the bait taken: what’s ‘traditional economics’ and why is it different from behavioral economics (or are they the same)? What’s an ‘irrational context’? Here’s an example, from the article, of the Ariely book:

“Ariely and his students went around and left six-packs of Coke in randomly selected dorm refrigerators all over campus. When he checked back in a few days, all of the Cokes were gone.

But when he later placed plates of six loose dollar bills in those same refrigerators, not a single bill was missing when he checked back. Even though the value was comparable–and thus the situations were supposed to be equivalent–people responded in opposite ways. Why is that?”

First of all, if I see a plate of loose dollar bills in the refrigerator I’m pretty well out of my comfort zone. Can it be so hard to explain why people don’t take dollars from a plate in a dorm refrigerator? Aside from being a bit silly, it’s the first misperception of economics at work! ‘The value was comparable’. Actually, I’m being unfair: this is worse than the first misperception of economics, because the Coke-dollar game, as reported by the article, is refusing to acknowledge any preferences whatsoever, ignoring, then, the most fundamental building block of modeling in economics. Maybe that’s why it’s ‘not traditional’.

There are other examples in the article, and I’m sure the book is full of interesting experimental results. I can’t get past that title, though, and it, like Freakonomics itself and the cottage industry it spawned, is squarely in the making-economics-look-stupid camp with the Christmas stuff. I’m sure insights from behavioral experiments can be informative beyond the triviality – the Obama advisers come to mind – but the press coverage for this new book has instead reinforced the discipline’s ‘quirkiness’ and furthered, in some small and delightful way, the misunderstanding of economics.