Plotting Public Policy Strategy without Economics?

In my last blog, I suggested that technical solutions to economic problems compete, not just on technical grounds, but on moral grounds. For this reason, economists must learn, if not to make the moral case for technical approaches, to at least understand and communicate the moral ramifications of those approaches.

The traditional view shared by many if not most economists was offered by Edward Glaeser in a recent blog. On that view, competition among public policy strategies is resolved, not by economists weighing technical considerations, but in the political sphere. Glaeser observes that

...the solutions to the budget problem won’t come from the technical expertise of economists but from moral and strategic decisions made by voters and their elected representatives...

...Economists are experts on tactics, not strategy — and the great budget challenge generally requires strategic choices, not tactical ones.

Economics is meant to teach how to think through the wide-ranging consequences of any public policy. If you raise the estate tax, what will happen? Will this deter people from saving money while they are alive? Or will, instead, people save more to keep their heirs whole? If heirs expect to receive less, will this cause them to work harder or marry later? This type of thinking is a crucial part of the budgetary process, but it doesn’t tell us where to cut.

Economics is also meant to help us find ways to reduce inefficiency and make everyone better off.

Yes. And he might have added this question: does forcing heirs of illiquid businesses to sell assets, such as land or physical plant and equipment, to pay estate taxes place the assets back into an asset pool where they can be purchased and used by others more productively, thereby enabling the "creative destruction" that some regard as an important characteristic of capitalist efficiency that benefits us all?

 Glaeser goes on to profess normative ignorance:

How would an economist know whether it is wiser to cut military spending or raise taxes? Our armed forces play an important role in the world, but are they worth the cost? Like many economists, I’m frustrated that foreign affairs experts haven’t convincingly monetized the benefits of wars or military spending. But I can’t do it for them.

Is it better to increase the Medicare eligibility age to 70 or raise taxes? This trade-off is fundamentally a social, moral and political question. Economics can’t tell us if it is better to make life harder for 69-year-olds or harder for the rest of us. Society as a whole needs to make tough choices about whether to raise taxes or to say no to the health-care desires of the elderly.

Hard questions. Especially as stated. I mean, suppose we raise the Medicare eligibility age to 70 instead of raising taxes. Does this really amount to a choice between making life harder for those 65-69 or making life harder for the rest of us? Well, yes, life will only be hard for those 65-69 as long as you can be sure that your parents and grandparents won't become seriously ill between those ages. Of course, if you get real unlucky, and some of us will, someone in your family may have to quit working to care for mom or dad. I'm thinking you'll probably feel some obligation to pay for some of their care or at least move them in with you. Now whose life is harder? You think it will affect your kid's education if you have to divert $100,000 of your savings to pay for your 67 year-old dad's new heart valve? You haven't saved that much? Too bad for dad.

How could we expect someone who is not trained in economics to be able to judge these things? We certainly wouldn't want only economists deciding these things, but it's equally frightening to think of "society as a whole" making these decisions without understanding some economics. Surely that's not what Glaeser meant, yet he says

A budget reflects two things: broad national priorities and the mechanics that deliver on those priorities. Broad national priorities include the decision to spend on armies or health care or education, and the decision about whether to more heavily tax the rich or the middle class. These choices reflect politics and philosophy more than the economics. Only when those choices are made does economics weigh in.[Emphasis added]

Really? Just politics and philosophy? Guns and butter is politics and philosophy, not economics? OK, I'll drop that lesson from Econ 101. What else do economists know that might be useful to the public in formulating public policy? Economists know that labor force participation and wage rates are affected by caregiver duties and obligations, but let's let "society" decide whether to raise taxes or raise the Medicare eligibility age while pretending that the latter won't also affect incentives to work, to invest in human capital, and to produce (not to mention the likely effects on any bequest one had been hoping to make that has now been spent on grandpa's heart bypass).

I daresay that if the political process in the United States resulted in a near universal demand that incomes be equalized, "economics" might bestir itself to "weigh in" with some normative judgements about the wisdom of that decision. At least I hope we would. Right now, however, it appears that voters and taxpayers have a preference for a highly unequal income distribution that favors a very few of the total population. Should economists weigh in on that as we would if the political trend became strictly  egalitarian? Is it efficient to have wealth and power concentrated in the hands of a few? Will "everyone" be "better off" if it persists? If we're in a second best world, will a strategy derived from first-best theory yield an improvement or a decay in total well-being? Might "society" prefer a little inefficiency in exchange for a more level playing field and more opportunities?

What about our assets as a country? Are they all captured by GDP? How should we invest resources to increase output and well-being over time? Can that be left entirely to the private sector when the private sector appears to have mastered the ability to kill the Coase fairy by distorting information about the externalities of production, whether it be tobacco smoke, global warming, under-water mortgages, or the marginal benefit of high-cost me-too drugs and by commandeering the political process that would otherwise reduce the transaction costs of a solution? How will "society" make wise decisions when many of us in the discipline continue to assert, despite real and recent evidence to the contrary, that the private sector is always and everywhere more efficient that government? What private incentives and objectives will result in attaining a societal objective of improved population health? Not the ones we currently have (or are about to revert to) that inordinately reward high-tech curative care and more of it rather than prevention.

And finally, how can we hope that those at the bottom of the economic pyramid will make sound investment decisions, whether with regard to health or to human capital, if "society" doesn't offer them some hope of the two things most likely to yield the return on investment that would justify those investment choices: the expectation of a longer life and a higher wage? If "society" can't offer those up front, then it had best subsidize investments in health and human capital for the poor and disadvantaged, instead of expecting the Horatio Alger fairy to lift them from squalor. Shouldn't we explain this to "society?"

Could we, as economists, at least weigh in (in English, not jargon, not equations, not existence proofs) and provide those of a philosophical and political perspective with a more informed economic perspective on these issues? Something that is more useful than the sound of one neo-classical hand clapping? Here's one of my favorite economists:

It should be the duty of economists to do their best to enlighten the public about the economic aspects of these menacing problems. They are impeded by a theoretical scheme which (with whatever reservations and exceptions) represents the capitalist world as a kibbutz operated in a perfectly enlightened manner to maximize the welfare of all its members.

The "menacing problems" Joan Robinson was referring to in the early 1970's were capitalism's dependence on the arms race and weapons trade for its success, the failure of capitalism to overcome poverty either in capitalist countries or in the developing world, and the growing threats of private sector supply and consumer demand to the environment. Forty years later, the private sector has given us a still possibly too large military-industrial complex, a still deteriorating environment, an outsized corrections-industrial sector, a real-estate bust, a banking system with no fiduciary credibility, and a record high plummet from the middle class into poverty. At least military expenditures and objectives gave us something besides national security, benefits like increased human capital, penicillin, and maybe safer food. It is also worth noting that any resemblance of the United States to "a kibbutz operated in a perfectly enlightened manner to maximize the welfare of all it's members" (I would say rather to maximize total welfare, which almost certainly will not maximize the welfare of each individual) will be pure coincidence and has never been our norm.

Robinson again:

Modern capitalism has no purpose except to keep the show going. To prevent severe unemployment and to keep real wages rising secures the adherence of the workers, growing consumption keeps the public in general complacent, the opportunities for profit encourage industry to expand.

Economists can't just be tacticians. We must have a role in helping voters to understand, formulate, and evaluate alternative strategies. To do that they (and we) must understand and think about all the consequences (moral and economic) of those strategies. They (and we) must think more broadly and more coherently about what are our societal objectives and how we are to balance them against often competing private incentives and objectives, not to mention moral constraints, constraints not only on the ends we seek, but on the means by which we achieve them.

To be fair, many of us do all of this, but we need to do it in ways that reach more people in simple language, not just the readers of blogs. This, in my opinion, is the only way that modern capitalism will evolve in the United States and "keep the show going" in a way that makes "everyone better off."

Comments

[Noni Mausa]

The Great Wall of Mynmahx

There’s a weird foreign country called Mynmahx, where a high wall divides the land like the Great Wall of China, only much more effectively.

On the one side are people with all the “stuff” – strong muscles, smart skilled minds, rich farmland and cunning machines, food plants and domestic animals, and children.

It’s pretty noisy and crowded on that side of the wall. Look at them go! They distill the aluminum out of common rocks, breed pigs and cut up the chops, design fabric and create music and measure Paleolithic oxygen concentrations in Antarctic ice. There is hardly an effort or study that has not got its dedicated followers. These legions expend their time, energy and attention in creating the goods and services for the whole society. In fact, they create far more than they can use, so they give away or simply waste a lot of the fruit of their effort.

Furthermore, they’re not all working – about one in four are still growing up, another 20% are elderly, winding down. Many are ill or injured or disabled. Additionally, quite a few simply have nothing to do at the moment. But that leaves about 60% of them, almost 200 million, buzzing away like honeybees.

On the other side of the wall is a tiny, tiny group, maybe 300,000, the size of Toledo, Ohio, and they are pretty quiet. They don’t build or grow much of anything. All their necessities are imported through the wall. They have some specialized skills, but couldn’t support themselves particularly well if the doors in the wall were sealed up.

1) On which side of the wall are all the decisions made about how resources are allocated in Mynmahx?

2) On which side of the wall do people live 7 years longer than the other?

3) On which side of the wall are there no people living in poverty?

4) On which side of the wall is the rule of law elective rather than mandated?

5) Why?

[Coises]

Glaeser is quoted, “Economists are experts on tactics, not strategy — and the great budget challenge generally requires strategic choices, not tactical ones.”

“Economists are experts on tactics” — really? “If you raise the estate tax, what will happen?” “...does forcing heirs of illiquid businesses to sell assets, such as land or physical plant and equipment, to pay estate taxes place the assets back into an asset pool where they can be purchased and used by others more productively...?” I’ll pose a more concrete question: “What would be the expected differential effects over the next six years of retaining the Bush tax cuts unchanged vs. letting them expire entirely?”

Are there any of those questions to which the economics profession — not one or another individual economist, but the consensus of the profession as a whole — can give a coherent answer? Even a consistent qualitative, let alone quantitative, answer?

As a non-economist, I’m going to guess not. I’ve yet to hear a single question about the “real” world with any possible policy implications on which there is anything that could be called consensus among economists. To this layman, it appears that economic “theory” is driven by each economist’s political philosophy, and there is little “fact of the matter” involved. Again, to an outsider: economics appears to be neither a science nor an art, but a form of religion, complete with competing faiths (freshwater and saltwater) and sects with their revered prophets (Keynes, Friedman). Answers to questions follow from beliefs and untested — probably untestable — principles; experience is something to be explained rather than something that generates new hypotheses to be validated or disproved.

Maybe this is just a PR problem on the part of Economics; but if so, I submit that it is a serious one which greatly erodes the credibility of the profession in the eyes of the general public. You see, we know that we don’t know enough to judge the technical merit of an economist’s arguments. When economists can’t reach a consensus among themselves, all we can do is go by what “sounds right” to us — faith-based economics.

This works well for conservatives in the United States, since here conservative ideas — Puritan values; protestant work ethic; no pain, no gain — tend to “sound right” to most Americans.

What new information can economics add to moral inquiry when everything controversial politically is at least equally controversial within the field of economics? It seems to me it actually makes matters worse by adding fertile ground in which partisans can sow fear, superstition and confusion, none of which can be debunked effectively by a faith-based discipline.

Would it have made sense to develop “medical ethics” while medicine still used leeches and tried to balance the four humors? I ask your forgiveness if that seems too blunt, but... isn’t that about where Economics is at present?

“the great budget challenge”

Can’t economists at least get together and clarify, once and for all, that the “balancing the budget” is a red herring? No, I guess not, because that superstition is helpful to the freshwater religion. One wouldn’t want to confuse the general public with the facts when common [non]sense works in ones favor.

[Darren]

Interesting article. In my view, unfortunately very few people have BOTH the requisite mathematical and technical ability to jump through the hoop of graduate school in economics, and the empathy, intellectual curiosity, eloquence necessary to seriously explore the moral dimensions of public policy.

[Bruce Wilder]

Coises asks, "Are there . . . questions to which the economics profession — not one or another individual economist, but the consensus of the profession as a whole — can give a coherent answer? Even a consistent qualitative, let alone quantitative, answer?"

I think there are actually many important questions for which the body of knowledge, which is economics, could supply coherent answers.

Confiscatory inheritance taxes on very large estates is a pretty easy public policy choice, precisely because the economics "favors" it so strongly and unambiguously. Not that you would know that, looking for a public consensus among economists on the issue.

Glaeser's elemental error isn't about the economics -- though he's wrong about that, too; Glaeser's big mistake is about the politics. The big value questions are not decided by the voters and their representatives; that's become a theatrical appendage, in our era of spokes-model politicians.

Economics cannot be about tactics; it must be about strategy. We are all practical economists, (more or less) trained soldiers in the daily marketplace battles. It is the strategic choices that must be made at a higher level.

We need economists as architects, structural engineers and urban planners, to design the system of systems within which the rest of us make our tactical choices.

Unfortunately, Larry Summers and Ben Bernanke work for the banksters and plutocrats, in doing that job, and Edward Glaeser, no doubt, hopes for a similar, if less exalted, job.

Meanwhile, those, who play economists on teevee do what people on teevee are paid to do: they disagree. Teevee doesn't educate; it entertains in the cheapest way possible: by portraying "reality" and "politics" in the cheap, cliched drama of staged conflict.

A lot of very bad economists and very bad economics is kept alive for its political entertainment value in legitimating policy favorable to the corporate plutocrats, who either run the show, or pay it for through advertising.

The political problem for a democracy is: how are the People to find and hire competent Economists as Architects of a fairer, more productive, less destructive political economy for a Democracy?

[reason]

"And he might have added this question: does forcing heirs of illiquid businesses to sell assets, such as land or physical plant and equipment,"

or shares in the business.