Keynes Was Right. Economists Should Aspire To Be Like Dentists

In a lengthy piece on “The Future of Jobs“, the Economist cites some estimates of the risk that IT will eliminate jobs over the next 20 years:

Bring on the Personal Trainers - Economist

So Keynes was right: Economists should aspire to be like dentists.

P.S. Actual Keynes quote: “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”

Why Do Economists Have a Bad Reputation?

Because macroeconomists have messed it up for every one else , says Noah Smith at The Week:

To put it mildly, economists have fallen out of favor with the public since 2008. First they failed to predict the crisis, or even to acknowledge that such crises were possible. Then they failed to agree on a solution to the recession, leaving us floundering. No wonder there has been a steady flow of anti-economics articles (for example, this, this, and this). The rakes and pitchforks are out, and the mob is ready to assault the mansion of these social-science Frankensteins.

But before you start throwing the torches, there is something I must tell you: The people you are mad at are only a small fraction of the economics profession. When people in the media say “economists,” what they usually mean is “macroeconomists.” Macroeconomists are the economists whose job is to study business cycles — booms and busts, unemployment, etc. “Macro,” as we know it in the profession, is sort of the glamor division of econ — everyone wants to know whether the economy is going to do well or poorly. Macro was what Keynes wrote about, as did Milton Friedman and Friedrich Hayek.

The problem is that it’s hard to get any usable results from macroeconomics. You can’t put the macroeconomy in a laboratory and test it. You can’t go back and run history again. You can try to compare different countries, but there are so many differences that it’s hard to know which one matters. Because it’s so hard to test out their theories, macroeconomists usually end up arguing back and forth and never reaching agreement.

Meanwhile, there are many other branches of economics, doing many vital things.

What are those vital things? Some economists find ways to improve social policies that help the unemployed, disabled, and other vulnerable populations. Others design auctions for Google. Some evaluate development polices for Kenya. Others help start-ups. And on and on. Love it or hate it, their work should be judged on its own merits, not lumped in with the very different world of macroeconomics.

Rajan’s “The Paranoid Style in Economics”

Raghuram Rajan, soon to be India’s chief central banker, has an excellent piece today dissecting “The Paranoid Style in Economics” and counseling humility for folks engaged in economic policy. A short excerpt:

All of this implies that economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment. This does not mean that our economic knowledge cannot guide us, only that what works in theory – or worked in the past or elsewhere – should be prescribed with an appropriate degree of self-doubt.

But, for economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions. Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise. This is not an entirely bad approach if it results in sharper public debate.

The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions. How do you convince your passionate followers if other, equally credentialed, economists take the opposite view? All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points.

The whole piece is worth a read.

Should Economists Pay More Attention to Politics?

Economists often ignore politics when analyzing policy issues or view politics as a problem to overcome rather than as fundamental. When evaluating a carbon tax, for example, I try to tote up its potential environmental benefits, its hit to consumers and producers, what happens to the revenues, etc. I might also ponder what policy tweaks could facilitate a political coalition willing to enact such a tax. But I don’t typically worry about how a carbon tax would change the balance of power among coal, oil, nuclear, natural gas, and nuclear interests or between energy consumers and producers.

In the latest Journal of Economic Perspectives, Daron Acemoglu and James Robinson argue that this approach is short sighted, sometimes dangerously so. They argue that economic policy analysts should evaluate how policy decisions might change the future balance of political power and, thereby, the efficiency and fairness of future economic decisions:

There is a broad—even if not always explicitly articulated—consensus amongst economists that, if possible, public policy should always seek ways of reducing or removing market failures and policy distortions. In this essay, we have argued that this conclusion is often incorrect because it ignores politics. In fact, the extant political equilibrium may crucially depend on the presence of the market failure. Economic reforms implemented without an understanding of their political consequences, rather than promoting economic efficiency, can significantly reduce it.

Our argument is related to but different from the classical second-best caveat of Lancaster and Lipsey (1956) for two reasons. First, it is not the interaction of several market failures but the implications of current policy reforms on future political equilibria that are at the heart of our argument. Second, though much work still remains to be done in clarifying the linkages between economic policies and future political equilibria, our approach does not simply point out that any economic reform might adversely affect future political equilibria. Rather, building on basic political economy insights, it highlights that one should be particularly careful about the political impacts of economic reforms that change the distribution of income or rents in society in a direction benefiting already powerful groups. In such cases, well-intentioned economic policies might tilt the balance of political power even further in favor of dominant groups, creating significant adverse consequences for future political equilibria.

Our argument is that economic policy should not just focus on removing market failures and correcting distortions but, particularly when it will affect the distribution of income and rents in society in a direction that further strengthens already dominant groups, its implications for future political equilibria should be factored in. It thus calls for a different framework, explicitly based in political economy, for the analysis of economic policy. Much of the conceptual, theoretical, and empirical foundations of such a framework remain areas for future work.

They offer several examples, including the allocation of natural resource rights (an Australian approach promoted democracy, while one in Sierra Leone did not) and financial and banking regulation / deregulation in the United States.

Well worth a read.

The Egalitarian, Cosmopolitan Core of Economics

Economists are often criticized for a worldview that emphasizes, and sometimes encourages, selfishness. In today’s NYT, Tyler Cowen highlights another, less-discussed aspect of that worldview, its deep tradition of egalitarianism:

If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently.

As I’ve argued before, one way this manifests itself is in economists’ generally cosmopolitan view of immigration. As Tyler explains:

A distressingly large portion of the debate in many countries analyzes the effects of higher immigration on domestic citizens alone and seeks to restrict immigration to protect a national culture or existing economic interests. The obvious but too-often-underemphasized reality is that immigration is a significant gain for most people who move to a new country.

Michael Clemens, a senior fellow at the Center for Global Development in Washington, quantified these gains in a 2011 paper, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” He found that unrestricted immigration could create tens of trillions of dollars in economic value, as captured by the migrants themselves in the form of higher wages in their new countries and by those who hire the migrants or consume the products of their labor. For a profession concerned with precision, it is remarkable how infrequently we economists talk about those rather large numbers.

Truly open borders might prove unworkable, especially in countries with welfare states, and kill the goose laying the proverbial golden eggs; in this regard Mr. Clemens’s analysis may require some modification. Still, we should be obsessing over how many of those trillions can actually be realized.

IN any case, there is an overriding moral issue. Imagine that it is your professional duty to report a cost-benefit analysis of liberalizing immigration policy. You wouldn’t dream of producing a study that counted “men only” or “whites only,” at least not without specific, clearly stated reasons for dividing the data.

So why report cost-benefit results only for United States citizens or residents, as is sometimes done in analyses of both international trade and migration? The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

Read his whole piece.

Why Many Economists Favor Immigration

In today’s New York Times, Greg Mankiw offers a nice explanation for why many economists favor immigration:

First, many economists, especially conservative ones, have a libertarian streak. Ever since Adam Smith taught us about the wonders of free markets and the magic of the invisible hand, we have been loath to prohibit mutually advantageous trades between consenting adults. If an American farmer wants to hire a worker to pick fruits and vegetables, the fact that the worker happens to have been born in Mexico does not seem a compelling reason to stop the transaction.

Second, many economists, especially liberal ones, have an egalitarian streak. They follow the philosopher John Rawls’s theory of justice in believing that policy should be particularly attuned to its impact on the least fortunate. When thinking about immigration, there is little doubt that the least fortunate, and the ones with the most at stake in the outcome, are the poor workers who yearn to come to the United States to make a better life for themselves and their families.

Third, economists of all stripes recognize that our own profession has benefited greatly from an influx of talent from abroad.

I’d add a fourth item to Greg’s list: Many economists, both liberal and conservative, have a cosmopolitan streak. They thus place great weight on the wellbeing of foreigners, not just native Americans. From the libertarian side, that means caring about the liberty of the Mexican worker, not just the American farmer. And from the egalitarian side, that means caring about the poor immigrant worker seeking a better life, not just the person who employs them or the resident worker competing for similar work.

Such cosmopolitanism isn’t universal, of course. For example, some economists oppose greater immigration on the egalitarian, but non-cosmopolitan, concern that it would drive down wages for existing U.S. workers. On average, though, that perspective seems less common among economists than among non-economists.

What Should Economics Do in the Next Decade?

Over at Economic Principals, David Warsh summarizes 55 short papers about the big questions that face economics. Among the suggestions:

Most popular of the pitches, judging from the number of SSRN downloads, is, Why Don’t People and Institutions Do What They Know They Should?, by David Cutler, of Harvard University  (a pungent exploration of the complexity of aligning incentives within and among organizations); followed by A Complete Theory of Human Behavior, by Andrew Lo, of the Massachusetts Institute of Technology(confront and reconcile inconsistencies across disciplines, complete with summer camps for newly-minted PhDs);  Research Opportunities in Social and Economic Networks, by Matt Jackson, of Stanford University (study the patterns of interaction that most economic models abstract away); and Modeling and Measuring Systemic Risk, by Markus Brunnermeier, of Princeton University, Lars Peter Hansen and Anil Kashyap, both of the University of Chicago, Arvind Krishnamurthy, of Northwestern University, and Lo, of MIT (build network models and collect new and often sensitive data) .

In macroeconomics: Randall Krozsner, of the University of Chicago, offered a concise blueprint for improving the dialogue between financial economics and macro, beginning with more attention to economic history. Kenneth Rogoff, of Harvard, described a three-item wish list, including a better cost-benefit analysis of financial-market regulation. Martin Neil Baily, of the Brookings Institution, described a series of fundamental questions and appended a strong brief for evolutionary economics. Ricardo Reis, of Columbia University, suggested investigating more carefully the potential upside of transfer programs such as Medicaid, tuition assistance, disability insurance and early retirement for combating recessions. Glenn Hubbard, of Columbia, called for more modeling and estimation of fiscal policy multipliers “outside of the heat of battle of individual policy debates.” And Herbert Gintis, of the Santa Fe Institute, plumped for more agent-based modeling.

Read David’s entire post for many more.

Free Brookings Papers on Economic Activity

Earlier today the fine folks at Brookings announced that they have made all past and current issues of Brookings Papers on Economic Activity free. You can find them here.

Some specific papers that readers of this blog might enjoy (all from the Spring 2009 volume):

Jim Hamilton on the “Causes and Consequences of the Oil Shock of 2007-2008

Christina D. Romer and David H. Romer on “Do Tax Cuts Starve the Beast? The Effects of Tax Changes on Government Spending

Phill Swagel on “The Financial Crisis: An Inside View

A List of the Top 50 Economic Theories

Last year, the Ivy Press asked me to help them with a popular book about the 50 most important economic theories. My primary task was assembling the top 50 list (assisted by suggestions from my readers); Ivy then found authors to write pithy essays about them.

The resulting book was published as 30-Second Economics: The 50 Most Thought-Provoking Economic Theories, Each Explained in Half a Minute. You can buy it for $5.99 over at Barnes & Noble, where it’s inexplicably attributed to someone named Emma Long (I have no financial stake in it).

Inevitably some good theories fell by the wayside, often for reasons unrelated to their importance. And the line between theory and concept got blurry at times. So please take the list in the spirit of fun mixed with seriousness.

And keep in mind, as I say in the introduction to the book, that

Important [economic] theories are not always right. So mixed among the most important theories you will find a few that are … wrong, despite their influence. See if you can find them.

Or maybe more than a few …

Here’s the list of the 50 economic theories that made the cut:

Continue reading “A List of the Top 50 Economic Theories”

IMF: The Lasting Effects of Financial Crises

Earlier this week, the IMF released a key chapter from the upcoming World Economic Outlook: Chapter 4: What’s the Damage? Medium-Term Output Dynamics After Financial Crises. As noted in the much pithier summary, the report concludes that:

The global financial crisis is likely to leave long-lasting scars on the world economy, but governments can act to stimulate a quicker revival and counter output losses … . The study finds that banking crises typically have a long-lasting impact on the level of output, although growth eventually recovers. Lower employment, investment, and productivity all contribute to sustained output losses.

Those conclusions are based on their review of financial crises around the world since the early 1970s. As shown in the following graph, the key finding is that after a financial crisis economic output remains below trend for years:

IMF - Lasting EffectsThe blue line shows, for example, that in the average country, output seven years after the crisis was about 10% below what would it would have been if the pre-crisis growth rate had continued.

The dotted red lines, however, highlight the enormous range of outcomes. At least one-quarter of the countries eventually had output that was above the level implied by the earlier trend; while another quarter eventually fell at least 25% below the prior trend.

The study slices and dices this result in numerous ways, trying to identify the factors that lead to better or worse outcomes. Some are bad news for the United States.

Continue reading “IMF: The Lasting Effects of Financial Crises”