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September 05, 2007

Should Economists Rule The World?

In stark contradiction to Bryan Caplan's thesis that we should all slowly back away from our government and let trained economists take over, a new paper by Anil Hira examines leaders from across the world and admits that "we cannot conclude that leadership training in economics leads to better economic outcomes." I chalk it up to the fifth and most deadly type of anti-market bias: Anti-economist-bias...

Update: Speaking of anti-economist bias, Matt suggests I have some. I don't! Honest! Some of my best friends are economists! Rather, I appropriate the Rick Perlstein line on conservatism and say: Economics cannot fail. It is only failed. A lot. For instance: Matt writes:

The ideas the Bush administration, The Wall Street Journal, and all the rest are working with are marginal, crackpot notions that are being mainstreamed through relentless message discipline. There isn't some army of orthodox neoclassical economists out there who think that returning to Clinton-era levels of taxation would wreck the economy, that retirement security can best be provided to all by expanding tax breaks for rich people, that health care can best be improved by expanding tax breaks for rich people, that sound education policy requires expended tax breaks for rich people etc.

That's correct. But nor is there some army of orthodox economists out there saying that. Indeed, highly respected orthodox economists like Greg Mankiw, who knows the supply siders are peddling quackery and said so in his textbook, happily contributed his voice and legitimacy to the quackery in 2003.

Jon Chait is right that the supply siders are maniacs, but they aren't marginalized maniacs, and that's in part because that economics profession hasn't seen fit to marginalize them. Mankiw may say, in his textbooks, that they're charlatans, but when push came to shove he joined their cause, disagreeing, he says, with some of their nuttier claims, but nevertheless lending them and their claims -- which included, in the Bush administration, such ideas as "returning to Clinton-era levels of taxation would wreck the economy, that retirement security can best be provided to all by expanding tax breaks for rich people, that health care can best be improved by expanding tax breaks for rich people," etc -- his name and credibility. And it wasn't a one-off: Mankiw is now a prominent advisor to Mitt Romney, who says discredited things like "“If you lower taxes enough, you create more growth."

Meanwhile, there's no outlet in the world that publishes as many economists -- and good ones, too, Nobel Prize winners -- as The Wall Street Journal editorial page. We know, and many of those economists know, that that editorial page is mendacious, extremist, and intellectually sloppy. But they nevertheless publish there, lending their titles and credibility to an outlet that continually promotes a fundamentally poisonous and empirically laughable ideology. This is, in large part, how supply-siderism survives. Not because economists believe it. But because the Right is very good at setting up incentives so it's good for the careers of otherwise credible individuals to seem like they're promoting it. And it's a shell game many economist happily participate in, and that grievously harms the country.

September 5, 2007 in Economics | Permalink

Comments

should economists rule the world?
.....
no.

Posted by: jacqueline | Sep 5, 2007 9:43:07 AM

"should economists rule the world?"

"for fifty-four years i've inhabited this planet, i've been interrupted only three times.
the first time was twenty-two years ago, when i was interrupted by a beetle that had fallen onto my desk from god knows where. it made a terrible noise, and i made four mistakes in my calculations.
the second time was eleven years ago, when i was interrupted by a fit of rheumatism, i dont get enough excercise. i havent time to take strolls. i'm a serious person.
the third time...is right now!
where was i?
five-hundred and-and-one million...."

"the little prince"
antoine de saint~exupery

Posted by: jacqueline | Sep 5, 2007 9:57:10 AM

If we treated other disciplines the way we treat economics, then the FDA would approve every drug that could be shown on paper to be effective. Then when people started dying from the side effects they would just be blamed for not taking the medicine correctly. There is an assumption that the various theories and formulas coming out of the purely academic research of an economist automatically and without need of interpretation or modification apply directly to the price of a loaf of bread and the ability of a family to have enough money to survive.

The thread to this post saw a reference and subsequent discussion about Edward Prescott's "work" on how many hours people work in various countries as related to levels of taxation. Of course, Prescott always made sure to call taxation "tax bondage." It's horrible research, basically a statistical analysis that he probably did in his sleep in order to give some substance to the idea that Americans work more hours - especially at the bottom economic rungs of society - because they're rewarded for it, while those slovenly and lazy French are so because of their "tax bondage."

And this was from one of your "Nobel Prize" winners - actually a prize set up by the Bank of Sweden in 1968 in memory of Nobel, since apparently old Afred understood long ago that economists would be able to get away with incredibly blatant biases and crackpot theories that are disproved, over and over, every single day.

It's not that I have an anti-economics bias, but that I believe the discipline should be subject to the same scrutiny and expectations of every other discipline. Hell, theologians aren't allowed to spend their entire careers with their heads as far up in the clouds as economists.

Posted by: Stephen | Sep 5, 2007 10:02:18 AM

Perfect post form Stephen.... you're not biases against Economists, just those that disagree with your view of how the world “ought” to be.

One can disagree with the Laffer curve and the idea that tax cuts are self financing yet believe that they are beneficial during certain points in the business cycle without being a maniac, right? It seems that liberals like to throw anyone who believes in the later with those that believe in the former together, and then say they’re all wrong.

Posted by: DM | Sep 5, 2007 10:34:14 AM

Boy, its shocking that people are so irrational that they want interesting non-servile jobs, some time to spend with their families, a lesser amount of economic insecurity, and health care for their children. If those jerks would get out of the way, the economists could build a wonderful future!

Posted by: Father Figure | Sep 5, 2007 10:36:08 AM

Two more reasons why Caplan is wrong:

1. Economics is pseudo-science.

2. Economists cannot be trusted to look out for the interests of the working class.

Posted by: Jason G. | Sep 5, 2007 10:38:31 AM

There isn't some army of orthodox neoclassical economists out there who think that returning to Clinton-era levels of taxation would wreck the economy,
Did somebody bomb the faculty rooms of the Economics Departments of the University of Chicago and George Mason University while I was out? Of course there is an Army out there. Try reading another Chris Hayes piece and concluding any different: Hip Heterodoxy
It's a Friday night in January, and I am searching for a free drink among 9,000 economists. Every year a sizable portion of the nation's economists descend on some lucky city for the Allied Social Science Associations Annual Meeting, the economics field's largest gathering, a kind of carnival of suits and supply curves. Most academic disciplines have a similar annual convention, but no other can boast the same influence on American politics and policy--after all, Presidents don't appoint a council of anthropological advisers. It doesn't take long for mainstream academic thinking to become the foundation for the government's macroeconomic policy. In 1968 Milton Friedman, then president of the American Economics Association (AEA), devoted his presidential address to arguing against Keynesian meddling in the economy and for a monetary policy focused on restraining inflation. A decade later, his prescriptions would be largely adopted. In 2005 onetime Reagan adviser Martin Feldstein called for Social Security privatization just as Republicans in Washington were mobilizing (unsuccessfully) toward the same end
Okay 9000 is not an army, just about two and half combat brigades. But maybe the neos are a forlorn group lingering in the corner all beat up by the Hipsters. Hmm, not so fast, at least not yet.
On the second evening, I come across two receptions facing off across a basement hallway. If you wanted to get a sense of the status hierarchies of the profession, this was a perfect tableau. On one side, a reception in honor of the impending rebroadcast of the late Milton Friedman's famed miniseries Free to Choose, a wildly successful bit of laissez-faire propaganda now set to reach a new generation of unsuspecting blue-state audiences. The room is packed and festive, with several Nobel laureates milling about, chicken satay skewers available for noshing and an open bar. (A man behind me in line complains of the free drinks that "Milton wouldn't approve! Because we're not getting the true price of the drinks.") Across the hall, a reception hosted by the Economic Policy Institute (EPI), a left-liberal Washington think tank that advocates policies--higher minimum wage, easier paths to unionization, social insurance--that are in almost every detail the opposite of everything that Friedman stood for. In that room, perhaps thirty people gather, picking at the cheese cubes and shelling out $6 a drink at the cash bar. The EPI's Max Sawicky, an imposing presence with a long gray ponytail and growling voice, tells me the turnout is better than usual.
Indeed there is good evidence that slowly but surely the Hip Heterodox are running intellectual circles around the Staid Orthodox at least in the blogosphere (EconoSpeak successor site to MaxSpeak, and for the more theoretical Heterodox Economist also new) but the notion that the Orthodox are on the run is ridiculous, they are hunkered down in positions of power behind strong defensive walls.

The fact that their confident public proclamations are not exactly backed up by their detailed findings in their published works is kind of irrelevant, because with the possible exception of Ezra who reads Econometrics anyway?

Posted by: Bruce Webb | Sep 5, 2007 10:42:58 AM

I really fail to see how supply side economics is fundamentally flawed.

I mean, it's clearly isn't perfect, but it isn't empirically laughable either. The laffer curve is a pretty obvious observation, I don't think it is controversial amongst economists that such a curve exists, the problem is that we don't know the shape and the highest point on the curve.

Explain yourself or clarify!

Posted by: Jar Jar Binks | Sep 5, 2007 10:45:02 AM

The existence of the Laffer Curve is not supply side economics. Supply side economics is, as Jon Chait points out, a distinct theory, with distinct predictions and prominent spokespeople who are constantly wrong.

Posted by: Ezra | Sep 5, 2007 10:57:20 AM

"I don't think it is controversial amongst economists that such a curve exists"

This is a joke, right? If not, I suggest you learn about the concept of "perspective." "I don't think it is controversial among christians that God exists." "I don't think it is contoversial among members of Al Queda that the US is evil." And so on.

Economics isn't even a psuedo-science; it's a study of the logical parameters of a world that is based upon a demostrably faulty premise (people act as rational individuals). Thus, its a neat parlor trick, but nothing more, and should be taken about as seriously as astrology is.

Posted by: Father Figure | Sep 5, 2007 11:03:11 AM

Speaking of theology the following passage from Hip Heterodoxy is telling:

After grabbing a free drink in the Friedman reception, I strike up a conversation with economist Michael Perelman in the hallway. Balding, with long gray hair, he has the intense, unblinking mien of a self-published science fiction writer, or a former grad student of Timothy Leary's. Perelman, who is there for the EPI reception, works at the margins of the discipline; he is one of a few hundred self-described "heterodox" economists at the conference. His last book, Railroading Economics, was about the creation of the "free market mythology," and his next book is titled The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression. I ask him about how he relates to the so-called mainstream of his profession. "It's a mafia," he says quietly, his eyes roving over to the suits spilling out of the Freedom to Choose room.

Perelman is a contributer to Econospeak
Mafia is probably a tad hyperbolic, but there is undoubtedly something of a code of omertà within the discipline. Just ask Alan Blinder and David Card. Blinder, a renowned Princeton economist and former Clinton economic adviser, has long been a zealous advocate of trade liberalization. But this past March, the Wall Street Journal ran a front-page article on Blinder's concerns about the massive dislocations that the current trade regime and outsourcing trends might bring for American workers. He suddenly found himself under fire from fellow economists for stepping out of line. Card, a highly esteemed economist at the University of California, Berkeley, caught flak for his heresy not on trade but on the minimum wage. In 1994 he conducted a study to see whether an increase in the minimum wage in New Jersey had the negative effect on employment that basic neoclassical theory would predict. He found it didn't. In fact, his regression analysis showed that, controlling for other factors, New Jersey gained fast-food jobs after increasing its minimum wage, compared with Pennsylvania, which hadn't raised wages. The paper attracted a tremendous amount of attention and criticism, and Card himself largely abandoned working on the minimum wage. In a 2006 interview, he explained his decision to leave the topic behind this way: "I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole."

Scientists don't have causes, or shouldn't. Ideologues have causes. And the notion that Social Democrats have somehow swept the field of the Friedmanites simply flies in the face of pretty much every Op Ed page out there. The battle for public opinion has barely been opened, rank economic nonsense is still conventional wisdom in most quarters. (Free Trade! Everyone's a winner!; Minimum Wage kills jobs!; Social Security is going broke!) Sure when pinned to the wall the Mankiw's and Bartlett's of this world will qualify those statements. But mysteriously those qualifications seem to disappear the next time they appear on the public stage. The fight isn't over, for the most part it hasn't even started.

Posted by: Bruce Webb | Sep 5, 2007 11:06:43 AM

"I don't think it is controversial amongst economists that such a curve exists"

No, but the Supply Siders never make any attempt to identify the peak, they simply assert that we are on the wrong side. That's not science or anything like it.

Now over at Angry Bear economist Cactus has made a rigourous run at the Laffer curve. Tax Rates and Economic Growth – A Look at the Data on Marginal Tax Rates, Capital Gains Tax Rates, and Real GDP per Capita. Cactus is more than open to rigorous, data infused arguments against his own, so if Jar Jar wants to Bring it On! I am sure he is more than welcome. But basically Supply Siders have not been willing to step up to the plate and present evidence that 35% is still on the wrong side of the curve, or that 39% wasn't the peak (hmm it eliminated the deficit) or for that matter 50% (good enough for St. Ronny).

For what its worth the data would seem to indicate that the peak of the Laffer Curve would have a top marginal rate of between 50-60%. Disagree? Don't forget to bring your data.

Posted by: Bruce Webb | Sep 5, 2007 11:18:33 AM

"Supply side economics is, as Jon Chait points out, a distinct theory,"

Indeed it is. A theory which states that there are times and places when reform of the supply side of the economy is a good thing to do. It "is not" all about lowering marginal tax rates nor is it all about the Laffer Curve nor the thought (something which as far as I know has only happened once in my lifetime, when income tax on investment income was lowered from 98% to 40% in the UK) that tax cuts pay for themselves. Those who say it is are constructing a straw man so as to be able to repudiate other sensible ideas also contained within supply side economics.

The break up pf AT&T, the privatisation of British Telecom: these were both supply side ideas. The deregulation of the airline industry. Welfare reform : a supply side idea (it's the reform of the supply side of the labour market).

Even your desired universal health care is supply side economics: it's the reform of the supply side of a major part of the US economy.

Posted by: Tim Worstall | Sep 5, 2007 11:25:05 AM

From Thoma's site:


One note. Jonathan Chait says:

Supply-siders may be laughed at by real economists...

Not quite. There are real economists that are supply-side advocates. But supply-side economics has been misused and misrepresented to suit political ends and that has tarnished its reputation, something that could have been avoided if those "real economists" had voiced strong opposition to claims made on behalf of the theory that were clearly wrong or wishful thinking at best.

Supply-side economics in the right hands, those of qualified real business cycle theorists who are interested in how the world works rather than supporting an ideology or political party, has a lot to offer. For example, I read an interesting paper last week ("A Theory of Demand Shocks") that combines a real business cycle framework with a new classical style Lucas island model information structure, where the information extraction problem concerns productivity shocks. But that is just the tip of a large iceberg of very good research on real business cycles."

So it really depends, again, on how you define supply sider. I’m guessing Chait, and Ezra, like to define it in a manner that supports their view of the world… supply siders (Economists noit politicians) are nuts, discredited, et al. But are they? Seems like Thoma believes there's some real value to their view.

Posted by: DM | Sep 5, 2007 11:31:06 AM

should economists rule the world?
.....
no.

Posted by: jacqueline

I seriously laughed out loud at that comment, it was great. I've always found your comments annoying. No offense, it's just a personal quirk of mine about your writing style: the lack of capitalization, constant ellipses and a rambling and dreamy way of saying whatever you're saying grate on someone as pedantic as me. When I skim what you're saying I usually agree with it, but I have to skim it lest I get out my red pen and start copy-editing it on the screen. Seeing jacqueline's version of "Simple Answers to Simple Questions" is like a talented but typecast actor finally playing a completely different role.

Posted by: Cyrus | Sep 5, 2007 11:52:19 AM

The careful defenses of supply-side economics by Tim Worstall and DM are probably true, but they sound like the critics who say that Richard Dawkins' complaints about religion are invalid because they only address the extreme varieties like Biblical literalism and ignore the sophisticated and well thought-out religion of (to pick an example out of thin air) Jesuits. Sorry to use an inflammatory analogy, but it's the only way I can think to put it.

The problem is, Biblical literalism to at least some degree is really common. A plurality of Americans actually do believe the world was created in seven 24-hour days within the last 10,000 years, according to polls, and I think it becomes a majority if you lump in those who don't agree to a timespan but reject science like evolution for a related reason. Dawkins is exactly right to address the type of religion with the largest impact, even if it is not the logically strongest argument for the existance of God.

And in the same way, there may be good arguments for supply side economics at Tim Worstall defines it, but it is entirely appropriate to address the invalid, harmful arguments that fall under its name and are fiercely argued by politicians and influential columnists.

Posted by: Cyrus | Sep 5, 2007 12:15:50 PM

"i've always found your comments annoying. dont take offense."

why would i take offense?
thanks for sharing.

dont worry, i just keep scattering ellipses and gladness around in my little corner of the universe!
glad i made you laugh, though!


Posted by: jacqueline | Sep 5, 2007 12:26:45 PM

Perfect post form Stephen.... you're not biases against Economists, just those that disagree with your view of how the world “ought” to be.

Wow. Way to bring your conclusions to the thread before you read anything.

I've already said before that the only problem with the Laffer Curve is that it doesn't really say very much, which is why it's a favorite tool of those who think that the best level of taxation is always lower than whatever level we currently have.

Find me an economist who thinks that people should be made to give all their property and earnings to the government which would then redistribute it and I'll happily condemn her or him as an ideologue.

Posted by: Stephen | Sep 5, 2007 12:35:02 PM

Jacqueline, the Little Prince quote has brightened my whole day. Thanks.

Posted by: Bruce Baugh | Sep 5, 2007 1:00:30 PM

"And in the same way, there may be good arguments for supply side economics at Tim Worstall defines it, but it is entirely appropriate to address the invalid, harmful arguments that fall under its name and are fiercely argued by politicians and influential columnists."

Fair point. Just don't call it supply side economics when you do so though. Call it insane Lafferisim or something. My own view on that very point is close to Bruce Bartlett's passed out recently. Except in very strange circumstances, tax cuts do not pay for themselves. But they do in part. Currently, the effects of tax cuts (and raises) are measured on a constant basis. In fact, they should be measured on a dynamic basis, how will the amount raised change given that people will change their behaviour because of the changes in relative prices?

Posted by: Tim Worstall | Sep 5, 2007 1:08:27 PM

:)

Posted by: jacqueline | Sep 5, 2007 1:17:38 PM

Stephen,
I thought your post was a good example of the same bias Ezra (and most everyone for that matter) display when presented with information that contradicts one’s view of the world. You basically called the economist lazy, a crackpot and his work horrible (your words, not mine), with little supporting evidence other than you think he’s wrong.

Cyrus,

I think your point is fair, but the same thing can be said of other political or economic positions as well. Would it be right to call all progressives crackpots because a few espouse ridiculous notions in regards to trade? I don’t think so, especially in this forum where political/economic nuances are taken a little more seriously.

Posted by: DM | Sep 5, 2007 1:21:16 PM

DM,

Go here. The reason I have such a problem with Prescott is that he wants it both ways. He spends the first section of his editorial saying that the reason Americans work so much more than Europeans is that Europeans have a higher marginal tax rate. Then later in the editorial he says that Europeans actually work just as much as Americans, only they have a black labor market where they do a bunch of their work because it's untaxed. He wants it both ways depending upon which ideological point he's trying to make. That's hardly a "scientific" approach.

Here's some data on the number of hours worked by major industry that covers the years 1964-1999. As you can see, the number of weekly hours worked steadily declined during that period.

Now go here. This chart shows the top marginal tax rates during the last 100 years or so. Look at 1964: 77% top marginal tax rate. In 1999, the top marginal tax rate was 39.6%, a decrease of 49%. Yet Americans were working fewer hours in 1999 than they were in 1964.

I'm tempted to say that this data blows Prescott's partisan theories out of the water, because you would then hopefully point out that these issues are far too complex to reduce to a function of the top marginal tax rate. Which is exactly my point: Prescott wants to reduce all the differences between several European countries - each with its own culture - and the USA to a function of how much tax is being collected, because to do so makes the data fit his preconceived and highly partisan notions.

He's undoubtedly brilliant. But he also allows his personal preferences to radically skew his interpretation. People don't call him or others on this type of bullshit because, as I said, economics is treated differently than other disciplines. If an economic theory doesn't square with reality, people put the blame on reality, not the theory. "Economics cannot fail. It is only failed."

Posted by: Stephen | Sep 5, 2007 2:48:04 PM

Why do people equate Supply Side Economics with its Voodoo Version?

Blame Bruce Bartlett. Or his editor. Someone decided to title Reaganomics; Supply-side economics in action the way they did. If you don't want your serious economic theory laughed at then don't let politicians like Reagan and Kemp present it in cartoon form.

Posted by: Bruce Webb | Sep 5, 2007 3:10:36 PM

Stephen,

Having read this stuff a couple of times in the past, I tend to agree with you that the op-ed, and the partisan tone you mention above, muddles the points presented in the actual study, which is pretty good. Often times, this stuff comes down to tone and verbiage. Prescott would be more effective using terminology other than “tax bondage” to sell his point; Ezra and other bloggers, could utilize better terminology than “peddling quackery” to describe Supply Siders who have valid positions, as made evident by Thoma and others on the left. It’s unfortunate.

Posted by: DM | Sep 5, 2007 4:03:53 PM

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