Have Economists Become Something More Dangerous — Policy Wonks?

Economists have a responsibility to argue for the best policies they believe in, not the best compromise they think lawmakers can pass.

The annual convention of economists and other social sciences is always difficult to get a handle on. It is large and unwieldy, with hundreds of panels and forums. I was in Chicago for this year’s pageant, and despite its many different moving parts, one thing rarely changes. Economists’ conclusions remain almost completely predictable. That’s true at least of the mainstream economists, who the redoubtable libertarian rebel Deirdre McCloskey insists we call something other than mainstream, such as “standard.” In sum, markets usually work, they say, but sometimes a little sand gets thrown into the gears. Since the financial crisis, perhaps there has been a little more sand than usual. Solution: clean it up.

Yet something out of the ordinary occurred this year. Economists agreed to a code of ethics, requiring them to make public who finances their research and with what fee-paying institutions they are associated. This reform was neither a result of guilt or newfound conscience. George DeMartino, an economist from Denver, has been loudly and admirably arguing for ethics standards and that a stronger code be adopted. McCloskey, according to a news report, argued outright that economists have become too much like lawyers, defending their clients’ positions no matter what. But the movie Inside Job, which caught economists like Glenn Hubbard and Fred Mishkin embarrassingly off-guard on camera, is what forced the profession into action.

But I came away with another concern. What are economists, anyway? Are they paid and/or consulted with for their unvarnished economic expertise, or do they tailor their views to carry weight in the political and lobbying arena with little regard for genuine economic evidence? The politicians and press who seek their advice prefer the latter, of course.

I went to a session called “The Political Economy of U.S. Debt and Deficits.” It included Alan Blinder, former vice chairman of the Federal Reserve, and three former heads of the Congressional Budget Office: Alice Rivlin, Douglas Holtz-Eakin, and Rudolph Penner. The latter two are Republicans; Blinder and Rivlin Democrats.

But no one actually analyzed the “political economy” of the deficit issues — that is, why people tailor their views to fit the current politics, why are current politics what they are regarding deficits, and so on. Rather, they gave their opinions about what the U.S. should do about its deficit. And in doing so, only Blinder acted like an economist. He said what had to be said: The U.S. has no serious deficit problem over the next ten years; it is only well beyond that that deficits get pretty crazy if projections remain what they are. Even then, most of the problem has to do with projected increases in health care costs, which he correctly made clear.

Rivlin came closest to Blinder but still demurred, arguing that we should get the budget under control within 10 years. The two others said it is important to undertake this battle right away. Why? Decidedly not for economic reasons; at least, they mentioned none. Or more precisely, they offered no evidence that a U.S. debt of, say, 90 percent of GDP is really Armageddon.

Penner is very worried about debt and has been since he served at the CBO in the Reagan years. He offered no economic evidence, as I say, taking for granted that few of any sense whatsoever could disagree with him. Holtz-Eakin worried that with high debt levels, the U.S. might not be able to withstand another major economic shock. Call it the fallout shelter view of deficit management — turning into Greece may be just around the corner. But Holtz-Eakin didn’t tell us how much deficit levels would eat into growth. Why? Because there is no really hard evidence.

Rivlin also offered no evidence for her concerns, and Blinder threw in his major concession: let’s do something about Social Security, because it is the low-hanging fruit. Even if we cut the expected Social Security gap, it won’t do much to reduce the future deficit, he admitted, but it will look to others like we mean business. Will it, really? Eating the low-hanging fruit is unlikely to show anyone anything about American budget-cutting guts. Health care reform is the real issue and requires the real guts.

A genuine discussion of political economy would have to look at why austerity economics has taken hold. If you are discussing economics, and not political economy, present us with the evidence. (To repeat, there is none. See this recent IMF paper.) But don’t do what McCloskey warns about, which is to use your credibility as an economist to argue a political case.

Rivlin has co-authored a budget-balancing plan with Pete Domenici that hopes to force health care reforms on the nation by essentially placing a cap on what Medicare will pay, handing over money to Medicare recipients who then buy private health insurance on an exchange if they want to leave Medicare. This plan assumes that somehow, the private players will not pick away the healthiest of the lot to reduce their costs and leave many of the elderly high and dry. Does Rivlin really believe she can regulate that away?

Her cap, which would be pretty low to begin with in many states, will rise at the rate of GDP growth plus one percent, which makes it more generous than Paul Ryan’s plan, but is still well below the rising rate of health care costs. This is the best we can do in the current political environment, she seems to say. But is it an economist’s job to lend credibility to the dubious case that competition and a cap will reform the system constructively? It’s likely that Penner and Holtz-Eakin believe free market competition can produce efficient care, and maybe Rivlin does too, but if so, she should tell us why. In my view, we need something like Medicare for all, not Medicare for fewer. At the least, Medicare should use its bargaining clout to reduce costs for drugs.

In fact, I doubt Rivlin really believes competition in health care will work. Talk about information and complexity problems. She is, as I say, practicing political compromise, not economics. A Medicare cap is not what we need, but it is the second, third, or fourth best choice for her.

Inside the beltway, this passes for realism and high pragmatism. Economics is their false front. I don’t mean they are dissembling. They are just so used to wearing their credential like a knight’s suit of armor that they may not fully realize what they are doing anymore. If an economist wears an economist’s hat, he or she should practice economics, not politics. When they put on a political hat, they should tell us. I would have liked a session on the political economy of the deficit in which these people talked about what compromises they make, what they really know and don’t know, what is simply a gut feeling and what is based on evidence, and of course, where their bread is buttered. We didn’t get that.

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

Cross-Posted From The Roosevelt Institute’s New Deal 2.0 Blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.


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