Did the stimulus package jump-start the economy? Will climate regulation create jobs? Are clean energy subsidies an efficient way to curb pollution? Is health-care spending worth it? And how worried, really, should we be about budget deficits?
Those are questions for economists. With those issues in the news, economists are in demand. They’re quoted in the press, invited to conferences, even sought out at cocktail parties. But what, really, do they have to tell us?
“It’s a very funny time to be an economist,” says Russ Roberts, an economics professor at George Mason University and a research fellow at Stanford University’s Hoover Institution. “Our reputation isn’t very good. Probably shouldn’t be very good. We didn’t predict the recession. We don’t have a theory on how to get out. Yet people ask us for guidance. It’s bizarre.”
Russ is an unusual economist because he spends a good deal of time trying to explain his trade to a broad public. He hosts an excellent weekly podcast called EconTalk. He has written “an economic romance” called The Invisible Heart. He blogs at Café Hayek and, most recently, produced a rap video showdown between Frederick A. Hayek and John Maynard Keynes that has amassed an astonishing 500,000 (!!!) views on YouTube.
But when Russ spoke the other day during a day-long media colloquium at Hoover, where he was joined by John Taylor and Robert Hall, who are distinguished Stanford economists, he titled his talk: “Is Economics a Progressive Discipline?”
By progressive, he didn’t mean left of center. (Not at Hoover!) Instead, he was asking whether economics, like physics, evolves, to develop deeper or more precise knowledge about how the world works. “Do we make any progress?” he asked. His answer, in sum, was not much. Unlike physicists or mathematicians (or even, I daresay, climate scientists), economists today can’t agree on what would seem to be very fundamental questions.
That became evidence during my day at Hoover. Prof. Taylor—who invented the “Taylor rule,” a guideline for monetary policy—gave a thoughtful, well-reasoned, data-driven lecture arguing, in essence, that the Obama administration’s $787-billion stimulus package had a very limited effect on the economy in the short run, and will do damage in the long run because “government purchases crowd out other things.” (Here’s a paper he co-authored on the topic.) Too much government spending, Taylor said, inhibits private investment and consumption because people, quite rationally, fear that government spending (and borrowing) will lead to higher interest rates and taxes. So people and businesses hunker down, undercutting the desired effect of the stimulus.
Prof. Hall, by contrast, argued that without the stimulus, the economy would be in even worse shape, with higher unemployment and slower growth. He produced a surprising statistic—real disposable per capita income of Americans is currently at an all time high. This is so even though the incomes of the rich fell during the Great Recession. “It looks like the middle class is doing better than ever,” Hall said. “You’d never know that from what you read in the press. But that’s what the numbers show.” What’s more, unlike Prof. Taylor, he suggested that the psychological impact of the stimulus would be positive, not negative, because government spending creates an “anticipation effect”—people are less fearful because help is on the way.
Their conclusions differ in part because their models are different, and that’s a key to knowing how economists work. Because an economy is an extraordinarily complex system, with numerous variables, economists often try to tease out cause-and-effect by building models. There’s no other way to figure out whether a job was “created” or “saved” because of the stimulus. (The government says, with remarkable precision, that 599,108 workers are being paid by funds from the stimulus package.) Nor, really, is there any way to know whether an increase in the minimum wage will helped low income workers, by lifting their pay, or hurt them, because fewer will be hired. Or what effect putting a price on carbon will have on economic growth, all other things being equal, which they never are.
Be especially wary when economists try to project the future. The truth is, they still can’t agree on what happened in the past—not the recent past, i.e., the 2008 financial meltdown, or even the distant past, as Russ noted
“It’s 2010. We haven’t figured out the Great Depression,” Russ said. As for the Great Recession: “We’re going to debate this period for 50 years. People say it was a market failure, People say it was a government failure.” But nobody knows.
“We really are in two groups,” he said. Quoting the Hayek-Keynes rap, he said: “There’s a group of us that wants to steer markets, and there’s a group that sets them free.” Later, he put it this way: “Our ability to reason is flawed by our emotional baggage.” Russ, for the record, is a libertarian Hayekian economist, i.e., he’d like to set markets free.
None of this, it must be said, is an indictment of economics per se. Russ clearly has a passion for economics; it’s why he’s such a good teacher. I’m a skeptic but I love to read about economics, especially when those doing the writing can communicate to non-elites. (Try Paul Krugman, Nassim Nicholas Taleb, the Freakonomics guys, Cass Sunstein, Richard Thaler, Dan Ariely, David Leonhardt in The Times, Michael Lewis, my friend Justin Fox’s book about markets and others). Economics offers great insights into how and why individuals behave as they do, and it can be helpful in trying to figure out how the world works.
But the best economists are willing to acknowledge that theirs is, at best, an inexact science and, at worst, a religion. Taylor noted as much in critiquing a Times story with the headline, New Consensus Sees Stimulus Package As a Worthy Step. Nonsense, he said: “There was not, there is not and there never will be a consensus.”
As for the ability of economists to interpret the same facts in different ways, Taylor told us that his wife decided a few years ago to buy him a new set of high-tech golf clubs with oversized heads that were all but guaranteed to lower the scores of weekend duffers.
Taylor’s scores, alas, didn’t get any better.
“I don’t want to tell my wife that the clubs didn’t have any impact,” he said. “So I say, without those clubs, my game would have gone downhill.”