Thursday, March 29, 2018

The uses and abuses of economics

Alan Blinder wrote a few days ago in the Wall Street Journal that economic theory has been often abused by politicians. He refers to what he calls the Lamppost Theory of Economic Policy, the notion that: "Politicians use economics the way a drunk uses a lamppost—for support, not illumination." His concerns are fairly conventional. He says:
By 2020, higher spend­ing and tax cuts will push the fed­eral bud­get deficit above 6% of gross do­mes­tic prod­uct—higher than it ever was in the Rea­gan years. Even deficit doves like me think that’s far too high ab­sent a re­ces­sion. Pres­i­dent Trump may be tak­ing the U.S. into a mul­ti-­front trade war, against the ad­vice of al­most all econ­o­mists. And Amer­i­ca’s po­lit­i­cal lead­ers refuse to en­act a car­bon tax, the rem­edy for cli­mate change that al­most every econ­omist fa­vors.
If you read the piece, you would think that economists agree on everything, and that the reasons for the consensus is that the subject is highly technical, and in a sense scientific. So fiscal deficits that are relatively large are bad (unless there is a recession), free trade is always good, and a tax can fix a problem with an externality, like climate change.

The reason for politicians misguided behavior is not difficult to understand either, in Blinder's view. It is essentially a problem of time horizons, politicians must by the nature of their trade be impatient. In his words: "Political time horizons are notoriously short, perhaps extending only to the next election—or the next tweet. In contrast, economists’ time horizons can be agonizingly long—far too long for politics."

I have problems with many of those issues, even if I'm also not a fan of Trumponomics. Note that larger fiscal deficits, including a 6% one, even without a recession, might be acceptable, depending on how the government spends and taxes. If the government is borrowing in domestic currency, with low interest rates, taxing the wealthy, and spending to provide a wide safety net for the relatively poor I would be perfectly fine with that. And there would be no risk of debt sustainability issues or default. Note that, the higher spending would probably translate eventually into higher growth and, as revenue increased, lower deficits. As Blinder well knows, deficits are endogenously determined. The point is that my favoring of higher deficits, in some circumstances, is related to the question of who are the winners and the losers of alternative fiscal policies.

My biggest trouble is, probably, with the free trade assumption (and I discussed that recently here). I don't want to repeat the argument, but there should be significant disagreement within the profession on the benefits of free versus managed trade, since the evidence for free trade is incredibly weak. Free trade is simply a particular kind of trade management that favors some groups at the expense of others.

I also would favor a Green New Deal, a significant increase in the spending on green technologies, since I'm skeptical of substitution effects in general and, hence, of a carbon tax (I'm not against it, just skeptical that it would solve our problems). It seems to me that the biggest issue with global warming is that the distribution of its effects (and note that the benefits of the process of industrialization that caused the climate change in the first place were unevenly distributed) will be very unequal. In particular, developing nations would end up paying a higher price.

All of these issues, with fiscal, trade and environmental policies, seem to suggest that the main problem with the political use of economics is not the illegitimate use of economic arguments for political aims associated to the electoral cycle, that is, the short-termism of politicians. The problem is the very legitimate grievances that arise from the social effects of those policies. Trump is not giving tax cuts just to win elections, although that may play a role (yet, most people are for higher taxes on the wealthy), but also, and more importantly, to increase the rents of the wealthy.

That's why I would be very skeptical of Blinder's suggestion favoring a technocratic government, which would reduce the role of politics in economic policy making. In his words:
I have one final suggestion, though its scope is limited: Suppose we took some—certainly not most—economic decisions out of the hands of politicians, and put them in the hands of nonpolitical technocrats instead.
This is the sort of neoliberal argument used by the Chicago Boys in Latin America to suggest that there was no alternative. Market friendly policies were the only game in town, because they were a technical issue, not open to political dissent, instead of a strategy of a political minority to impose very unpopular policies that favored the wealthy. Trump should be defeated, and his policies rolled back, and for that Dems should field a left of center candidate with reasonable ideas favoring the majority (i.e. the working class), rather than propose undemocratic (technocratic) solutions.


  1. Prof. Vernengo,

    With all due respect, I find that assumption below distressing

    It seems to me that the biggest issue with global warming is that the distribution of its effects (and note that the benefits of the process of industrialization that caused the climate change in the first place were unevenly distributed) will be very unequal. In particular, developing nations would end up paying a higher price.

    I don't dispute that the benefits of industrialisation were unequally distributed. We are in agreement on that.

    What I find questionable is the assumption that the developing nations will end up paying a higher price. This may be so if climate change is limited and one considers a short time horizon. However, if the current projections hold and one considers a longer time horizon, I think the question of who loses more is kind of moot.

    I fear the developed world may be lulled into a sense of misplaced complacency by that kind of assumption.

  2. I find it too. But the point is that I think if you leave in say Manhattan, I think you would be better off than someone in a tiny Pacific island when it comes to dealing with the effects of global warming. Not only the causes of it were uneven the consequences will also be, and there is little discussion of that so far.


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