The Trouble with Economics by Sahil Grover, Impact Investing Intern, University of Virginia
On June 20th, 2017, the Brookings Institute invited Alan Blinder, Representative Jamie Raskin, and Former Representative Vin Weber to discuss the "Lamppost Theory" – the tentative title for Blinder’s new book that seeks to explain why economic policy often comes up short. Held in the Hutchins Center on Fiscal & Monetary Policy, the discussion began with Blinder explaining what the book title means. Blinder’s main argument is as follows: “Politicians use economics the way a drunk uses a lamppost – for support, not illumination”
Blinder believes that the reason economists and politicians have not had success working together to create effective policies is because they hail from two completely different “civilizations”. He believes both parties share blame for past policy failures and must learn from each other. Blinder argues that economists and politicians measure success differently, using a completely different set of criterion to make decisions. Economists tend to use more logical, substantive, and idea-driven approach while politicians focus on using people skills, gaining influence, and creating a message. Furthermore, economists use longer time-frames while politicians are subject to the election cycle and much shorter time-horizons.
Blinder describes policy formulation as a “four-ring circus” that gives economists little influence on public policy. The four “rings”, or phases of the process include: Substance, Politics, Message, and Process. According to Blinder, economists become too focused on the substance and fail to engage in the other phases of policy formulation. Blinder asserts that most economists either do not understand or do not care for these parts of the process, diminishing their potential level of impact on policymaking. Some of the principles that economists need to learn from politicians include:
o Fairness beats efficiency
o Unprincipled compromises beat pure solutions
o Complexity sells poorly (KISS principle)
o Need to differentiate what is good from what sounds good
Blinder identified the three impediments to generating sound policy as the 3 I’s: Ignorance, Ideology, and Interest Groups. Economic literacy is very low, making slogans such as “protectionism saves jobs” sell better than complex economic explanations. Additionally, Blinder believes that while economists focus on theories that maximize social welfare and macroeconomic conditions, politicians focus on special interests and policies that benefit a narrow set of interests.
The second part of the discussion involved a panel moderated by David Wessel, formerly of the Wall Street Journal and now Director of The Hutchins Center. Rep. Raskin, recently elected to serve Maryland’s 8th District, believes that economists need to change their approach by using newer fields such as behavioral economics to influence public policy. Mr. Weber, one of the most prominent lobbyists and strategists in the Republican Party, added that part of the reason classical “technocrats” are not highly regarded in politics is due to past failures. Weber points out that the 2008 financial crisis and economists’ lack of ability to foresee it created an overall distrust in economic expertise. (Of course, he is wrong about this. Only nonminority, mainstream economists missed the crisis. See: http://www.creativeinvest.com/InvTrackRecord.html , and Trump: https://www.linkedin.com/pulse/why-trump-win-william-michael-cunningham-am-mba - Ed.)
Reverting back to the 3 I’s, Blinder emphasizes that while they may hold different values and theories, economists tend to be much less further apart than politicians. Raskin admits that the current political climate has compromise extremely difficult, making him become more of demonstrator than legislator. Although he agreed that it has become much harder to have an impact, Weber believes there is still hope. In order to fix this problem, Weber believes we must try to figure out what people actually believe in – not the slogans they sprout. Going forward, all three discussants see a tremendous opportunity for economists to positively affect economic policy. Though tax reform is the major issue area in which Blinder sees a need for technical expertise, Raskin points out the war on drugs and campaign finance as policy areas in which economic insight could play a major role.
Takeaway: At the end of the day, economics is not an issue area that many Americans understand. According to a study by FINRA Foundation, nearly two-thirds (63%) of Americans could not pass a basic financial literacy test, knowledge that has continued to decrease since the financial crisis. In order to build coalitions for more effective economic policies, we must start by making it a topic that the American electorate both cares about and can follow. As Blinder points out, this will not be easy and will take at least a generation of fundamental change. Although the long-term solution requires changes to the K-12 curriculum and more emphasis on better economic/financial press coverage, there are a number of online resources to help the transformation. For absolutely no charge, individuals can enhance their economic knowledge by taking online classes on topics such as Stock Investing and Crowdfunding.
Additionally, we must figure out an create a superior communication network between politicians and economists to improve fiscal policy formulation. As Rep. Raskin points out, there is no real “neutral” economic group or organization that Congress can rely on. Although Blinder suggested a scenario in which a group of economic experts were selected to rewrite the tax code with a set of goals and oversight provided by Congress, he admitted that it was not a politically feasible solution. While I do not expect Congress to relinquish its ability to create fiscal policy anytime soon, there are incremental changes that can make economic policy more sound. In order to eliminate the time-frame problem, we must consider remove election-cycle pressures from affecting broad fiscal policy decisions. Politicians and economists must be held to the same timeline, having a standardized set of outlook and forecasting components that make analysis and comparison easier.