OP-EDS

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May 1, 2007

Good economics doesn't make good politics

Last week, the U of C made big news when superstar economist Austan Goolsbee, a professor at the Graduate School of Business (GSB), was appointed as Barack Obama’s lead economic adviser for the 2008 presidential campaign. This means that if Obama gets elected, Goolsbee will have his pick of positions in the new cabinet and will exert great influence on the economic policies of the Obama White House.

Or will he?

In covering this story, The New York Times summed up Goolsbee’s economic philosophy with a nice quotation: “Moral exhortation doesn’t change people’s behavior. Prices do.”

This sort of statement shouldn’t be new for anyone who has taken an economics class at the U of C, but for the overwhelming majority of the electorate, this sort of thing would be seen as heresy—particularly if it were juxtaposed with a controversial moral issue. Just think of how the views of economists and ordinary people diverge on issues like minimum wage, a high estate tax, or the outsourcing of jobs.

All of these are controversial political issues that have largely been settled in the minds of economists. Even a higher minimum wage is only supported for social and political reasons. Theory and empirical work have told us that there are no positive economic reasons to raise the minimum wage.

But the main reason you see such political disagreement on these issues has nothing to do with economics. Instead, it’s the result of politicians playing to self-interested constituencies that are rarely made up of price theorists. That is, regardless of what economic theory and replicable empirical work tell us about an issue, politics will always win the day.

In the few instances that economists have tried to take on the political structure, they have failed miserably. Just think back to 2004, when at the height of the outsourcing scare, Harvard economist and chairman of the Council of Economic Advisers Greg Mankiw said, “I think outsourcing is a growing phenomenon, but it’s something that we should realize is probably a plus for the economy in the long run.”

Of course, there is nothing off about what Mankiw said from an economics point of view, but it prompted outrage. Republican and Democratic leaders alike called Mankiw’s theories “Alice in Wonderland economics” and claimed that his ideas failed “a basic test of real economics.” The response was so overwhelming that Mankiw had to issue a rather humiliating apology in which he “clarified” his statements.

If you want another example, just look at what happened to Harvard president and economist Larry Summers. He made some benign comments to members of the National Bureau of Economic Research about how certain assumptions possible in labor economics might explain the lack of women in science—and his career imploded. And if those remarks got him lynched by a mob of well educated Harvard professors, imagine if Summers had said that when he was Clinton’s treasury secretary.

Of course, there are traditional areas of economic policy that an adviser might have some sway over. Most prominent are taxes and trade policy. But has it actually played out that way?

First, let’s look at tax policy. The main area of political disagreement in the U.S. when it comes to taxes is the extent to which our tax code should be progressive, but that is really where the differences between the Republicans and Democrats end. Outside of progressivity, there are hundreds of problems with our tax code (like its complexity) that would make everyone better off if they were addressed. That doesn’t mean we’ll be seeing change anytime soon, though. Why? Simple issues of political expediency. Why would the White House waste enormous amounts of political capital reforming the tax code when no one really cares that much about it?

Second, take international trade, where economics couldn’t be more certain that free trade is the way to go. Obviously this isn’t how it has played out, though. In fact, the liberal Clinton administration embraced free trade like no other, while the conservative Bush administration (whose advisers are bananas for markets) has risked tariff wars with China, flouted the World Trade Organization, and pushed through the protection of farmers, steel manufacturing, and timber. The reason things played out like this was political convenience. Clinton and Bush both had to respond to the issues concerning the populace in order to get re-elected.

Of course, candidates make lots of promises when they run for office, particularly for the presidency, but the first to go out the window are the sorts of bland policy proposals that economists love.

That’s why, come 2008, my ballot will hardly reflect my conservative economic views—because, honestly, what’s the point? I won’t be happy with what I get either way, so I might as well vote based on the other issues that are important to me.