Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

To be relevant, economists need to take politics into account

Posted by hkarner - 19. Januar 2017

Date: 13-01-2017
Source: The Economist: Free exchange

The advent of the Trump administration finds the economics profession in crisis

EVERY January more than 10,000 economists meet for the annual conference of the American Economic Association (AEA). This year, the shindig was in balmy Chicago, a stone’s throw from its second-tallest building, the name TRUMP stamped in extra-large letters across its base. Most papers had been written months in advance; few sessions tackled the electoral earthquake in November. Yet there was no mistaking the renewed sense, following its failure to foresee the 2007-08 financial crisis, of an academic field in a crisis of its own. The election was seen as a defeat for liberalisation and globalisation, and hence for an economics profession that had championed them. If economists wish to remain relevant and useful, the modest hand-wringing at this year’s meetings will need to yield to much deeper self-reflection.

Their theories had always shown that globalisation would produce losers as well as winners. But too many economists worried that emphasising these costs might undermine support for liberal policies. A “circle the wagons” approach to criticism of globalisation weakened the case for mitigating policies that might have protected it from a Trumpian backlash. Perhaps the greatest omissions were the questions not asked at all. Most dismal scientists exclude politics from their models altogether. As Joseph Stiglitz, a Nobel laureate, put it on one star-studded AEA panel, economists need to pay attention not just to what is theoretically feasible but also to “what is likely to happen given how the political system works”.

Researchers on topics of political relevance—from the global effects of dollar appreciation to the economics of the production of fake news—promised in Chicago to produce more timely research. One recent example: just after the election, David Autor, of the Massachusetts Institute for Technology, and others published a short paper comparing congressional-district election results against data they had previously gathered assessing local-area exposure to Chinese imports. Similarly, Anne Case and Angus Deaton of Princeton University were able to compare their results on recent increases in mortality rates in parts of America with voting patterns.

In a keynote address, Robert Shiller—a Nobel prizewinner, habitual freethinker and outgoing AEA president—suggested that economists should think more broadly about the factors that affect human behaviour. Narratives matter, he argued. Powerful ideas, captured in memorable stories, can spread like epidemics, wreaking economic havoc as they go.

Views such as these, however, are notable for their rarity. Economists in Chicago debated the likely effect of the fiscal expansion expected under the Trump presidency, just as they had in past years debated the need for more of a fiscal boost during the outgoing Obama administration. Hardly discussed at all, however, was why deficit spending that seemed politically impossible then is on the political agenda now. A few years ago it might have boosted an American economy struggling to overcome weak growth and near-zero inflation; now the unemployment rate is just 4.7% and both growth and inflation are accelerating.

Economists seem to feel that such political questions are outside their area of concern. Yet politics helps determine the value of economic-policy recommendations. Many aspects of the stimulus plan passed early in Barack Obama’s tenure, such as the money provided to states to plug budget holes and protect public services from large spending cuts, were chosen because they were judged to have a high multiplier effect—ie, each dollar in new government debt generated a more-than-equivalent rise in output. But the spending remained largely invisible to voters, who had little idea as a result whether (or how) they had benefited from it. That, in turn, made stimulus easy to demonise, hindering subsequent attempts to boost fiscal spending and harming labour markets. Policies that look effective in the absence of political constraints can prove anything but in the real world.

Similarly, economists are rightly beginning to wrestle with the threat artificial intelligence could pose to jobs. But they are doing so in almost purely economic terms, when it is the political impact that may prove most interesting and important. Besides modelling an economy where machines do 100% of the work, it might be worth thinking through the potential political effects of a world in which, say, 20% of working-class adults are deprived of good, meaningful work. Long before the last human worker clears his desk, protectionist or Luddite reactions might anyway have destroyed the path to this brave new world.

It’s the politics, stupid
Many economists shy away from such questions, happy to treat politics, like physics, as something that is economically important but fundamentally the business of other fields. But when ignoring those fields makes economic-policy recommendations irrelevant, broadening the scope of inquiry within the profession becomes essential. Some justifiably worry that taking more account of politics could destroy what credibility economists have left as impartial, apolitical experts. Yet politics-free models are no insulation from political pressures—just ask a climate scientist—and nothing would boost economists’ reputations more than results which match, and even predict, critical outcomes.

Political and social institutions are much harder to model and quantify than commodity or labour markets. But a qualitative approach might actually be far more scientific than equations offering little guide to how the future will unfold. Donald Trump campaigned (and may well govern) by castigating the uselessness of experts. To prepare for a time when expertise comes back into fashion, economists should renew their commitment to generating knowledge that matters.

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