There’s No Market for Good Economic Policy

September 19th, 2011 at 8:31 am

A few weeks ago I referred to austerity economics—fiscal or monetary tightening when we need both to be expanding—as akin to the medicine of medieval times.  Bleeding patients was thought to cure them, but it generally made them weaker and less resistant to disease.

Paul Krugman uses the same analogy today and I was reminded of an aspect I hadn’t thought of before, having just finished a (great) historical novel covering the period in history when medicine was just beginning to wake up (World Without End by Ken Follett).

The way Follett tells it, by the end of the 14th century, private hospitals began offering alternative treatments to those in the monasteries.  Monks were still practicing bleeding and other “austerity” measures, but early physicians were beginning to understand that such practices were…um…contractionary to your health.

So people began to migrate away from the monks and their ancient ways.

In other words, there was a market—you could choose, and once people were able to assess the different results, the choice was obvious.

And here is where the analogy breaks down.  Unemployed workers, families unable to make their budgets on shrinking paychecks and falling incomes, small businesses suffering from a lack of foot traffic—they can’t go across the street and try a different macroeconomic policy.

They have to accept the austerity whether it’s coming from the Fed (“we’ve got some other tools here but we’re just not ready to use ‘em”), the Congress (“the President’s jobs plan won’t work”), the European Central Bank (“price stability uber alles!”), or the medievalists of Europe (“only by contracting will you grow!”).

I guess one could argue there’s an election market for such choices, and in some sense, the “throw the bums out” dynamic fulfills that role.  But it’s a slow, cumbersome, and noisy process—there’s so much misinformation that it’s hard for people to sort out the facts, so you end up with politicians who claim to be different but have their leeches and bleeding bowls at the ready (see Republican field).

The only way out of this mess is to reach more people—voters—with the evidence-based facts of the case.  It won’t always work—the noise machine is powerful and well-funded.  But the truth will out.

I mean…I hope it will…it will…um…right??  Hello…anyone there??!!


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12 comments in reply to "There’s No Market for Good Economic Policy"

  1. Tyler says:

    We’re here! The problem is that economics is very complex, so it is very easy to mislead people on it.

    The main thing that has to be taught to the American people is that their family is not like the federal government – unless they, too, have bottomless pockets.

    • Sharon says:

      He used the “government is like your family” construct again in his speech this morning.

      Every time I hear him say it, I die a little inside.

      Hey Jared, can you ring up your old compadres back in the White House and ask them to hide this phrase from the President?

  2. Jim Johnson says:

    Medical treatment is a private good, economic policy a public good. So the market story you tell about the 15th C is plausible. Conversely, for the same reason not only is there no market for the latter, it is difficult to see how their could be (despite the fantasies of libertarians who think – despite Economics 101 understanding of markets – there can be markets for everything).

  3. Paul Papanek says:


    Professor – Thanks for another great column.

    For several years, progressive economists have been arguing for expansion via fiscal stimulus, but without penetrating the mainstream media (never mind Fox). But in the last few months, it seems these progressive messages are filtering in, and therefore reaching the ears of at least a few voters.

    I wish we had a metric for this — a way of tracking the number of ears reached by these progressive messages, with their ruefully correct predictions about the folly of austerity over the past few years.

    Agree that if more voters saw that the Republicans’ Very Serious policies were running us into the ditch, and saw that progressive economists, Cassandra-like, had correctly predicted this years ago, we might get a big political swing toward sanity. Is there a way to track the trajectory of the public’s knowledge about dumb austerity vs sensible expansion?

  4. Paul J says:

    Yes. That’s why I’m hoping that the Obama administration/campaign couples its policy pronouncements with a massive voter education campaign. You don’t need to persuade everyone that the Republican notions for creating jobs are just flat out wrong, but if you can convince just 5%, they’ll tend to be the 5% that others listen to.

  5. reflectionephemeral says:

    Yeah, it’s hard to see how elections perform the market choice function here. First off, we have a lot of data showing that elections are very sensitive to economic conditions– so, as we saw in 2010, a Democratic Party with good ideas implemented halfheartedly, will lose elections to a GOP that has no ideas or exclusively bad ideas. Relatedly, as you point out, there’s little indication that our policy elites as a whole care very much about getting things right. Appearing savvy and making plausible-sounding arguments for one’s side certainly seem to take precedence over coming up with a theory that fits the data.

    It’s not ideal.

    I’d also like to make the important historical point that I used the “bleeding with leeches” analogy in May: “Today, as we face low rates on gov’t bonds, low inflation, OECD-average debt levels, and catastrophic unemployment, the Republican Party wants to purge the rottenness out of the system, or perhaps bleed the economy with leeches.”

  6. perplexed says:

    “But it’s a slow, cumbersome, and noisy process—there’s so much misinformation that it’s hard for people to sort out the facts, so you end up with politicians who claim to be different but have their leeches and bleeding bowls at the ready (see Republican field).”

    Yes, but we need more help from the “economics profession” in controlling the discussions as well. I’ve been following these debates for some time now and have yet to see the question of: “what do economists have say about what policies we should follow to get out of this depression recession, liquidity trap, confidence crises (or whatever label bias seems to work best)?” summed up as well as it has been in these five articles:

    Barro’s NY Time article.:

    Cowen’s post defending Barro:

    Thoma’s response to Cowen’s defense of Barrow:

    Justin Fox’s analysis of who has the ‘right’ model? (Including the Minsky quote that: “There is nothing wrong with macroeconomics that another depression [won’t] cure.”)

    Krugman’s elaboration on some of the comments in Thoma’s response:

    It would appear from reading these articles on the state of the science of economics with respect to the current crises, that there are three very powerful words all economists need to know how to use more effectively: “ECONOMISTS DON’T KNOW.”

    With the appropriate use of these three little words, economists might be able to significantly alter the political debate (while at the same enhancing the relevance and usefulness of what they do know). Consider the difference between the following two statements:

    1. “The way the economy works, in order to get out of this depression, we should …”
    2. “Economists don’t know, but the evidence seems to suggest that we should…”

    While somewhat similar, the two statements are different in very profound ways. Statement 1 conveys that the writer (or speaker) has the requisite knowledge of how the economy works, that this knowledge of “the way the economy works” is uncontested and known well (or at least known well by “knowledgeable economists”), and that the prescriptions that follow can be depended upon to produce the desired results if properly implemented. It also conveys upon the proponents of these “prescriptions” the power and credibility of “economic science.”

    Statement number 2 on the other hand, makes no such claim. It truthfully states the “the state of art” of economic science, without suggesting at all that economic science doesn’t have a great deal to offer. The other thing it does is instantly separate the credibility of “established science” from the prescriptions being offered, while preserving the ability of economists to weigh in with what they do know. But now, when the likes of Paul Ryan, Mitch McConnel, John Boehner, Eric Cantor, Ryan Paul, Rand Paul, etc., claim to know how the economy works, the press can ask them, “How is it that you possess all of this precise knowledge when economists themselves say these questions have not yet been answered?” By allowing these people to hide behind the credibility of what some Harvard, or University of Chicago economist said, we relieve them of any duty to actually understand what they’re talking about, and leave them free to pick and choose whatever they can find that supports what they already want to do, regardless of the context. Furthermore, we empower the economists that would do so, to be able to sway policy choices with their largely unsubstantiated “theories” of “how the world works.”

    Saying “economists don’t know, but…,” would also alter the discussion about what economists can add by focusing the discussion on the right questions to ask in light of the uncertainty around policy choices. If economists can’t say for certain (or even for high probability), which is the policy choice that will produce the desired the outcome, then the politicians are forced with making policy choices between two (or more) highly risky propositions with conflicting scientific theories of which is best. So how should those making such decisions proceed? By pretending that they themselves are are in possession of the “truth” and that the other guys claims are unfounded? Let the economists publicly fight it out and see who can best “sell” their unproven theory to the public? The “Dancing With Stars” model of economic policy making? If American TV watchers can figure who the best dancers are, they should have no problem figuring out who the best economists are! Then we let career politicians (and their very knowledgeable campaign contributors) espouse their tremendous knowledge of economics (often acquired at medical school or at daddy’s tavern) into the mix? How absurd is this? Is this not what we’re doing? For many years the Catholic religion operated with two popes, each of whose interpretations of “Gods word” were “infallible;” now, instead of just two, we have many infallible interpreters, enough to support a number of different religious dogmas.

    So how should policy decisions like these be decided and can economists help, even if they can’t agree on the scientifically “best” option? (Physicists still have no single theory of what gravity is, but they can certainly predict its effects with a high degree of accuracy – you don’t need to “know everything” to be able to go to the moon and back successfully.) Obviously the thing to know when presented with a choice like this is what’s the risk? What happens if you make the wrong choice? Who wins and who pays what price, not if you’re right, but if you’re wrong! Isn’t this really what the argument is about anyway? Why not just state it explicitly and have an intelligent discussion about it? Obviously, if you make the right the choice, everybody comes out ahead or gets hurt less than they would otherwise; only if you’re wrong does it make a real difference. But is that where the discussion is focused? Every economist and every politician is absolutely sure they’ve identified the right solution that should be quickly and enthusiastically implemented; but its always others that suffer the consequences if they are wrong; its no wonder they want to avoid the discussion (its class warfare, so lets not discuss wealth taxes as part of the solution to many of our most serious problems!).

    As it turns out, this is where economists can really add something, especially if they can’t “scientifically” determine the “best” choice. Instead of fighting out a battle of “why I’m right and the other guy is wrong,” they should be focusing on what are the costs and “who pays them if my policy choice is the wrong one”? What are the costs and who pays them if the other guy’s policy choice is implemented and it’s wrong? This is the information the policy makers and the public needs before policy decisions are made. Its also the information economists have some great tools and ability to predict (and I suspect that the disagreements about who gets hurt with a wrong policy choice are much more narrow than differences about who is right and who is wrong). How nice would it have been to have known, in some detail, that this is where we’d end up if trickle down economics didn’t work as predicted? How might it have changed the debate to know ahead of time that, if it didn’t work, much of the middle class of the country would be destroyed and substantially all of the wealth would be concentrated in the hands of very few? Was this outcome really so unpredictable based on what we knew at the time? Wouldn’t it have been nice to have been told that the theory wasn’t working, and the outcomes were following the prediction of some economists who predicted it wouldn’t work after only five, or even ten years, instead of waiting thirty plus years to discover it was a disaster for most Americans and an enormous windfall for a select few? While economists were busy fighting about who is right and who is wrong, no one tried to seriously analyze what would happen to the banking and financial systems if real estate prices fell 5, 10 or 15%? No one identified that there was no way to know what the damage of derivatives positions could cause to the financial system because the information wasn’t being gathered and reported on at the macro level; only because that wouldn’t have won any “beauty” contests? Seriously? Instead, economists spent the last thirty years saying I’m right and you’re wrong without the kind of evidence that would be conclusive enough to settle the debate. Maybe that isn’t possible in economics. If that’s the case, at least be honest about it and help determine what the risks are, who really pays for wrong policy choices, and what the best way is to offset the costs our wrong policy choices impose on those that ultimately have to pay them. And, speaking of honesty, how about mandatory full disclosure of all possible conflicts and payments. The public has a right to know whether the words they are hearing are from an “independent academic” who’s only focus is to add to the current body of knowledge or if it is the “product” of some group paying an economist to tell them what they wish to hear, how the “facts” can be slanted to their interpretation, or to support a “political” position. If economists want to be treated as “scientists,” they must act accordingly. The deception this supports, the damage it has caused, and potential for more damage is intolerable and indefensible.

    If policy decisions were analyzed by economists based on the “who pays if its wrong?” question, it would be very obvious that every decision that we’ve made along the way has been made in an effort to minimize the risk that the wealthy would suffer loses if the policies are wrong. If it works, great, but if not, the poor and unemployed pay a tremendous price. The same rationale that carried the day in the 30’s, what an amazing coincidence! Things that might have worked were avoided or undermined because, if they didn’t work, it might impose a cost on, or risk to, the wealthy. How does this happen in a democracy? The poor, the unemployed, the underemployed, the middle class, all paid and are paying the costs because the policy choices that might have helped them were dismissed, not because they had been shown to be wrong, but because they might have imposed costs on the wealthy. If austerity works, everyone wins, if austerity fails however, the poor & unemployed get creamed, but the wealthy and employed fair pretty well! If Keynesian stimulus works, everyone wins; if Keynesian stimulus fails, the poor and unemployed do better than they would have otherwise, but the wealthy and already employed now face the higher taxes needed to pay down the added debt (even though the larger economy mitigates at least some of the burden). If economists worked in advance to project and communicate these probable outcomes, the politicians would be forced to address them prior to the decisions being made. Who knows, giving the media the right questions to ask might even help them to again be part of the solution. If the policy makers were forced to discuss why they propose implementing a risky policy (austerity in liquidity trap economy for instance) that would impose huge costs on the poor and middle class if it didn’t work, why do they believe these groups should bear those costs, or what is their plan to offset the damage done if the policy is wrong? If austerity doesn’t work, how are those that paid the cost of implementing that destructive policy to be compensated? What is the rationale for asking this group to bear these risks to begin with?

    By helping to frame the debate in terms of the discussion of these very possible outcomes, economist could have a huge positive impact on the choices that are made and the protections extended to those that bear the risk of being wrong. They would simultaneously make it clear which politicians were representing which groups when the policies are selected and make it much more difficult to pass the risks along to others while acting in the interests of a select few.

    It may well be the case that “economists” as a group may have more political influence than they should be entitled to given the state of the “science.” But big time responsibility comes with that territory! I doubt that historians will look very sympathetically on the “its not my job” excuse as a reason to exonerate economists from their role in the suffering and government capture based on shaky premises that are being supported by “economic science,” not to mention the manipulation of the gap that exists in the state of our “knowledge.” In the long run we are indeed all dead, but our legacies will live a long time and someone has to clean up after we’re gone. Maybe that should matter more than it apparently does. There are some serious problems with the incentives here aren’t there?

  7. ReaderOfTeaLeaves says:

    I know fine and (mostly) decent people who, having breathed in media that glorified CEOs, downsizing, cost-cutting, and neoclassical assumptions for their entire adult lives still line up to be bled by leeches. It’s alarming to see.

    However, given some of the suppressed fury that I think is what I’m hearing, I have the sense that people are incredibly frustrated. I hope that means they are open to new ideas, and I think it’s a very tough, but incredibly important task to provide new, clear explanations.

    There’s a lot of opportunism and silliness these days.
    Ludicrous beliefs, like claims that ‘private enterprise’ is ‘the only source of wealth creation’ are still expressed with confidence by those who hold such ideological views. ( I suspect them of owning a large supply of leeches, which they sell at a sharp markup to neoclassical economists…;)

  8. Lars Olsson says:

    Dear Professor Cassandra,

    That was an excellent post: most salutary in terms of addressing the economic problems we as a nation face.

    Unfortunately, that sentence should have the addendum “…IF it were, in fact, the case that fact-based approaches won over voters.” Sadly, in the era of FOX News and shrinking budgets everywhere else in journalism for truly in-depth analysis, they do not.

    That’s not to blame the media for all of our troubles, either. The simple reality is that if ordinary people wished to discover the facts, those facts (due to the ministrations of knowledgeable folk such as yourself) are not much less available today than they have ever been. Perhaps the signal-to-noise ratio is lower (or perhaps it is more like a noise-to-signal ratio), but fact-based analysis and solutions are certainly out there.

    They’re just not having much effect. And MORE of them won’t change that.

    When I realized that we all live in a country in which the average person truly has at least something of an ethical problem with spending something like 27 cents per capita on the NEA but in which “Disco Duck” went platinum at a couple of bucks per 7″, I knew for sure we lived in a debased culture which had abandoned not only empiricism but also good taste and mercy.

    Just a (depressing) thought.

  9. Bud Byrd says:

    Unfortunately, Jared, in your dreams. I don’t think the American public, generally speaking, has the patience to search out the facts. It is too easy to listen to the bull-crap and make snap, usually irrational decisions / choices. We have blasted our economic hole to infrequently attained levels …don’t know if we have the wherewithal to climb out …may need to fill the hole with water and float us out, but many of us will drown in the process.

  10. David says:

    If you like historical fiction (with a twist), I recommend heartily Eric Flint’s series about the 30 years war, starting with the novel “1632.”

    (available as a free e-book, but beware, you will certainly spend money on later books in the series).

    Lots of very interesting information about the politics of the period.

  11. perplexed says:

    -“I guess one could argue there’s an election market for such choices, and in some sense, the “throw the bums out” dynamic fulfills that role.”

    But what if all of the choices in the elections are pre-screened by the wealthy campaign funders? This leaves a pretty significant number disenfranchised and without any choice at all doesn’t it?