When you listen to economists who have worked in or near government about their role in the mechanisms of policy-making, they are appropriately humble. They harbor few illusions that a quick lecture about, say, the dynamics of supply and demand or the advantages of rule-based monetary policy will convert politicians to their point of view. They are aware that political figures will grab an economic argument if it tends to support their pre-existing views, and ignore the argument otherwise. That said, economics does play a role in real-world economic policy–but how?Milton Friedman offered one answer to this question in the “Preface” to the 1982 issue of Capitalism and Freedom. He wrote:

What then is the role of books such as this? Twofold, in my opinion. First, to provide subject matter for bull sessions. As we wrote in the Preface to Free to Choose: “The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let them simmer, and after a long time turn your preferences into convictions.”

Second, and more basic, to keep options open until circumstances make change necessary. There is enormous inertia–a tyranny of the status quo–in private and especially governmental arrangements. Only a crisis-actual or perceived-produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

I noted last spring an essay by Alan Blinder, who wrote in a similar spirit about the gap between economics and politics. Blinder wrote: “Almost a half century ago, George Stigler (1976, p. 351), later a Nobel prize winner, wrote that `economists exert a minor and scarcely detectable influence on the societies in which they live.’ Stigler was no doubt exaggerating to make his point. But he had a point. And things have not changed much since.”However, Blinder also emphasizes the role that economists can play in designing legislation to improve the ratio of benefits to costs.

So here’s my advice to economists interested in actual–as opposed to theoretical–policymaking. Don’t forget about efficiency. It matters. We are right about that. But we may have to content ourselves with nibbling around the edges, below the political headline level, to make the details of a complex policy package less inefficient. Call it the theory of the third or fourth best.

Back in 1996, on the 50th anniversary of the legislation that created the Council of Economic Advisers, the Journal of Economic Perspectives had a short symposium on the subject of the CEA and policy advice. Charles L. Schultze, who headed the CEA under President Carter, wrote ” The CEA: An Inside Voice for Mainstream Economics:”

Forty years of observing policy debates, including 15 years of participating in them, have not dulled my amazement at how few participants have a grasp of fundamental economic principles and how differently from economists they analyze issues. Several reasons stand out for the wide divergence between the views of economists and others. First, to politicians the world is full of corner solutions; the idea of continuous cost and demand curves with nonzero elasticities is foreign to their way of thinking. Second, some important principles in macroeconomics and international trade are counterintuitive; for example, the essential reason for a country to export is to import, not to increase total employment. In periods of full employment, additional spending on “good things” like exports or investment can harm the economy. The balance between a country’s saving and domestic investment is by far the most important determinant of the trade deficit, not “unfair” trading practices by foreign competitors. Depending on costs, there is almost always an optimal amount of “bads” that society shouldn’t try to eliminate. Precious few policymakers grasp the principle of comparative advantage.

Third, noneconomists have an almost universal desire to deal with market failures through carefully specified regulation rather than a change in incentive structures. Such specification is the natural function of lawyers, and the legal profession continues to dominate Congress. When government intervenes in the marketplace, our political leaders typically rule out the manipulation of economic incentives to deter undesirable actions because reliance on market responses injects an uncertain, partially random, and therefore “unfair” set of forces into the picture. Yet in the American political context, any use of market forces and incentives for policy purposes would be modest compared to the enormous power that our society readily cedes to the market over a huge slice of our national life.

In the same symposium, Herbert Stein, who chaired the CEA during part of President Nixon’s term of office, wrote “A Successful Accident: Recollections and Speculations about the CEA.” He described the qualifications for an economic adviser in this way:

The qualifications for an adviser differ from those for an innovative scientist or theorist. People who invent new ideas almost invariably have a devotion to them, but an adviser should not be so devoted to some new idea that he is unable to give the president a picture of the options that economics supports. As Frank Knight (1933, p. xx) said, “Anything very original in economics would be wrong anyway.” A few years ago, I wrote of the characteristics necessary in a good economic adviser (Stein, 1991, p. 9). In addition to a stock of economic knowledge, which is “slowly replenished and refreshed with a flow of ideas from the journal mill,” a successful adviser needs “knowledge of the institutions in the field of his concern; a body of relevant statistical information; a set of ideas about how the government works; a political calculus of several kinds; judgment; and communication skills.” These qualities have been sought by the people selecting members of the CEA and generally found in those who have accepted the position.

Oddly enough, we just had a presidential election in which both Trump and Harris were undergraduate economics majors. This fact does not necessarily raise one’s hopes about how economics can contribute to public debate and policy-making. Economists are rarely going to set the policy agenda. But in a political setting, perhaps especially when it can become imperative to “do something”, serious economists do have access to pile of ideas laying around. Some of the ideas in that pile are concrete and spelled out policies. But many of the ideas are instead about the range of ways in which to structure a policy: that is, how to structure taxes, subsidies, payments, regulations, and even institutions in the most useful ways. Pragmatic economists involved in the design of public policy often just want to shape the agenda-of-the-day in a way that promises to improve the ratio of benefits to costs.More By This Author:The Line Between Unreadable And Unread
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