Turning economics research into policy

Hat tip to the inimitable GoodLiberal for pointing me in the direction of an excellent article I would certainly have missed otherwise. It's by Noam Scheiber and it's about Barack Obama's advisers; in particular some of the economic policy advice he's been getting. You can find it here, but get it while it's hot because it might move behind the subscriber's wall at the New Republic. To be clear, the economic policy parts are most interesting to me, but there's more to it than that.

It's interesting both how Scheiber characterizes the type of economic theory that's apparently fueling some Obama policy, and how the path from one to the other winds. There are so many fun lines I might just go ahead and start quoting. On the distinction between academics and nonacademics:

"In economics, it's the academics who are first-rate engineers and the nonacademics who are either dreamers or technicians."

Very well put, though I fear a little harsh on dreamers. Research and teaching in academia are indeed geared towards the sterile positivism; the engineering analogy is well drawn. I do wish we had a bit more dreaming in the dreamy spires of academia though.

The article starts out by describing "behavioral economics", that field that's trying to figure out how people act and how to build it into economics.

"Behaviorists like Thaler believed that the perfectly rational, utterly selfinterested maximizers of economists' imaginations had little in common with actual human beings, who frequently err when making simple calculations, who have trouble with self-control, who often act out of altruism or spite. But what's really interesting is how Thaler and his fellow behaviorists responded to this fairly critical insight. Though rational self-interest was the central tenet of neoclassical (i.e., modern) economics, they didn't take a wrecking ball to the field and replace it with some equally sweeping theory of human behavior."

Behavioral economics is possibly the least revolutionary revolution ever to hit an academic discipline, because, as Scheiber is alluding to, the behavioral school is absolutely not changing or abandoning the methodology of economics. As I've noted before, the "perfectly rational" economic man can happily do whatever the behavioralists want him to do to be more "realistic"; it's therefore not necessary to come up with a whole new way of modeling people.

Instead the behavioral school is writing down models of "perfectly rational, utterly selfinterested maximizers" who act in accordance with the behavioral evidence. That is, writing rationalization of the "irrationality" we observe. Contrast this with the traditional criticism of economic man, which is to throw up ones hands and loudly reject the whole idea of trying to predict what people will do. I prefer the behavioral way.

Anyway, what's coming from having this type of economist on the Obama team?

"For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called "status quo" bias."

Does it take an economist to suggest this? Of course it does not; the article argues, however, that the "engineers" in academia are the ones who can tell you if the opt-out policy will increase saving or not. That's a nice example of the value of positivist economic science: it gives you the evidence that switching from opt-in to opt-out might increase retirement saving, which is handed off to the policymaker, who says "I want to increase retirement saving", and proposes opt-out. Presto. Did any part of the economic science at the bottom of the pyramid require esoteric math or have an ideological bias? Doubtful.

Here's an even better one:

"Obama wonks tend to be inductive--working piecemeal from a series of real-world observations. One typical [economic adviser Austan] Goolsbee brainchild is something called an automatic tax return. The idea is that, if you had no tax deductions or freelance income the previous year, the IRS would send you a tax return that was already filled out. As long as you accepted the government's accounting, you could just sign it and mail it back. Goolsbee estimates this small innovation could save hundreds of millions of man-hours spent filling out tax forms, and billions of dollars in tax-preparation fees."

How simple, how wonderfully useful that would be. How fickle am I that I would vote purely on the basis of an easier tax return?

"The Clintonites were moderates, but they were also ideological.... The Obamanauts are decidedly non-ideological. They occasionally reach out to progressive think tanks like the Economic Policy Institute, but they also come from a world-- academic economics--whose inhabitants generally lean right."

Oh really? Aside from the repetition of this common error about economists' politics, this implies that the positivist approach to academic economics is bleeding into economic policymaking, drastically shrinking the gap between the science and the normative judgment informed by the science. The crucial distinction remains - for example, I could argue that it's wrong to make people opt-out of a retirement scheme rather than opt-in, a violation of their right to be left alone, and I couldn't be wrong, despite what the science said would happen - but the information on which the policy is based is very close to the policy itself.