Friday, May 9, 2008

'Good' versus 'bad' economics

A peculiar distinction is often made between 'good' and 'bad' economics when analyzing economic policy. The current hot potato of a gas tax holiday in the US is a case in point - though it might be a trivial issue in the scheme of things, it did provide this absolutely outstanding moment from Hillary Clinton:

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

There are a couple of things going on here. First, it just shows that declaring opposition to economists is just as popular a political strategy as declaring opposition to 'business' or 'the elite' or 'greedy oil companies'. This is almost certainly because 'economics' is perceived as being one and the same with these things, an ax wielded by the establishment to crush little people under the wheels of capitalism. Again, true economic analysis is valueless, and is subjective only once we evaluate the outcomes or the processes that would lead to or from one thing or another.

The other point, related, is the implicit invocation of a consensus among 'economists'. It's related because it is unambiguously true that the majority of economists evaluate things in a particular way - the subjective part is a collective subjectivity rather than a diversity of opinion. Why is that? Are economists molded into a particular normative stance that evaluates policies or outcomes in a particular way? A significant amount of work has been done on the question of which way the causality runs between studying economics and policy opinions: do economists dislike the gas tax holiday because they've studied economics or because people who dislike these kind of policies study economics?

The truth is that it's very easy to identify what 'good' and 'bad' economics are, because that label can be attached only to the logical, scientific chain of argument - the positive side - that draws the map from cause to effect. Of course we can argue about the validity of the links in the chain, test our assumptions, look to evidence, but the fact remains that 'bad' economics is that which fails to acknowledge the true effects of an action.

By contrast, the normative side cannot be labeled 'good' or 'bad', because it is only opinion. To argue against a normative stance is to argue against an opinion. This is why it is so dangerous for the 'Principles of Economics' to include value-loaded statements; this is why it is so dangerous to have a normative consensus among people who call themselves 'economists'. When that happens, we risk confusing the normative opinions of these people with a scientific conclusion; it is not.

If a politician was to ignore or lie about the tangible consequences of a policy, that is bad, in the sense of being misleading or untrue. However, if a politician acknowledges the best guess of the consequences, whether they argue for or against the policy is neither bad nor good. Economists would do well to remember that they are part of the second group, not the first. It is fine to point out misinformation, but to argue that 'economics tells us what to do here' is to assume that their opinion is good, which is a great sin of arrogance.

When one responds to the gas tax stuff with a line like (from Paul Krugman)

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory...

I'm sure they are really pointing out the tangible consequences of the policy, but the line between the positive and the normative is fuzzed, the value-free analysis becomes loaded with subjectivity. The two must be separated.

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