Beware of Economists Bearing Fiscal Advice
Policy + Politics

Beware of Economists Bearing Fiscal Advice


If all economists were laid end to end, they'd never reach a conclusion
--George Bernard Shaw

Switch on a television news show or flip open an op-ed page these days and you’re likely to find an economist sounding off about some proposed economic policy.

Trouble is, one economist’s prescription is invariably another one’s poison. Rep. Paul Ryan’s “Path to Prosperity”  sets the stage for strong job growth or is a cruel hoax, depending on who’s talking. Raising the $14 trillion debt ceiling will speed the recovery or merely feed Washington’s spending frenzy. Repealing financial reform will roll back burdensome regulations or remove safeguards against Wall Street abuses.

This nation is a ship without a rudder and
we’re the navigators, but we can’t even agree
on what is north and what is south.

What’s going on here? Isn’t economics a science whose practitioners base their theories on facts and hard data? And if that’s not the case, how can the public make sense of the clashing advice that passes for policy discussion? “This nation is a ship without a rudder and we’re supposed to be the navigators,” says Princeton’s Uwe Reinhardt of his fellow economists. “But we can’t even agree on what is north and what is south.”

That’s largely because there is no real science of economic policy. When it comes to predicting the impact of policies, “It’s all a crap shoot,” says Middlebury College economist David Colander, who has written extensively about his profession. “There’s a pretense of science, but the relationships are so complicated that we don’t have a model that can tell you what to do.”

Reinhardt is in close agreement. He warns his students that “economics is not really a science at all and, if practiced within the political arena, often is just ideology marketed in the guise of science.” Economists frequently put their thumbs on the scales to further their agendas, he notes—a technique that he calls “Structuring Information Felicitously,” or SIFFING.

He cites as an example the differing forecasts that Christina D. Romer of the University of California at Berkeley made before and after being chosen to chair President Obama’s Council of Economic Advisors (CEA).  Prior to her nomination, Romer coauthored a study that estimated that each $1 of tax cuts would increase GDP by $3 over time.

But after she was picked to head the CEA, Romer cowrote a paper that reduced the tax-cut multiplier from three-to-one to just 0.98-to-1—or far less than the predicted impact of the added federal spending that the White House planned to make its main fiscal weapon against the recession. Reinhardt calls this an example of the “flexibility” that economists can make use of when recommending policies. 

Romer, who returned to Berkeley last August, told The Fiscal Times that she switched to the lower tax-cut multiplier “because we wanted to err on the side of being conservative, and because we wanted to use widely accepted estimates” at a time when her previous study had not yet been published.

While 13 [economists] worked in some capacity for
private financial institutions, only five revealed
such ties.

Graduate school itself is a form of brainwashing, says Reinhardt. “I was trained at Yale and we were brainwashed one way,” he says of that school’s economics department, which is known for its liberal views. “Those who went to Chicago,” where a conservative free-market philosophy predominates, “were brainwashed another way.”

Also potentially swaying economists is the fact that many do consulting work for, or serve on the boards of private companies—something the public may not be widely aware of. In fact, a University of Massachusetts study of 19 prominent economists found that while 13 worked in some capacity for private financial institutions, only five revealed such ties in media articles or public appearances and testimonies between 2005 and 2009. “Even if you can’t show that getting the money is why they hold their views, [the money] creates incentives to have those views,” says economist Gerald Epstein, who cowrote the Massachusetts study last year with graduate student Jessica Carrick-Hagenbarth.

The researchers then sent a letter signed by some 300 economists to the American Economics Association (AEA) that urges the professional society to adopt a code of ethics requiring members to disclose potential conflicts of interest. An AEA panel headed by Nobel laureate Robert Solow is pondering the matter and plans to report to the executive committee by the end of this coming summer.

The issue is particularly sensitive in the wake of last year’s Academy Award-winning documentary “Inside Job,” which charged that Wall Street had corrupted academic economists who supported deregulation while working for financial firms before the 2008-2009 meltdown. Whether or not they were corrupted, few economists recognized the peril before the collapse.

In a book titled Why Aren’t Economists as Important as Garbagemen?  Colander suggests applying what he calls the “reasonable person criterion” to the recommendations of economists. This means judging policies from the standpoint of what a reasonable person would accept when all the costs and benefits are spelled out. And factoring in such debits and credits makes clear that there are two sides to every balance sheet, a truth that economic pundits routinely omit.

So how should the public regard the bold assertions of economists in light of these many caveats? The answer is with a grain or salt—or maybe the whole saltshaker.

Related Links:
Systematically Biased Beliefs about Economics (The Economic Journal) 
Economists' Ideological Blind Spots (Library of Economics and Liberty)