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Beyond the ‘lamppost theory’ of economic policy

in Opinion
Beyond the ‘lamppost theory’ of economic policy
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There is an old joke in economics about two economists walking together down the sidewalk. One of them stops the other and says, “Look! There’s a $100 bill lying there on the ground!” As he stoops to reach for it, the other economist shakes her head and says, “Don’t bother. If there were a $100 bill there, someone would have picked it up already.”

It’s axiomatic in economics that there are no $100 bills lying around—no obvious opportunities that the market, society, or other sources of collective wisdom have simply ignored. But when it comes to economic policy, I don’t believe that’s true. A slew of misguided interactions between economists and politicians are plagued by a “clash of civilizations” that results in many missed opportunities for both sides. And as an economist who has witnessed this clash close-up, I think there are some things my fellow economists can do to have more success influencing policy.

When I write and talk about economists’ role in policy making, I often refer to what I call the “lamppost theory” of economic policy. The theory holds that politicians use economics the same way a drunk uses a lamppost: for support rather than illumination. This practice is far from optimal from a policy-making perspective, but wishing it weren’t so will not get economists very far. Politicos (by which I mean not just elected officials, but anyone who works in the political sphere) are not going to change simply because we want them to, so those of us who would like to use economics to improve policy outcomes would be wiser to focus on what we economists get wrong and could and should do better.

Two civilizations

As often happens when civilizations collide, politicians and economists each find the other more than a little odd. There are, in fact, important differences between the two groups, not just in their goals and incentives, but in areas as fundamental as the ways they think and talk. For example:

Logic. You might think logic is logic. However, I characterize the logic economists use as Aristotelian logic—that is, the classical system of logic based on syllogisms, corollaries, and deductive reasoning. Politicians often don’t use that logic. They use instead what I call political logic—what will work best with the voters or with other politicians with whom they are negotiating.

Language. Logic-based as it is, the language that we economists use in speaking and writing is often dry—sometimes barely intelligible to laypeople. In contrast, the language that politicians like to speak and write in is often vivid—and in clear English. But because it is so full of spin, economists tend to tune out when we hear it.

Calculation. Each group also has its own approach to how it makes calculations. Economists use arithmetic and, when necessary, calculus. Economic equations can be complex, but they are straightforward in that they follow the rules most of us learned in math class. But political arithmetic is different—it’s weighted by influence. I can explain what I mean with an example that, while trivially simple, is indicative of what goes on in, for instance, the details of tax and trade policies.

Imagine a policy that generates $1 million each for 10 people, and costs 10 million people $2 each. Making the simple economic calculations, we can quickly see the policy leads to $10 million of gains and $20 million of losses. So we conclude it’s probably a bad idea, unless there’s some good reason to do it despite the loss of wealth.

But if you apply political calculus to the same numbers, you reach a starkly different conclusion. The 10 people that it helps so much will pay rapt attention and may even show their gratitude with political donations. Meanwhile, the 10 million people who lose two bucks apiece are probably not even going to notice it. The policy, therefore, has political merit.

Real people live in transitions for most of their entire lives, while we economists focus almost exclusively on equilibrium states.

Intelligence. Academic economists prize traditional intelligence as captured by things such as high IQ, good ideas, and the ability to express those ideas. Success in academic economics does not typically rely on people skills. Successful politicians, on the other hand, depend much more on their social and emotional intelligence. There are, of course, some politicians with plenty of the same kind of intelligence we prize in academia. But the good ones are smart enough not to demean voters by making them feel less smart by comparison.

Objectives. Economists who engage in policy are generally trying to maximize social welfare. Politicians, of course, are trying to maximize their prospects for election or reelection, which may not be correlated with social welfare.

Policy evaluation. The aspect of a policy that matters for economists is the substance of the policy: Is it really good for society? What matters in the political world are, naturally, the politics and the message involved in the policy. Does it sound good? Needless to say, what is good and what sounds good are not always aligned.

Concerns. Economists’ main concern is efficiency: we talk about it, think about it, dream about it. But efficiency doesn’t much interest politicians, who are far more concerned about fairness, or perceived fairness, which is a broad concept encompassing income distribution but also much more.

Interests. In whose interests should policies be made? For economists, it’s generally the national interest (if we’re talking about federal policies). But for politicians, it’s very often some narrow, parochial special interest, as I suggested with the hypothetical policy that handed a million dollars to 10 individuals.

Courtesy Chicago Booth By Alan S. Blinder

Read the whole article here

Tags: Chicago Booth

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