Economics would be hard...if it worked.

Wow. Kartik Athreya, researcher at the Richmond Fed, set off a blogging conflagration the likes of which I haven't seen since George Will lied about global cooling. What Athreya said was this:

In this essay, I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contibute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public...

In the wake of the recent financial crisis, bloggers seem unable to resist commentating routinely about economic events...Examples include Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich....I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy.

On the face of it, this seems like a reasonable complaint. Athreya is a PhD economist; these others he named (and many other "economics bloggers" like Megan McArdle and Will Wilkinson) have no advanced economics degree. He's saying "Listen to the experts, ignore the laymen."

Is that such a crazy statement? If an epidemiologist told us not to listen to bloggers who denied AIDS was caused by HIV, or if an evolutionary biologist told us to ignore bloggers' arguments against human evolution, or if a geologist told us to ignore writers who advocated for a "young Earth," or if climatologists told us to ignore George Will's or Steven Levitt's armchair theorizing about climate change, part of their argument would certainly be that the bloggers in question simply didn't have the technical expertise to make an important contribution. And we would buy that argument. But when Athreya tries to use this line in reference to economics, he receives an epic smackdown!

Brad Delong:

[S]omeone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas[.]

Matt Yglesias:

Now in the natural sciences [you would] try to conduct some experiments...Economists, however, can’t run controlled experiments on macroeconomic phenemona. That’s a big part of what makes these questions so hard. But that’s also why it’s foolish to view them as akin to questions in the natural sciences where laymen have nothing to contribute. If economic policy questions were easier, you’d just “ask an economist” what to do about sky-high unemployment. But...there’s no consensus and relatively little prospect for forging a consensus [on economic issues] through standard scientific methods.

Will Wilkinson:

[Athreya's] argument for why [economics] is so hard –economics is full of phenomena ”pathologically riddled by dynamic considerations and feedback effects”– sounds to my ear like an argument for the unreliability of pathologically oversimplified economic models, and for the proposition that economists will more often than not fail to converge on a consensus position on which the rest of us can rely.

Mike Konczal:

I’m actually going to take the critique one step further and be critical of economics. Never, and I mean never, during the financial crisis, where we’d leave work on Friday and wonder whether or not the world would collapse during that weekend or what kind of market we’d walk into on Monday, did I think “man I wish there were more academic economists around.” Academic economists had very little language with which to describe the crisis. Most of our narratives come straight from journalism or sociology. There are no “toxic assets” in economics, that evocative description comes to us from business world and journalism. Same with the culture and pitfalls of high mathematical finance, math predicated on the efficient markets hypothesis...

I think [Athreya] took down the essay, but he mentioned how bloggers who haven’t taken the first year of Economics PhD coursework, and passed the prelim exam, shouldn’t be writing...My very first economics class ever was auditing a graduate macroeconomics class where we went through the Lucas/Stokey “Recursive Methods in Economic Dynamics” and Ljungqvist and Sargent “Recursive Macroeconomic Theory.” I still remember asking my classmates “no seriously, this isn’t what macroeconomics is, is it?” It was like they were training to be electrical engineers, but could do no actual engineering. I still am terrified of what macro graduate students are cooking.

John Chandley:

[T]hose economists who were in charge got it mostly wrong, probably because of their particular PhD training in economics.

The grownups in charge back then claimed they knew what they were doing, even though they couldn’t see an $8 trillion housing bubble, didn’t think it was a problem, didn’t think the Federal Reserve or anyone else should do anything about it, didn’t want states enforcing laws against lending fraud, didn’t think the shadow banking system and its fraudulent CDO/CDS trading were a systemic threat that required intervention, didn’t realize major banks/investment banks had become too big to fail/reform/control, and believed deep in their souls despite all evidence to the contrary that financial markets were self correcting . . . and then watched helplessly as the financial system collapsed and took the economy and millions of people, their homes, their jobs, their savings down with it.

Economics can seem hard to non-economists, but it doesn’t take a PhD economist to recognize the last 30 years of ruling economic advisers and their apologists should never be trusted again.

Richard Green:

[I]n the end, we should be respecting evidence more than clever theoretical edifices. And yes, Kartik, while I am not an expert in macro, I did have to slog through lots of OLG models and rational expectation models and real business cycle stuff in graduate school, and pass prelim questions on them, so I have at least some idea of what it is that I find intellectually unsatisfying. [George] Akerlof's view, expressed before we had the financial meltdown, that we really need to start over with modern macro, has, I think, largely been vindicated.

And finally, Matt Yglesias again with the epic smackdown:

To oversimplify a bit for the sake of polemic, a lot of economics work seems to put more emphasis on “doing work that superficially resembles physics and therefore counts as science-like” rather than on doing work that actually resembles scientific endeavor in the sense of leading to useful predictions or technologies or what have you. You get the sense that some practitioners of economics would pick up The Origin of Species and dismiss it as too narrative to count as real science. This guy’s just arguing from a bunch of anecdotes!

The consensus response to Kartik Athreya is: Macroeconomics sucks so hard right now that anyone with half a brain has useful things to add to the discourse. And the sad thing, and the amazing thing, is that this response is completely correct.

Macroeconomics started out in the 30s with Keynesianism, which was mostly (but not completely) wrong science, but at least it was science. The discipline was then gutted by Robert Lucas, Edward Prescott, and their followers in the 70s, who asserted a number of ridiculous things (I will not launch into a list and explanation of these ridiculous things, but you can read me ranting about them here, here, here, and here); these ridiculous things were heavily promoted by businessmen and Republican politicians eager to stop government from intervening in the economy, and because of this - and with more than a little help from the Nobel Prize committee - Lucas, Prescott, et al. turned macroeconomics from wrong science into nonscience.

And here we are today. Macroeconomics doesn't work because it was designed not to work. And so bloggers with philosophy degrees often have just as much valuable stuff to say as PhD macroeconomists. Someday, if serious scientifically-minded folks can fix macro, Athreya's admonition to "listen to the experts" will be right. But that day is a long way off. As of now, there are no experts.

Health Care and the Debt-pocalypse

More and more, one single truth about America's national debt is becoming clear: If we don't want an unsustainable increase in our debt level, we must cut federal health care spending. A lot.

Brad DeLong reiterates this point:

In short, if we want to do as much harm to the long-term budget picture as we did good by passing [Obama's health care bill], we would have to spend $8 trillion on additional stimulus. The effects of fiscal stimulus spending now on our long-term budget position are lost in the rounding error.

The reason, of course, is that the big drivers of the long-term deficit are the excess above GDP projexted growth rates of Medicare and Medicaid. Put in place institutions that slow the long-term growth of Medicare and Medicaid--as the CBO believes the [Obama's health care bill] does--and you do infinitely more to improve the long-term budget picture than any stimulus program could possibly do to harm it.

As you can see, except for the brief bump caused by the stimulus, federal discretionary spending has held steady or shrunk as a percent of GDP. It is also apparent that Social Security is not in trouble; payments are headed for only a modest rise as the Baby Boomers retire, a rise that could be completely counteracted by ending the income cap on payroll taxes and raising the retirement age by a year or so.

So basically all of the huge projected growth in federal spending comes from Medicare and Medicaid. We have two choices to avoid a sovereign default: raise taxes enormously to cover this cost, or enact deep cuts in Medicare and Medicaid.

I strongly dislike the first option. Though in general I support taxing the public to pay for public goods, I don't think most of this health care spending qualifies. First of all, health care is mostly a private good, meaning that the benefits of health care spending mostly accrue to the person the money gets spent on. That reduces the economic rationale for having the government pay. But even more importantly, health care is a sector with low and decreasing productivity; most of that new money we're spending isn't giving us better health. Why distort our economy with higher taxes just to throw the money at unnecessary treatments, procedures, and fees?

I supported Obama's health care bill because it came up with a bunch of ways to control costs (some of which could be expanded in the future if they work), and by making health care universal it enabled the broad political coalition that will be necessary to cut health spending in the future. But the reality is, health spending needs to be cut, and cut big. If we do this now, we can call it "restraining the growth of Medicare and Medicaid spending." If we wait, we'll have massive government and social breakdown as old people pull out all the stops to save their health care from the draconian slashing that will by then be necessary.

So we had better start slowing Medicare and Medicaid down right now. This may sound like a political non-starter for the Obama administration, but I think it could actually be a good move; if Obama shows all the austerity-freaks and deficit hawks out there that he is serious about long-term deficit cutting, they'll be more inclined to accept short-term measures like the recently defeated jobs bill.

But, one way or another, Medicare and Medicaid must be cut, and cut big. We have no other option for averting the Debt-pocalypse. None.

Behavioral political economy

Superhero economist Paul Krug-man, and his favorite sidekick J. Bradford, are hopping mad over the turn toward fiscal austerity in European (and, potentially, American) policy circles. Krugman has written blog post supporting more stimulus spending here, here, here, here, here, and here, as well as full-length columns here, here, and here, and DeLong has made arguments here, here, and here.

As they themselves lament, however, almost no one is listening. Why not? The models Krugman and DeLong are using are unambiguously better than anything stimulus opponents can come up with. And the apparent success of stimulus policies in America and China are hard to ignore. Why, then, is everyone other than America's leading economist, from politicians to Fed officials to pundits, suddenly a deficit hawk? Are they, as Krugman claims, falling victim to the idea that fiscal austerity and lengthy periods of low growth are morally virtuous?

I doubt it. My guess is that the fear of increased deficits is mostly due to other less ridiculous psychological factors. Specifically, these three:

1. Policymakers don't trust economists. And with good reason; economic models are usually pretty bad at forecasting the economy, and pretty ambiguous when evaluating the effect of a past policy choice. When Krugman gives a laundry list of countries that boosted their economies even while cutting deficits, and then gives a different reason why each example doesn't apply today, people who don't understand - or who don't believe - the underlying assumptions tend to increase their skepticism as each new wrinkle is introduced. Given economists' lousy track record, of course we're skeptical when even a famous and brilliant economist tells us to do something counterintuitive.

2. Many policymakers are risk-averse. Most economists are fine picking their most plausible model, cranking out the results, and drifting off to sleep assured that their policy recommendations are as correct as they could have possibly been. Fed officials, whose decisions directly affect the lives of millions (and their own jobs), naturally tend to be quite a bit more cautious, risk-averse, and (small-c) conservative when selecting from among the enormous constellation of economic models. They tend to judge those models based not on what the models say is the most likely outcome - which experience shows us rarely happens - but what they say is the worst-case scenario (if only the Fed controlled carbon emissions, right?).

The worst-case scenario of Krugman's model is that fiscal austerity leads to a decade of high unemployment. That's bad, but the worst-case scenario of any model in which stimulus doesn't work is that fiscal expansion leads to sovereign default. And sovereign default is very bad for a country. Like, 1990s Argentina bad. When Paul Krugman claims that debt markets are not worried about current U.S. levels of debt, cautious policymakers remember that markets were not worried about the housing bubble either - until it burst.

And, finally:

3. Policymakers have different priorities than economists. Stimulus spending almost certainly involves some degree of tradeoff between the present and the future. Stimulus is justified by the idea that reducing unemployment over the next few years is worth the drag on future growth caused by debt. But that is dependent on a value judgment, namely, Keynes' idea that "in the long run, we're all dead." Some policymakers, especially independent technocrats like central bankers, may not feel that being dead in 10 years is a good plan. Though many elected politicians seem willing to spend their countries into the ground (! Republicans! !), central bankers could easily take a longer view, and decide that the cost of piling up, say, an additional 100% of GDP of debt is not worth putting 5% more of the country to work over the next decade.

Now, policymakers may be wrong to instinctively mistrust Krugman's models. They may be overly cautious. And they may be caring about the future too much and the present too little. But these failings are far more forgivable, and far more understandable, than simply having moral values that insist that economic pain is good.

And who knows - maybe in this case the crowd is right, and the experts are wrong, and more stimulus spending really would be a boondoggle. I myself think that stimulus would work, and that it would be worth the cost. But I'm not willing to say that with 100% confidence. And Krugman and DeLong, if they are scientists first and policy advisers second, could stand to show a little more of the doubt that is the foundation of science itself.