Sunday, November 02, 2014

Preview: Trillion Dollar Economists, by Robert Litan

In the tradition of passing judgment on books I haven't read, let me say that Trillion Dollar Economists, by Robert Litan, looks like it mostly agrees with my priors. From the inside flap:
A trillion dollars, and most likely more – that’s how much economists contribute to the U.S. economy. But you’d never know it by reading the jokes and criticisms (some of it fair) about economists in the media and in the blogosphere. 
In Trillion Dollar Economists, one of the nation’s leading policy analysts, Robert Litan, explains with lucidity and precision how the insights of many economists, mainly over the past fifty years, have helped to revolutionize business, resulting in huge benefits for companies and consumers. 
Economists and their ideas are embedded throughout the economy, Internet-based companies (even on-line dating sites), and increasingly in sports. Whether they know it or not, Internet retailers owe their existence to economists who in earlier decades helped convince policy makers to remove limits on prices and entry into the transportation business, while providing much of the intellectual impetus for breaking up the telephone monopoly that otherwise most likely would have inhibited the growth of the Internet. 
The widespread use of auctions in on-line commerce and search has its origins in economic research. 
Consumers and businesses that have benefited from the oil and gas boom have economists to thank for convincing policy makers to remove energy price controls. Investors in indexed mutual funds and other financial products are in debt to entrepreneurs who got their ideas or inspiration from financial economists.
This sounds a lot like what I wrote here, except without the macro-bashing.

Anyway, it looks like Litan divides the benefits of econ into two categories: 1) engineering applications, and 2) policy advice. That sounds right to me. I would have added a third: 3) ideas.

Economists helped prepare the public psychologically for the advent of neoliberalism in the 80s and 90s. Neoliberalism has had its costs and its benefits, but overall I'm glad we went down that road, since I've seen the alternative (Japan). Economists eased this transition by basically being priests of the free market. That often meant ignoring things like externalities and public goods, which was bad, but it might have been necessary in order to convey a simple message to the public: Don't be afraid of economic liberalization. Economists assured Americans that although liberalization would destroy many jobs, more would be created in their place. That turned out to be pretty much true. But anyway, now that the gains from neoliberalism have been mostly reaped in the U.S. (though not in Japan, Korea, or some European countries), economists may have to shed the role of "priests of the free market," and start talking about how to fix the market failures that they glossed over in the 80s.

So I'm interested to see if Litan deals with this idea.

I'm also interested to see what he thinks will be economists' most important role going forward. My guess has always been that micro theory would become more and more important, as tech companies find more ways to exploit things like auction theory, search and matching theory, etc., and that policy advice would become a bit less important now that the big liberalization boom is over. So I want to see if Litan agrees. I also want to see if he thinks that economists' policy advice will continue to shift from simple deregulation to designing "smart" regulation (a shift I think has already occurred to some degree with things like pollution permits).

Anyway, looks like a cool and interesting book. I'll of course write a review after I've read it.


  1. The Neo-Liberal agenda has been such a disaster for the middle class and working class since 1980 that we should be burning down economics faculties across the country.

    1. Really? I think you should look at Japan, which has largely avoided neoliberalism. Japan's inequality problem is not as bad as ours, but it is worse than UK, France, or Germany. And middle-class income has declined more there than here. Also, the system is soul-crushing and sucky in many other ways.

      As for the middle class and working class in America, they aren't much better off than in 1980, but they aren't much worse off either, so I find it hard to conclude there's been a "disaster" at all.

    2. But Japan isn't the only alternative, is it? The interesting counterfactual for me is Germany. The country gets a (deserved) bad rap for its macro-fundamentalism, but on the micro side they are largely continuing and even developing all sorts of highly non-neoliberal programs. Seriously, we're talking about a country with more than half of its finance in the hands of public and cooperative banks, substantial worker participation in management, the most ambitious human capital investment system anywhere, the most effective industrial policy in the developed world (e.g. Energiewende), etc. And they easily pass the market test in trade, cleaning the clocks of the neoliberal, shareholder value-obsessed Anglo-Saxons.

      No, it's not perfect, but it's better.

    3. jackrousseau7:05 AM

      Noah, are you setting up a false equivalence? We either accept what the "priests of the free market" say or become Japan? That's pretty silly. China for instance told those priests to go to hell, ignored basically every tenet of the Washington Consensus/neoliberal dogma and got 10% growth year over year for the better part of three decades.

      "Economists assured Americans that although liberalization would destroy many jobs, more would be created in their place. That turned out to be pretty much true."

      Sometimes I just have to shake my head. The employment to prime age population ratio hasn't even recovered since the crisis, and a good deal of the high quality jobs have since the advent of neoliberalism fled to China etc. Is this just wishful thinking on your behalf?

      "As for the middle class and working class in America, they aren't much better off than in 1980, but they aren't much worse off either"

      So in 35 years the working and middle classes haven't budged an inch, and yet a tiny fraction of the population has gotten obscenely rich since that time, mostly through exploiting everyone else. You're saying that isn't a disaster? The rage on Main Street against economists, politicians, big business and so on is palpable. I understand that "bubble living" is common for those in the aforementioned groups, but if history furnishes us with anything, it's that ignoring the peasants for too long typically leads to rather sudden uprisings, and then bad things happen.

      I'm with Absalon. Let's burn down economics and try again. "At least we haven't lost too much absolute ground in 35 years of GDP growth" is frankly not nearly good enough.

    4. Peter: I think Germany has done well, but it's not a slam-dunk case that they've done better than we have. Our per capita GDP (and median income) has been consistently higher, and our unemployment rate lower, for most of the post-1980 era. And much of the "market test in trade" you mention has come as the result of mercantilist policy that can't work for everyone simultaneously. Plus they have less opportunity for working women than we do. I agree they've done a good job containing inequality, but I don't think their model clearly beats ours. And in addition, they have charted a middle path between neoliberal policy and Japan-style corporatism. So I would not hold up Germany as proof that neoliberalism has been a failure - far from it.

      As for China, that's a bit ridiculous.

    5. All of the income growth from liberalization, technical progress and rising productivity has gone to the top 1%. The middle class has lost job security and pensions. The Neo liberals have built an unstable financial system that perpetually hovers on the edge of collapse.

      The Neo-liberals want more reform. It is possible that all of the benefits of further reform would go to the 1% and costs all fall on the 99% (as has happened so far) with the result that total GDP rises but 99% are worse off.

      Going back to 1980 is a false counter-factual (there are gains since then that should be shared) but most of the working class and middle class would probably choose 1980 over what they have now.

    6. I seem to remember Noah previously gushing about how we should emulate Japan. I'm confused now.

    7. Michael: ?? In some ways they are good, in some ways not good.


      All of the income growth from liberalization, technical progress and rising productivity has gone to the top 1%.

      I don't think so; median personal income has grown substantially since 1980.

      The middle class has lost job security and pensions.

      Job security yes, but pensions were always going to have to be cut severely; it's much worse in Japan and Europe.

      The Neo liberals have built an unstable financial system that perpetually hovers on the edge of collapse.


    8. Noah are you sure of this?
      I don't think so; median personal income has grown substantially since 1980.

      Do you mean median household income (and are you including children and retired people) or median family income? I'm pretty sure median wages have fallen.

    9. Yes, personal median. Check this out:

      That does NOT include in-kind benefits like health care.

      We've been flat or down since 2000, but up a lot since 1980.

    10. I really wonder what is included.
      If I look at this:
      then I wonder.

      Now women's earnings have risen, but that is mostly because they work more (but also they are better paid). But this means that we are not comparing like with like (and are mostly seeing increased inputs - which if leasure is valuable is not necessarily a good thing).

  2. Bill Ellis12:06 AM

    Ut oh... Someone used the term neo liberal.. Let the angry comments flow...

    Neoliberal is a term that has been redefined many times. It has become synonymous in the minds of many with a blind devotion to free market gods and the willingness to force these beliefs on the rest of the world against their will.

    Globaly, Neo liberalism has become the economic equivalent of neo conservativism's armed intervention.

    It's too bad. Because neo liberalism was originally not so libertarian. At first it was simply about the notion that humans can understand markets, and society and use that information to act and effect positve change. In short they were technocrats. Defined this way a Keynesian is more of a neo lib than a libertarian.
    Paul Krugman half heartly floated the term..."proto neo liberal" a way to try and differentiate left leaning neolibs like himself from the libertarian variety. Didn't catch on.

    Maybe its time for liberals to just surrender the term and come up with one they can own?
    "Technocratic Market Liberalism"?

  3. I disagree with Litan's characterization of the role of economists in telecom deregulation and the Internet. Industry economists of the 70s and 80s defended the "natural monopoly" privilege of the Bell system to the bitter end. The Internet is engineered as a network-neutral peering system in defiance of the metered rates and tollbooths that economists had designed for the old telecoms. These telecom industry economists were ultimately forced to leave their homelands and migrated to old strongholds like electric power and green fields like carbon credit markets.

    Curious that most of the beneficial examples Litan cited were made by "priests of the free market" recommending deregulation. I.e. undoing the regulatory frameworks imposed by prior generations of economists and governments.

    1. Interesting. This gets into history I don't know, and the book which I haven't read! So I need to learn more about this.

    2. Re: "smart" regulation--it has never been clear to me that granting the likes of Goldman Sachs government franchises to make a market in Pigouvian tax collection (e.g. carbon credits) is as fair or effective as a plain old tax that establishes a level, non-distorting playing field. It provides the appearance of "dude, it's market-driven, not regulation" while creating yet another way for Wall Street to collect a rentier buck.

      So the claim that economists have bettered society by getting into cahoots with traders to create a novel tax privatization scheme is also a little flimsy to me.

      I like auction theory though. :)

    3. I made a nice pile of money from the Bell breakup, but the US is still the weak sister of the internet and mobile age in terms of available service and pricing. The telecommunications business sucks up huge government subsidies and delivers little in return. I think the jury is still out on whether Jimmy Carter's deregulation experiment was a success or not.

      My problem with modern economics is that it is fundamentally feudal with its emphasis on monetized relationships, local efficiency and local control. There's a reason that feudalism was replaced by the nation state starting in the 14th century. If nothing else, it handles crises better. Modern economics may have some value, but most people are never going to get a taste of it. The money that was printed for QE[n] could have been spent creating jobs and building infrastructure.

  4. Hi Professor Smith. Years ago, I saw a TV series Lost in Space. Have u seen it. There was a character there, a Professor Smith. When trouble comes, he would say "Never fear, Smith is here". How nice to know that we have you around to save the planet. I love reading your posts.

    Litan's claim seems justified, in my view. I would add that there is a broader battle of ideas between economists and international relations "realists" about how to make the world a better and safer place. Modern day economists have largely inherited the liberal tradition of Adam Smith and David Hume of having a broad and comprehensive understanding of outcomes and well-being. Not focussing on "national interest" as perceived by elites, rather paying close attention to livelihood of individual persons. I think this view of looking at the world is one of the greatest contribution of economists.

    I hope your mission remains to save the world (including the poor communist Chinese) and not Western liberal democracies only.


  5. Anonymous7:50 AM

    "Neoliberalism has had its costs and its benefits, but overall I'm glad we went down that road, since I've seen the alternative (Japan)"

    Actually, Japan's economy is in better shape than the US economy right now, and yes inequality is not as bad there. It really depends upon what you care about, I guess. If you really get off on numbers, perhaps all of the negative aspects of neoliberalism that most people feel every day just don't register. This is supposed to be the reason for democracy, because I don't care what any economist thinks of neoliberalism. We shouldn't run this country for the economists.

    I think we need to be very careful before attributing an entire nation's outcome to something so broad as neoliberalism or no neoliberalism.

    Japan was a horrible place to live and work during their boom years. To an economist that looks at the numbers, perhaps this doesn't register. Their export markets drove much of their domestic policy. I really doubt that allowing more imports would have drastically improved their quality of life. Lower taxes? Deregulation? Which country's financial system and economy recently collapsed?

    By what measure that normal people care about is the US better off than Japan due to neoliberalism? And don't assume everything thinks like you do. I mean for real, if normal people were to honestly rate the importance of certain aspects of their lives, how much would the results of neoliberalism mean to them? I don't know a single person who, when asked in an objective manner, highly values the results of neoliberalism.

    1. I think Americans are considerably richer, have MUCH better work-life balance, have MUCH better opportunities for working women, have greater job flexibility (i.e. getting laid off does not kill your career), are more productive, and do not suffer from a two-track job system. Japan beats us on inequality (but not by so much anymore), and has great job security for a privileged subset of workers.

  6. A Post of Pure Ideology.

  7. Just use "The Washington Consensus" and you won't end up on the Google alerts.

  8. American labor unions have about disappeared. That strips the vast majority of citizens of the necessary balancing economic and political muscle. Resulting trend in so called "inequality" (such a saccharin phrase for this disaster):

    If the top 1% income continues to receive all the economic growth, then, by the time the output per person expands 50% (25-30 years?) the top 1% income will “earn” half of a half-larger economy (25% + 50% = 75% of 150%). By the time output per person doubles (typically 40-50 years) the equation will read 25% + 100% out of 200% = 62.5% of a twice-as-large economy.

    Look at most of the Americans you meet working on less than specific training-required jobs (like x-ray tech): they are embarrassed. They are earning $400-$500 a week. $500 is today's median income (median wage is $16 so they must not be getting 50 weeks or 40 hours).

    Look at the official federal poverty line: 3 X the price of an emergency diet (dried beans only please; no expensive canned) -- a formula from the mid-fifties = $20,000 poverty line for family of three ($400 a week). Realistic minimum needs line based on table 3-2, p. 44 (after adjusting for inflation) in the MS Foundation book Raise the Floor works out to more like $50,000 a year for family of three if it has to pay for its medical insurance ($1,000 a week!). Half of today's Americans earn half that truthful minimum needs line or less!

    If we double today's Walmart's nonsupervisory hourly pay to $24 and throw on an extra 25% for benefits to make $30, Walmart prices would rise about 10%.

    Somebody challenged me that raising Walmart prices 10% (at $30 -- only 3.5% at $15 min wage) would take $26 billion from the poorest consumers. I pointed out they could take it out of the extra $560 billion they got from the $15 minimum wage (not $30).

    A $15 minimum wage would shift about 3.5% of income from the 55 percent of the workforce who garner 90% of income to the 45% who scratch only 10%. $8,000 average raise X 70 million (45% of 140 million + 5% at minimum now) = $560 billion out of $16,000 billion GDP. BTW, 45% of workforce not going to be sent home over a 3 1/2 percent shift in income share.
    ”Denmark has no minimum-wage law. But Mr. Elofsson’s $20 an hour is the lowest the fast-food industry can pay under an agreement between Denmark’s 3F union, the nation’s largest, and the Danish employers group Horesta, which includes Burger King, McDonald’s, Starbucks and other restaurant and hotel companies.”

    What Denmark does have – along with most of continental Europe and French Canada and Argentina and Indonesia -- is a labor market setup called CENTRALIZED BARGAINING where every employee doing similar work (e.g., retail clerk) negotiates one common labor contract with all employers doing similar business (e.g., Safeway, Best Buy, Walmart).

    $20 an hour + benefits: it’s the (centralized bargaining) free labor market, progressives!
    yr..per capita...real...nominal...dbl-index...%-of


  9. ".. resulting in huge benefits for companies and consumers."

    Are any of those gains to companies at the expense of consumers? I'm thinking of things like pricing strategies for airlines or utility companies.

  10. Anonymous3:09 PM

    Are economists really bad at monetizing the value of their work then? Or could it be that Litan's estimate is a little bit biased? It would be interesting to have a member of every profession estimate the value of that profession to the overall economy. I wonder if the sum would be smaller or larger than the overall size of the economy.

    1. It would be interesting to have a member of every profession estimate the value of that profession to the overall economy.

      I am a lawyer. I estimate that if we did not have a functioning set of laws and legal system, GDP would be about half what it is.

    2. "Between 20 and 30 percent of the gross national product of the United States comes from high energy physics." - Senator Phil Gramm (R-TX, at the time)

      As a physicist modesty forbids that I say more.

    3. Are economists really bad at monetizing the value of their work then?

      Regarding the engineering applications, they do a good job of monetizing. They don't monetize the policy advice, because no one monetizes policy advice.

      Mark: Heh. :-)

    4. Paul Krugman is in Japan right now monetizing his policy advice.

      If we killed all the lawyers, the missing GDP attributable to frictional legal and regulatory costs cause a terrible depression?

    5. "Between 20 and 30 percent of the gross national product of the United States comes from high energy physics." - Senator Phil Gramm (R-TX, at the time)

      Mark Jackson: "As a physicist modesty forbids that I say more."

      Yes, Phil Gramm is certainly a reliable source - how much did he make from RBS?

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  12. More seriously: claiming to have quantified, by inspection, the value of a single element of a highly complex system in which many elements must interact to create any value at all strikes me as an excellent example of what one might call the Fallacy of Decomposition.

    1. Well yeah, but who knows anything, really?

  13. I don't believe the claims made above (I think economists describe how market systems work and have made some policy recommendations, many of which are never followed). Basically auctions existed before economists and price controls have come and gone often enough in history, regardless of what economists said or didn't say. I think he is basically attributing anything to economists he can, some of which surely is unmerited.

  14. Besides which of course having contributed 1 Trillion dollars of value (compared to what baseline?) may just be a reflection of inflation more than anything else.

    1. And they've probably helped remove 1T at least with the deregulation of finance and the resulting 'boom' (Wall St sucked all of the money) and crash (Wall St sucked all of the money).

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    1. The economists should be sent to Pol Pots reeducation camp. Though smart as they may be, some of them won't graduate.

  16. How I admire people who are involved with finances and economy. There's so much information that we need on how to make money with all the data that they have. financial planning process

  17. Anonymous2:03 AM

    Litan's book is pretty good. But it does focus on the engineering applications, which is by far the more interesting story. It's a corrective to econ text books which unfortunately way overemphasize policy.