Advice and Dissent

Chapter 1

The Lamppost Theory of Economic Policy

May I start by dispelling a myth? Many people seem to believe that economists have enormous influence over public policy. After all, we pop up frequently on television, have our own Council of Economic Advisers within the White House, serve in many advisory posts, sometimes occupy cabinet positions, and dominate one of the US government’s most powerful agencies, the Federal Reserve System.^* All this provides superficial credence for the popular misconception that economists play pivotal, if not indeed decisive, roles in public policy decisions.

But it’s a myth. The truth is better summarized by the epigram above: like a drunk, politicians use economics for support, not illumination. Consider Donald J. Trump. He was elected president of the United States on November 8, 2016, and assumed office on January 20, 2017. That was plenty of time to acquire some economic advisers, not to mention some economic advice. If he wanted any. Instead, the new president killed the Trans-Pacific Partnership, presented a budget to Congress, embraced a radical House plan to replace Obamacare (which later failed in the Senate), backed America out of the Paris Agreement on climate change, and made menacing noises about bank deregulation—all before he had a single member on his Council of Economic Advisers (CEA).

That “momentous” event finally arrived on September 12, 2017, when Kevin Hassett was confirmed as chairman of the CEA. Until that day, a campaign aide named Peter Navarro was the only PhD economist in Trumpworld. What’s that? You’ve never heard of Navarro? That’s my point. If Mr. Trump thought either illumination or support from economists was important, he certainly didn’t show it.

As a longtime member of the tribe, I’d like to believe that economists are essential pieces in the economic policy puzzle. But it’s a myth, and one purpose of this book is to explode it. The truth is that the Lamppost Theory, which predates President Trump by decades, has it about right. To be sure, there are instances in which economic reasoning has provided illumination that influenced policy profoundly, maybe even decisively. Deregulation of trucking and airlines in the 1970s and 1980s comes to mind, as does tax reform in 1986. But it’s hard to think of a recent example. There are far more cases in which politicians knew what they wanted to do, and then just leaned on economics—sometimes very bad economics—for support.

The Lamppost Theory may be good for politicians. Many of them like to trot out economists to support their favored policies in public. It’s good for political messaging—or so they believe. It certainly adds a patina of intellectual respectability. And, especially in a world where hardly anyone believes politicians, economists can add putatively disinterested—maybe even “scientific”—voices to the debate.

There is even a name for this support activity. It’s called “validating.” I have served as a validator for Democratic politicians numerous times, typically being asked to speak or write approvingly about policy positions I had no role in formulating. (After all, if you’ve helped formulate a policy, how can you validate it?) If I agree with the policy, I often accept this role willingly. If I disagree, I don’t. Many other economists, both Democrats and Republicans, do the same. Notice that validating is only about lending support. It comes way too late in the game to provide any illumination. And after the way the 2016 election and its aftermath denigrated expertise, even the political usefulness of support is now open to question.

Is the Lamppost Theory good for economists? Not likely. Being used as a stage prop is usually harmless, and some economists enjoy seeing their names in the papers and their faces on TV. But in truth, most of us are naturally what Harry Truman once disparagingly called “two-handed” (“On the one hand,… but on the other hand,…”). Complex policy proposals are rarely all good or all bad. The world is a messy place in which purist solutions hardly ever make sense and, even when they do, are politically infeasible. So real-world policy proposals run the gamut from mostly attractive with a few warts to mostly ugly with some pleasant features. And choosing policies that are mostly good, albeit with some blemishes, is a huge step up from choosing policies that are mostly bad, though with some bright spots.

Genuine illumination would present the full picture, including all the pros and cons and the weak points in each side’s arguments. But when you’re serving as a validator, the politicos are seeking support, not illumination. Giving voice to “the other hand” might provide fodder for your opponents—which is not helpful to your side. This political reality creates a tension for many academics, for whom exceptions, fine points, and shades of gray are their stock-in-trade. So many won’t venture anywhere near the political arena, and even those who do may fill the role of validator clumsily. In politico-speak, they pose a constant risk to stray “off message,” a place where political handlers never want you to be.

My favorite all-time example of this hazard happened way back in 1982. The Reagan administration trotted out George Stigler, an illustrious conservative University of Chicago economist who had just been awarded the Nobel Prize, to (they hoped) sing the praises of supply-side economics—the “theory” that underpinned the Reagan tax cuts by claiming miraculous effects of tax cuts on growth. What a fantastic validator, they must have thought: a Reagan supporter who had just been anointed an oracle. But when Stigler was put in front of the TV cameras, lights blazing, and asked about supply-side economics, the iconoclastic economist opined that “it’s a gimmick, or, if you wish, a slogan.” Ouch. That didn’t help Ronald Reagan. I presume it didn’t help George Stigler either, who was quickly hustled off stage. (But it did not hurt Stigler’s lofty reputation in academia.)

Is the Lamppost Theory good for public understanding of economic policies? Definitely not. When presented with dueling teams of economic experts making opposing claims, ordinary people are likely to be confused, to conclude that economists don’t know what they’re talking about, and to tune out. The best spinners, not the ones with the best arguments, are likely to prevail in the public debate. And in a democracy, a confused electorate opens the door to poorly conceived policies.

Once again, supply-side economics, a doctrine that was born in the 1970s but lives on today, offers a marvelous example. Early in the Reagan presidency, supply-side economics was flying high politically, even though it had never left the ground economically. At the time, perhaps eighteen thousand members of the American Economic Association would have told you that the Reagan tax cuts would not stimulate enough new economic activity to pay for themselves; maybe about eighteen would have told you they would (though I can’t name eighteen). But that “division” of opinion meant that every TV show that wanted to demonstrate how fair it was could produce an economist on each side of the phony debate. Most did. There never was a real intellectual debate, just a few quacks advocating a nutty position with no evidence behind it. Nonetheless, the media dutifully reported that economists were divided on the issue. So the public was first befuddled and then buffaloed.

Finally, the most important question by far: Is the Lamppost Theory good for public policy? Certainly not, and here the stakes are high. Public opinion matters in our rough-and-tumble, media-driven, hyper-democratic system—more than most people realize. In a sense, election campaigns never end. Since votes in Congress are swayed by popular attitudes, politicians often engage in intense message warfare—a process that resembles commercial advertising more than it does the Lincoln-Douglas debates (and may the best spinner win). Unfortunately, only by sheer coincidence are the best crafters of policy also the best crafters of message.

Thus the Lamppost Theory appears to be good for many politicians but bad for almost everyone else. Please don’t jump to the wrong conclusion, however. The chapters that follow are not a paean to the remarkable wisdom and insight of economists. I will not suggest that the body politic should hand over critical policy decisions to a bunch of wonks with PhDs in economics. With some rare exceptions, such as the Federal Reserve’s monetary policy, the division of labor that has economists advising and elected politicians deciding is approximately right. We call that democracy.

The real questions are: Can the status quo be improved in ways that use economics for illumination somewhat more and for support somewhat less? And if so, how?

The search for answers must begin at the beginning—with an understanding of what can, without exaggeration, be viewed as a clash of civilizations between politicos and economists. That is the subject of Chapter 2, which analyzes in detail how and why politicians seek support while economists offer what they see as illumination. That same clash is the tacit subject of Chapter 3, which concentrates on the contrast between the super-short time horizons of politicians and the excessively long time horizons of economists, and of Chapter 4, which discusses the starkly different ways in which politicians and economists practice the art of messaging. (Preview: Economists are pretty bad at it.)

In Chapter 5, on the role of the media as information intermediaries, the focus shifts from the use of economics for support to the possible—and, I argue, socially more useful—uses of economics for illumination. The media, we shall see, can help or hinder each. Following that, Chapters 6 and 7 discuss in more detail what I really mean by illumination. How could the quality of economic policy improve if politicians made better use of economics?

The next three chapters get down to cases. Here I apply the basic ideas and lessons from the first seven chapters to three major issues of contemporary policy: why international trade is so controversial politically even though it is not controversial among economists (Chapter 8), what might be done economically to mitigate income inequality—if politics didn’t prevent it (Chapter 9), and how politics makes a hash out of economics when it comes to reforming the tax code (Chapter 10).

There are problems you solve and others you just manage. The Lamppost Theory falls squarely in the second category. The clash between political and economic civilizations runs so deep, and is so multifaceted, that no one should pretend to be able to solve it. I won’t. Instead, I devote Chapters 11 and 12 to the search for palliatives, not solutions. What are some feasible changes that could make economic advice more useful to politicians, and thereby improve the quality of economic policy?

But first we must understand why economic lampposts are used so much more for support than for illumination.

* Prior to Jerome Powell, five of the last six chairs of the Federal Reserve Board, dating back to 1970, were economists. The other lasted just seventeen months on the job.