Ezra Klein sees the Biden administration as downgrading the role of economists:
Biden has less trust in economists, and so does everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics.
Multiple economists, both inside and outside the Biden administration, told me that this is an administration in which economists and financiers are simply far less influential than they were in past administrations. Some were frustrated by the change, others thought it a proper rebalancing of roles. But there is nothing like the axis of influence held by Summers, Tim Geithner and Peter Orszag at the dawn of the Obama administration, or that Robert Rubin and Summers held in the Clinton administration. Janet Yellen, the Treasury secretary, holds real weight in internal discussions, and so do some others, but economists are one of many voices at the table, not the dominant voices. This partly reflects Biden himself: he’s less academically minded, and more naturally skeptical of the way economists view the world and human behavior, than either Obama or Clinton. But it goes deeper than that.
The backdrop for this administration is the failures of the past generation of economic advice. Fifteen years of financial crises, yawning inequality and repeated debt panics that never showed up in interest rates have taken the shine off economic expertise.
I’d add one more factor. It seems to me that the failure of inflation to move higher has tended to discredit mainstream macroeconomists. In the mainstream approach to macro, the following three factors are often assumed to lead to higher inflation:
1. A policy of low interest rates
2. Big budget deficits
3. Sub-4% unemployment (as in 2019)
The failure of inflation to rise above 2% is not easy to explain using mainstream models.
Readers of this blog know that I attribute the low inflation to a relatively contractionary monetary policy since 2008. But then I’m not in the mainstream. I do not believe that interest rates, budget deficits and unemployment have a significant effect on inflation, at least in a country like the US (where there’s little risk of default on public debt.)
Of course, these things go in cycles. Once this new (progressive) approach to policy begins to fail—as all policies eventually do, even successful ones—the pendulum will swing back to those who emphasize the importance of opportunity cost and incentives.
It’s an endless cycle.
PS. The same is true of other issues, such as crime and punishment. An endless cycling back and forth between being hard and soft on crime.
PPS. This also caught my eye:
Economists have their ideas for solving climate change — a hefty carbon tax chief among them — but Biden and his team see this as fundamentally a political problem. They view the idea that a carbon tax is the essential answer to the problem of climate change as being so divorced from political reality as to be actively dangerous. Deese gets animated on this point. “I want to double down on that and say, it’s not just a messaging and narrative imperative,” he told me. “It has to be that Americans see and experience that the investments in building out a more resilient power grid actually improve their lives and create job opportunities for them, or their neighbors.”
Deese is in for a rude awakening. Climate change policies that are actually effective are not going to be politically popular. Carbon taxes are the least painful way of addressing climate change.
READER COMMENTS
Michael Barton
Apr 10 2021 at 2:35pm
Once this new (progressive) approach to policy begins to fail—as all policies eventually do, even successful ones
This raises the question of what is a successful policy. My naïve idea is that it is one that does not fail.
Walter Boggs
Apr 14 2021 at 10:15am
I also noticed that and thought Scott had goofed. Then I decided that the wording made sense in a way!
Todd Kreider
Apr 10 2021 at 6:16pm
“PS. The same is true of other issues, such as crime and punishment. An endless cycling back and forth between being hard and soft on crime.”
I see the influence of your recent Schopenhauer readings has kicked in.
Scott Sumner
Apr 11 2021 at 2:59pm
I’m sure he influenced me, but I don’t recall him writing on any social science issues.
Todd Kreider
Apr 12 2021 at 11:27am
I was referring to his cyclic notion of life: ““Life swings like a pendulum backward and forward between pain and boredom.”
Market Fiscalist
Apr 10 2021 at 10:55pm
‘An endless cycling back and forth between being hard and soft on crime.’
Is this really true ? Over a multi-century timeline isn’t the trend one of becoming increasingly ‘soft’ on crime ? Almost certainly – over the same timeline – more interventionist economic policies have also trended upwards.
Scott Sumner
Apr 11 2021 at 3:00pm
For much of my life, we got tougher on crime.
And free market policies gained ground from 1975-2000.
john hare
Apr 11 2021 at 4:51pm
I believe the two of you are on different timelines. Centuries back, capital punishment was a common public spectacle in many parts of the world. I seem to recall reading somewhere that England had 300 plus capital crimes in the 17th century. Things that were common centuries back would be considered cruel and unusual punishment today. OTOH, tough on crime has been a political selling point in recent decades in the US.
Haven’t studied historical free market policies to have an opinion.
Mark Z
Apr 11 2021 at 12:44am
Economists themselves often hold economics in less esteem nowadays, presumably because the stakes are seen as so high that winning at politics is more important than making good policy. Paul Krugman, probably the most prestigious economist on the left side of the spectrum and doubtless read by members of the Biden administration, spends a lot of ink actively defending the ‘Green New Deal’ against what he knows are better policies because he thinks the former makes for better politics. If economists themselves don’t even care more about economics than politics, why should anyone else?
Michael Sandifer
Apr 11 2021 at 8:16am
Scott,
Market monetarists are mostly unassailable, because they stick to best established, very basic macro theory, and mostly eschew efforts at estimating hypothetical variables and producing non-market forecasts. Advocating NGDP level targeting for large, diverse economies allows you to be correct with policy, without having to dive into the theoretical or statistical procedural weeds, helping avoid error and distraction.
But, what about some of the more mainstream details? How likely is it that the entire single representative homogeneous agent approach is entirely folly, representing an example of fallacy of composition? Modeling risk aversion or temporal discounting on the agent level and assuming it applies to the macro level in this manner doesn’t seem to actually fit data. Yet, many economists I interact with go right to a simple representative agent model for intuition when trying to figure out how plausible it is that the real interest rate should equal real GDP growth in equilibrium, for example.
It will be interesting to see what kind of progress is made from further development of heterogeneous agent models, with emergent macro properties. Perhaps a worthy micro-foundations macro model will emerge one day, but my impression is that it hasn’t occurred yet.
Frank
Apr 11 2021 at 1:38pm
Economics is held in high esteem by the public whenever it promises something for nothing, such as in the 1960’s. The current generation thinks it can have it all, also for nothing. Since economists believe in budget constraints, they are clearly unsuited for policy positions at this time.
Thomas Sewell
Apr 11 2021 at 5:19pm
For a Democratic politician, the purpose of climate change fighting government programs isn’t mostly to fight climate change. It’s an opportunity to transfer wealth to friends, associates, supporters, and those on the “same side” politically.
If it also does something useful, they’d like that as well, but it’s not an absolute requirement and it’s an unlikely result.
That’s why a revenue-neutral carbon-tax was never politically on the table for them. How does that translate to “green jobs” they can pretend they created for voters? How does that allow them to pick winners and losers? To shift massive amounts of wealth to the industries and companies (and their government-contract required union workers, don’t forget!) which support them?
Why would they be motived to fight climate change, when the prospect of shifting trillions of dollars to their “side” is out there?
Tom West
Apr 11 2021 at 9:26pm
Does an assumption of bad faith on the part of those you disagree with accomplish anything?
I usually see this from the other direction (assumptions of bad faith on the part of political conservatives), and even if it is true, the net effect of such accusations is to make it harder to persuade people of the opposite conviction to one’s side.
Bob Roberts
Apr 13 2021 at 12:50am
It’s not an assumption of bad faith, it’s reality.
If politicians of any slant wanted to do something about climate change, it’s really quite simple: switch over to nuclear power. Not just for power generation, but for ocean freighters, too. No new technology required. Electric cars are a fraction of emissions. Ocean freight is a huge share of global emissions, burning not just diesel but nasty, heavy oils which are far more polluting.
The fact that no one will even discuss practical solutions to the problem, but always reach for their favorite new tax or regulation scheme, is quite telling.
Knut P. Heen
Apr 13 2021 at 9:20am
Carbon taxes may increase the emissions. Suppose you tax person A and give the money to person B. Person A may reduce the emissions, but person B may increase the emissions. If the system is crazy enough, person B’s increase may be larger than person A’s reduction. The only way to avoid this problem is to burn the tax-money, but no one wants that.
Frank
Apr 11 2021 at 5:34pm
Economists have prestige with the public when something for nothing is on offer, as in the 1960’s. Because even Macroeconomists have learned about budget constraints since then, economists don’t fit into any policy positions. So they got new people who don’t believe in constraints.
David Seltzer
Apr 11 2021 at 6:25pm
“Biden’s constant frustration is that economists don’t understand politics.”
Given his recent statements, I suspect Biden doesn’t understand economics.
He advocates a minimum wage of $15 dollars an hour. An econ 101 student would ask if President Biden thinks the demand for labor is inelastic.
Tom West
Apr 11 2021 at 9:15pm
Well, to be fair, the disemployment effects of minimum wage increases have mostly been missing or negligible (at least in the short term) when there’d been dire predictions of immediate mass unemployment.
That said, a minimum wage of $15/hr over the entire country would seem to pushing that presumption of relative inelasticity pretty hard indeed.
Alexander Otero
Apr 12 2021 at 9:28am
I’d heard that the net gain for jobs in sectors where the state hiked minimum wage has been lower than would be the case if their were no negative impact. So it’s occuring, but it the loss of new jobs, not the loss in existing jobs. There are reductions in “fringe” benefits I believe.
Anonymous
Apr 12 2021 at 10:09am
“dire predictions of immediate mass unemployment.”
Really? I thought the whole game was to disguise the disemployment effects with gradual rollouts, etc. It’s no surprise it’s hard to discern short-term effects, although many (I think most) studies still do.
Floccina
Apr 12 2021 at 11:03am
+1 If there are no employment effects then why do the supporters want to phase it in? It would be a little more efficient to do it all at once. Just one change in payroll and presumably prices (though some supporters might even argue that prices would not chang but that all the cost increase would be compensated for by lower profits and high paid employee compensation.)
David Seltzer
Apr 12 2021 at 10:27am
Tom,
Look at a demand curve. Prices and quantity demanded are inversely proportional. I’ve owned a number of businesses. Increases in costs, labor costs, are passed on to consumers and future hiring, when FORCED to pay more than one produces, is precluded. Of course, persons with limited skills are most adversely affected. Going forward current employees get fewer or lower raises and benefits may be limited. Is it fair to assume that an employer would be fined if both he and a worker agree to a lower wage than the minimum? After all, both benefit as they both freely agree. Does an employer shutter his business as he realizes his return on his total investment does not compensate him for assumed risk? If economics is about incentives, do minimum wage laws reduce incentives to innovate, take risk and grow? These are a few of unintended consequences of government abrogating private agreements between employer and employee. An example of Bastiat’s “That which is seen and that which is not seen.”
Henri Hein
Apr 12 2021 at 3:18am
Biden, even more so than other recent Presidents, reminds me of the Thomas Sowell quote: “The first law of Economics is that all resources are scarce. The first law of Politics is to disregard the first rule of Economics.”
Matthew W
Apr 12 2021 at 6:17am
The climate change weirdness is happening in NZ too. We have an operational ETS, all ready to go to get our emissions to meet our targets. And we have a government apparently very serious about climate change. And yet they are almost explicitly anti-ETS – they dont think the ETS will lead to the “right sort” of emissions reductions. On NZ politics twitter it is seen by some as being almost a climate change denier to be pro-ETS. Its utterly bizarre.
Christophe Biocca
Apr 12 2021 at 10:52am
Similar issue in Canada, though in our case the carbon tax did pass a few years ago. Then the Liberals had to promise even more measures of the expensive-and-inefficient kind to fend off claims that they were doing “nothing” on the climate. That seems to have calmed down a bit since, but the real test is the next election.
Floccina
Apr 12 2021 at 10:52am
In a way, we already have a very inefficient and not very effective CO2 taxes, like CAFE standards
I think hidden taxes are bad, but when Biden says politics of a CO2 tax, I think he saying we need to hide the taxes. IMO it’s one of the jobs of economist to reveal hidden taxes.
Michael Sandifer
Apr 13 2021 at 12:04am
I think a part of why economists lack prestige is the inability to resolve questions empirically, and they are losing prestige in recent years, because this has become more obvious. Particularly, when this leads to bad monetary policy, the effects can obviously be devastating.
Take the equity premium/risk-free rate puzzle, for example. Just looking at US data since 1962 and we see that the average S&P 500 earnings yield only differs from average NGDP growth by .2%, but differs from average S&P 500 earnings growth and S&P 500 index growth by about 1.5%. The average one year Treasury yield over the same period is about 1.3% below the average earnings yield and NGDP growth rates. The Fed obviously sets the one year Treasury rate, as it tracks the Fed Funds rate.
Isn’t an obvious thought that monetary disequilibrium might be the cause of this contradiction? The Fed Funds rate has been too low, on average, at different times due to both tight and loose monetary policy.
Moreover, the difference between the average S&P 500 earnings yield and the average changes in earnings and the index value disappears, if setting the average one year Treasury rate equal to the average earnings yield/NGDP growth rates. Might this be telling us something?
Maryann Keating
Apr 13 2021 at 4:58pm
Please, what is it telling us? What is the relationship between “Inflation is always and everywhere …..” and the “monetary disequilibrium” which you mention?
Nick R
Apr 14 2021 at 6:21pm
One reason economists’ prestige has fallen, perhaps is that they’re so quick to revise their economics to suit the political winds, as Mark Z. commented. Janet Yellen is just fine with running up the deficit by uncounted trillions in the midst of an economic recovery because… well, because COVID or something. Also, most economists have been spending the past four years expressing contempt for Trump and his policies that, just maybe, they can’t bring themselves to state the obvious–that Biden’s economic policies show every indication of being much worse, perhaps catastrophically so.
Nick R
Apr 14 2021 at 8:11pm
Of course, there’s another reason the Biden Administration would want to downgrade the role of economists. The last thing they want is an honest economist giving them an economics-based assessment of what they might want to do on taxing and spending. Obviously, they want to spend more–much more!–and they also want to tax, but not necessarily in ways that are economically sensible or efficient.
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