July 4, 2022

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The War on Economics | The New Yorker

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There has always been something irresistible about advice in mathematical form. When, in the Book of Genesis, Joseph was plucked from prison to interpret the dreams of the Pharaoh, he offered some Biblical budgeting: To survive the seven years of famine that will come after seven years of abundance, the Egyptians must save exactly a fifth of their harvest. Sun Tzu’s military counsel in “The Art of War” depends on ratios: “It is the rule in war, if our forces are ten to the enemy’s one, to surround him; if five to one, to attack him; if twice as numerous, to divide our army into two.” Alexander Hamilton, arguing for a national bank in 1790, presented the appeal of fractional-reserve banking in quantifiable terms. “It is a well-established fact, that Banks in good credit can circulate a far greater sum than the actual quantum of their capital in Gold & Silver,” he wrote in a letter to the Speaker of the House of Representatives. “The extent of the possible excess seems indeterminate; though it has been conjecturally stated at the proportions of two and three to one.”

Where leaders once turned to sages and pols for such wisdom, they now turn to the guild of economists. The most powerful states in the world are accustomed to outsourcing the management of their crucial macroeconomic decisions to committees of central bankers. Nowadays, no arena of public policy is untouched by economic guidance, solicited or unsolicited. Economists influence the way that children are cared for and schooled; the way that citizens are housed, treated in hospitals, and policed; the way that countries regulate industry and manage climate change. Public policy is now conducted in the language of budgets, cost-benefit studies, regulatory-impact analysis, and mathematical models of dazzling beauty and complexity.

Yet we’re not close to consensus on central questions of economic statecraft. Can the cycle of booms, bubbles, and busts be moderated? How much money can a welfare state redistribute to the poor without encouraging dependency? Economists, for all their hardcore mathematizing, still disagree with one another on basic issues. Which raises a question: Was it a mistake to entrust them with public policy in the first place?

Elizabeth Popp Berman, a sociologist at the University of Michigan, certainly thinks so. In her new book, “Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy” (Princeton), she argues that the mid-century turn toward “the economic style of reasoning” had devastating consequences for progressive Democrats. Back in 1934, Franklin D. Roosevelt came away from a meeting with John Maynard Keynes, the most important British economist of the twentieth century, baffled and appalled by his “whole rigmarole of figures.” Economists were once relegated to the basement, inglorious actuaries to the lawyers on top, but they’ve steadily gained in prominence, influence, and office space. Since 1946, the President has retained a Council of Economic Advisers. Last year, President Joe Biden elevated the chair of that council to the White House Cabinet. There exists no comparably august advisory body of anthropologists, political scientists, or sociologists.

This conquering new style of reasoning, Berman argues, was insidious. “It portrays itself merely as a technical means of decision-making that can be used with equal effectiveness by people with any political values,” she writes. “This, though, is a ruse: efficiency is a value of its own.” And the dominance of economic thought has scuttled ambitious policymaking. Why, she asks, “did the Obama Administration not produce, or even seek, more fundamental change? Why did it remain committed to an incrementalist, modestly ambitious vision of government, even as the country faced unprecedented challenges?” The answer, she says, is that the new technocrats, fixated on incentives and choice, undermined “some of Democrats’ most effective language—of universalism, rights, and equality.” Under their malign sway, as cost-benefit analysis became codified in government bureaus and standards of jurisprudence, previously bold Democrats reduced their dreams for betterment to feeble meliorism. The dominion of economics has, Berman says, resulted in “forty years of neoliberalism.”

The indictment comes with a long bill of particulars. Because Berman believes that a fixation on efficiency has undermined political progress, her account shines a harsh light on the British economist Nicholas Kaldor, who, along with his colleague John Hicks, devised what became a standard test for assessing the costs and benefits of public policy. Berman writes that, “while the virtues of these kinds of efficiency may seem self-evident, the pursuit of efficiency frequently conflicted with commitments to competing values,” and she faults the Kaldor-Hicks test for undermining the moral case for national health insurance.

More recently, antitrust enforcement was narrowed to businesses that violated the consumer-welfare standard—the achievement of Robert Bork and members of the “law and economics” school fostered at the University of Chicago. Transportation markets for flights, freight, and railroads were deregulated. The Environmental Protection Agency moved away from regulating pollution through inflexible, strict limits, adopting instead market-inspired emissions-trading programs. Public housing was phased out in favor of rental vouchers. Anti-poverty policy was reformulated to respond to worries about moral hazard and dependency. And health care never got the overhaul that it needed: rather than refashioning it into a single-payer system like the British National Health Service, Congress has only built annexes for a great Rube Goldberg machine formed of interlocking government subsidies, private insurance, and opaque hospital pricing. Again and again, Berman maintains, hapless progressives have been overrun by brigades of economists armed with slide rules.

Berman is at her best as an archeologist of ideas, digging through archives to excavate the origins of the economic style of reasoning and its takeover of federal policymaking. In the waning days of the Second World War, American military leaders, intent on preserving the impressive statistical and logistics machine they had built to win the war, created an organization that would eventually become the RAND Corporation, a central figure in Berman’s account. The group, which prided itself on “empirical, nonpartisan, independent analysis,” quickly rose in stature. A big boost came from the Kennedy Administration, with its legendary appetite for experts, especially of the Harvardian variety. And when John F. Kennedy’s defense secretary, Robert McNamara, surrounded himself with a coterie of “Whiz Kids,” many were supplied by RAND. McNamara embarked on a grand scheme to bring “scientific management” to government business, the Planning, Programming and Budgeting System, and Berman argues convincingly that the initiative, though now forgotten, had an important legacy. It brought economic reasoning to the executive agencies and then to Congress, and helped develop “a new academic discipline of public policy.” She goes on to catalogue the penetration of various governmental bureaus by practitioners of the economic style, who, within a few decades, created permanent planning and policy offices. Obsessed with cost-benefit analysis, randomized experiments, and policy evaluation, these technocrats, many of them Democrats, scaled down the vision of the Great Society types.

Berman’s central thesis—that the implicit values of economics clash with and crowd out progressive aims—is more familiar. It arises from the widespread idea that neoliberalism, or its even woollier cousin “late capitalism,” is to blame for many of the ills and inadequacies of the American state. An influential version of this view is captured in the title of the 2019 book “The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society,” by Binyamin Appelbaum, an editorial writer for the Times. An essay titled “Against Economics,” by the late scholar and social critic David Graeber, contended that people who manage large economies have come to realize that the discipline isn’t “fit for purpose.” Or, in the brisk formulation of Philip Roscoe, who teaches at the University of St. Andrews school of management: “Economics is itself one of the biggest problems we face.” The charge that economists are more than occasionally guilty of excessive self-confidence is incontestable. The more serious charge is that a moral and intellectual tension exists between equity-conscious progressives and efficiency-fixated economists. How much harm has this discipline done?

A fuller accounting reveals a more complicated story. Some economists were indeed hostile to the social-welfare state; others designed it. In 1910, Henry Rogers Seager, an economist at Columbia University, published a book titled “Social Insurance: A Program of Social Reform.” Between the bland covers was a blistering denunciation of American economic conditions, which Seager claimed “make the program of individualism little better than a program of despair,” and a call to create or expand unemployment insurance, workers’ compensation, and social security. In building his argument, he drew freely from the research of the neoclassical economist and statistician Irving Fisher. “Social Insurance” not only augured the New Deal but also provided intellectual justification for another sweeping effort: “I believe that we shall devise means for exterminating poverty as we have devised means for exterminating other evils,” Seager wrote. Lyndon B. Johnson’s War on Poverty would not fire its first salvos for another half century. Not that Johnson could have waged his war without a precise definition of poverty—and the thresholds his Administration used were formulated by an unassuming number cruncher at the Social Security Administration, the economist Mollie Orshansky.

Perhaps the most consequential counterpoint to the “economists vs. progressives” narrative comes from across the Atlantic. In 1941, William Beveridge, a British economist with a habit of irritating government ministers busy with the war effort, was dispatched with the unenviable task of examining the country’s social-insurance schemes. Beveridge decided to exceed his mandate. “A revolutionary moment in the world’s history is a time for revolutions, not patching,” he declared when he returned, a year later, with a three-hundred-page report in hand. It was a radical document with almost preposterous ambitions—to vanquish the “five giants” of disease, idleness, ignorance, squalor, and want by crafting a cradle-to-grave welfare state. At least some of the grandiloquence proved justified. Few white papers are properly read even once. But the British public, lining up outside government offices, eventually purchased six hundred thousand copies of this one. Here was a report that laid out a set of universal national-insurance schemes for disability, unemployment, and retirement, in addition to “a national health service for prevention and comprehensive treatment to all members of the community . . . without a charge at any point.” Was it too good to be true?

Some critics insisted that it was, claiming that the plan would bankrupt the country. The task of mathematically defending Beveridge’s ideas was taken up by one of the most influential and quantitatively gifted British economists of the century—Nicholas Kaldor, that bugbear of Berman’s. Kaldor assembled an economic model that forecast the effects of Beveridge’s plans, presaging the kind of costing exercise that is routinely undertaken by modern-day institutions like the British Office for Budget Responsibility and the American Congressional Budget Office. Kaldor’s sums demonstrated that Beveridge’s plan could be financed for a pittance of a tax increase: “6 pence on income tax and a penny a pint on beer.” Buoyed by such analyses—firmly within the economic style of reasoning—Beveridge’s plans became reality after Clement Attlee became Prime Minister and established National Insurance and the N.H.S.

In fact, a great deal of what we think of as progressive policy is indebted to Kaldor, who happens to have been a lifelong socialist. He strenuously advocated for higher taxes on non-labor income, including capital gains, corporate profits, and inheritances. A. P. Thirlwall, his biographer, credits him, too, with influencing the design of the universal child benefits instituted in 1975, by Harold Wilson’s Labour government. So it’s curious that in both Appelbaum and Berman’s histories Kaldor figures only as an unhelpful catalyst for the economic style of thinking. If this style of thinking is inherently at odds with progressive policy, how was it that in the U.K. it propelled and sustained progressive policy on such a vast scale?

Nor does the tension between economic and progressive values seem so clear in recent decades. Governments rarely invite wholesale policy redesigns by economists. On the few occasions that they have done so, the results have varied widely. In the nineteen-seventies, after Augusto Pinochet seized power in Chile, the Chicago Boys remade the Chilean economy into a laissez-faire playland of Milton Friedman’s dreams; in the nineteen-eighties, the Princeton economist Uwe Reinhardt persuaded the Taiwanese government to implement an N.H.S.-inspired single-payer health-care system. (Reinhardt considered efficiency in health care too important to leave to the market.) When a generalization about economic thought is ventured, it’s worth taking a look at what’s omitted from the data set.

Dunking on the discipline won’t help progressives get what they want, because partisanship-induced gridlock is a far greater obstacle than technocratic caution is. Barack Obama’s proposal for a public health-insurance option was felled by the realities of Republican filibustering in the Senate, not by dissenting economists. Consider, for that matter, the Biden Administration’s agenda. It calls for the federal government to provide, among other things, generous child tax allowances to fight poverty, a program of universal pre-kindergarten, new subsidies for child care and family leave, stricter enforcement of antitrust rules to limit corporate power over wages and prices, and much more ambitious reductions to carbon emissions in order to halt global warming.

There is no dearth of economists willing to endorse these proposals. Last year, more than four hundred eminent economists—including several Nobel laureates—signed an open letter calling for Congress to make permanent the pandemic policy of near-universal child tax benefits launched as part of Biden’s American Rescue Plan. Their arguments, with references to “long-term fiscal payoff” and “parental labor supply,” fall solidly within the economic style of reasoning whose values allegedly clash with the progressive ideal of equity. Although the policy was hugely successful while it was in effect—reducing, according to researchers at Columbia University, the number of American children in poverty by forty per cent—it lapsed in January. The problem had nothing to do with the economists’ veto, and much to do with legislative vote-wrangling. Build Back Better, Biden’s plan for transforming America in a Johnsonian manner, has been stalled by maverick Democrats like Joe Manchin and Kyrsten Sinema. How does Berman reconcile her story about technocratic paralysis with the fact that the contemporary Democratic Party is quite comfortable with expanding the state? It’s an issue she mainly skirts, save when she cryptically credits “economists not committed to the economic style.”

Of course, the limitations of economics should not be papered over. Borrowing from other fields has improved the discipline, albeit slowly. The Black-Scholes model for pricing certain assets derives from Einstein’s study of the Brownian motion of particles in a fluid. Contemporary behavioral economists are using psychological experiments to update unrealistic stipulations about rational actors; Nobel Prizes are being awarded to economic empiricists who test the ways in which textbook theories fail in the real world; and the Big Data types are hyping machine learning. But economic models are still sensitive to assumptions—as the duelling cost-benefit analyses of Republican and Democratic administrations plainly demonstrate. It is naïve to think that these analyses are immune to political influence and shoddy workmanship in the form of bad starting data, unsound modelling techniques, and poorly qualified findings.

Politics aside, some important things are simply harder to price than others. A measurement of the “social cost of carbon,” the negative effects of an additional ton of carbon-dioxide emissions, may one day underpin a national carbon tax. But arriving at this measurement requires modelling changes in global temperatures, ocean acidification, sea level, extreme weather, agricultural losses, and human population for the next few decades. That leaves a lot of room for discretion informed by political considerations.

Epistemic humility, though, is distinct from epistemic nihilism. Berman’s approach to economic analysis is essentially to disregard it unless it confirms what she already thinks. “When our political values align with those of economics, we should embrace the many useful tools it has to offer,” she writes. “But when they conflict, we must be willing to advocate, without apology, for alternatives.” After all, she says, that’s what conservatives do. Ronald Reagan “led with his values,” and “unapologetically embraced ideology over technocracy”; his Administration “used the economic style when convenient, and ignored it when not.” Progressives ought to learn from the Gipper, she thinks, and demote economics to something like actuarial cheerleading. It would be tempting to follow Berman’s lead and supplant economic analysis with moral certainties—why not just assert that “bigness is badness” when it comes to antitrust policy, and that free health care is simply a right?

Idrees Kahloon
2022-05-16 06:00:00

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