Is Economic Analysis Just a Weapon in Public Policy Wars?

How Public Policy Became War, a recent book by David Davenport and Gordon Lloyd, documents one of the reasons why political debate has degenerated over the last few decades. Faced with a problem—any problem—the political instinct is now to declare war. Presidents of both political parties have declared wars on crime, drugs, poverty, and terrorism. Davenport and Lloyd note:

At first blush, one might think that declaring war on intransigent problems such as poverty or crime would be a good thing. As these domestic policy wars have evolved, however, five conclusions become relatively clear: (1) they do not generally solve the problem at hand; (2) they create roadblocks to better policy solutions; (3) they increase executive power at the expense of Congress; (4) their imagery is often negative and destructive; and (5) they never end. In a larger sense, these domestic policy wars also contribute to the contentious policy and culture wars that have plagued Washington in recent years.

Like many a thought-provoking book, this one answered a seemingly unrelated question I have long been pondering. Bear with me a minute on what will seem like a complete change of topic.

Are You an Austrian?

When I talk with conservatives and libertarians, I am often asked if I am an Austrian economist. Similarly, I cannot count how many non-economists I have met who proudly declare themselves to be Austrians. When this first started happening, I was a bit bewildered. Over time, I have realized that the only proper reply is, “I do not think that word means what you think it means.”

Austrian economics is a school of economic thought that was largely developed in the first half of the twentieth century by, among others, Menger, Mises, and Hayek, all of whom were from Austria. If you want to get a PhD in economics and study Austrian economic theory these days, there are a handful of programs you can attend. But—and this is simply meant as a statement of fact and not a judgment on the accuracy or usefulness of the theories—Austrian economists are very much akin to Marxist economists in being a very small subset of economists. If you go to the right gatherings of economists, you can meet them, but you do have to look.

So, why do so many non-economists think of themselves as devotees of Austrian economic theory? It has absolutely nothing to do with the theory itself. To see this, you need look no further than the amazingly witty rap battle between John Maynard Keynes and Friedrich Hayek that was produced in 2010. The chorus of the song has Keynes saying, “I want to steer markets,” and Hayek replying, “I want them set free.” Faced with that chorus, it is readily obvious why conservatives and libertarians instantly side with Hayek.

But, listen to the rest of the song, in which both Keynes and Hayek delineate their theories. (The song is admirable in that it does not sacrifice solid economic content to raise its entertainment value.) Imagine you were faced with the details of the two theories, having no idea which theory went with which policy conclusion. Is a depression caused when decision makers at firms collectively arrive at a conclusion that the future is not bright, and thus investment falls? Or, is a depression caused when low interest rates have increased investment to the point where there are simply no longer enough profitable opportunities to justify further investment? One of those is an Austrian model; one is a Keynesian model. Faced with that choice, are you an Austrian or a Keynesian?

One could believe that government intervention in the economy is good or bad using either one of those theories. Even more importantly, since around the 1980s, virtually every single PhD program in the country is neither Austrian nor Keynesian. At the level of economic theory, this is a debate that lives in the history books. Austrian economists and Paul Krugman are not happy about this fact, but if you attend the seminars at any of the top twenty-five economics PhD programs in the country, you will likely never hear a word about Austrians or Keynesians.

So, why are there so many conservative and libertarian non-economists who declare themselves to be Austrian economists? It is because Austrian economists tend to oppose central planning. This led to the epiphany I had when reading Davenport and Lloyd’s book. In a war, you know your goal, and then you decide on the best means to achieve that end. If you think about economic debates as a form of war, then choosing an economic model is not the first question. Once you know your preferred policy outcome, you then choose an economic analysis that leads to that conclusion.

Economics as War

Just like with public policy in general, economic analysis has become war. Pick a debate. For example, if you believe the country could use higher levels of immigration, you know that studies that show the benefits of higher levels of immigration have done their analysis the correct way. You also know that studies that show the opposite effects have been done incorrectly. The same is true of tax policy, school funding, healthcare, and on and on. Decide on your conclusion first, then look at the analysis. As Davenport and Lloyd note, “Think tanks have proliferated, but they tend to be more advocates than thinkers.”

Economics as it is practiced by economists is a very poor fit for this manner of thinking. The first rule of economic analysis is that there are costs and benefits in every decision. To see how this might work, consider a seemingly simple and uncontroversial economic policy decision. Pick a reasonably busy intersection near you without a stoplight. Should the town put a stoplight there?

This is a fairly straightforward economic problem. On the one hand, there is the obvious cost of installing the stoplight. On the other side, there is the obvious benefit of potentially improving the flow of traffic. To decide this matter, we could compare these costs and benefits. We would need to gather data on traffic flows and the number of accidents, finding out about pedestrian traffic in addition to automobile traffic. Thinking about all the costs and benefits, we could make a decision.

Now imagine what would happen if, instead of gathering the data and treating this as a simple comparison of costs and benefits, we decided to go to war in this debate. Some people start exclaiming, “It’s all about the children. We want children to be safe. Stoplights are safer. If you care about the kids, we must have a stoplight.” Others immediately reply, “It’s all about the tax burden and the size of government. You will have to take money from hard-working people in order to pay for this stoplight. Older people on fixed incomes will be particularly burdened by this new expense. Most people never even drive through this intersection. If you care about freedom, we should not impose taxes on people in order to pay for this stoplight.”

Once this debate has started, what are the chances that we arrive at a reasoned conclusion? Swap “Should we put in a stoplight?” for just about every economic debate occurring these days. The pattern is immediately recognizable.

The Moral Obligation of Economic Analysis

What can be done? The first step is to be willing to step back from the brink of war and think about our moral obligation here. In a war, the foremost obligation is to help your side to win. Economic analysis would thus be merely a tool in achieving victory. But, if economic analysis is not war, then we have a very different moral obligation. The moral obligation of people who make economic decisions is first to understand. Economics is very good at isolating the fundamental issues of contention. The method of economic analysis is to strip away the extraneous factors and to ask what is essential. What are the facts of the matter? What are the implications of assorted decisions?

There is an old legal axiom, “Reasonable people may disagree.” On some issues, there is a clear-cut moral divide. On others, there simply is not. Figuring out which issues are which is vital. We can all agree on the importance of a well-ordered society, but that does not mean we will agree on whether there should be a stoplight at a particular intersection. Similarly, we can all agree that a well-ordered monetary system is important. That does not mean, however, that all right-thinking people will agree on whether there is a need for a central bank.

Faced with a policy issue, the instinct in the modern political debate is to arrive at the conclusion first, and then to use the analysis to justify the decision. That order needs to be reversed. First understand the issue. Then arrive at a conclusion. And in arriving at a conclusion, it is perfectly fine to say, “This is what I conclude, but I can easily see how a well-informed, reasonable, thoughtful, and moral person would arrive at the opposite conclusion.”

There is another way of framing the argument. Some issues are of the first order to the functioning of a good society. It is very important that we get those issues right. But many, maybe even most, economic issues are of the second order. Not every political issue is equivalent to asking whether or not killing young humans is morally permissible. If we care about society, then it is very important to make these distinctions between first-order and second-order issues. It is wrong to pretend that first-order questions are second-order. It is equally wrong to turn second-order problems into first-order ones.

In the early twentieth century, John Erksine gave a lecture with the intriguing title, “The Moral Obligation to Be Intelligent.” He said:

We make a moral issue of an economic or social question, because it seems ignoble to admit it is simply a question for intelligence. Like the medicine-man, we use oratory and invoke our hereditary divinities, when the patient needs only a little quiet, or permission to get out of bed. We applaud those leaders who warm to their work—who, when they cannot open a door, threaten to kick it in. In the philosopher’s words, we curse the obstacles of life as though they were devils. But they are not devils. They are obstacles.

We all have a moral obligation to be intelligent. We have a moral obligation to think about costs and benefits of whatever policy we prefer. If you cannot explain why well-meaning, intelligent people have a different set of policy preferences, then you have not fulfilled your obligation to be a good citizen. In a society that is ready to adopt the war metaphor for every difference of opinion, one of the most radical moral acts that we can take is first to set out simply to clarify the matters under discussion.

Davenport and Lloyd quote Albert Einstein:

If I had an hour to solve a problem and my life depended on it, I would spend the first fifty-five minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes.

In thinking about a good society, the moral obligation of economic analysis is faithfully to spend that fifty-five minutes.