Don't shoot the messengers

At this point, no one should be surprised by the fact that economics isn't John McCain's strong suit. The guy even said so himself. He supported the universally panned "gas-tax holiday", and he once strangely opined that interest rates should be set at 0%. So it shouldn't be that surprising that McCain has directly called out economics as a profession.

Speaking at Federal Hall near the New York Stock Exchange, McCain said: "You know the economists? They're the same ones that didn't predict the housing crisis we're in. They're the same ones that didn't predict the dot-com meltdown. They're the same ones that didn't predict the inflation that's staring us in the face today."

McCain must find it to be quite a burden, being right all the time. However, his reductionist view of economics glosses over a large amount of diversity in the field. And, as ThinkProgress has pointed out, many economists did predict the bursting housing bubble, including Nobel Laureate Joseph Stiglitz, Paul Krugman and Dean Baker. Maybe McCain should do a better job of listening.

Unfortunately, McCain isn't the only politician hating on economists. Several weeks ago Hilary Clinton's campaign manager took aim at the profession, when essentially the entire field criticized his candidate's own gas-tax holiday plan. Asked if she could name a single economist who thought it was a good idea, Ms. Clinton herself responded, "I don't want to put my lot in with economists".

So what's going on here? Justin Wolfers posed this question two weeks ago. What's strange is that you don't see this happening with other professions. No one gets mad at doctors who say smoking can lead to lung cancer (except maybe the cigarette industry) or at engineers who say a bridge is structurally unsound. But claiming, "four out of five economists agree" doesn't have the same cache that it does with dentists.

Why treat economists differently? One answer is that economic policy is playing a much more prominent role in this campaign, so there are many more opportunities for candidates to have their policy proposals questioned. Another possibility is that many economic phenomena are counter-intuitive, particularly those related to trade, technological change and taxes. Cutting gas taxes sounds like it would lower the price of gas; the complexities of tax incidence, however, are more subtle.

Personally, I blame the tension between politics and policy. Politicians get elected by promising the public more, not less. So while policymaking involves trade-offs, politics encourages our leaders to tell us we can have out cake and eat it too. The role of economists (or really, any group of experts) is to lay out the trade-offs associated with policy proposals, so votes can make a more informed choice. When economists oppose a plan, they're not pushing any specific agenda; they're just the messengers explaining what is and isn't possible.

This was certainly the case with the gas-tax holiday, when economists from across the political spectrum lined up against a plan that had little chance of succeeding. Polling suggests that the public believed the economists over the politicians, and that Hilary Clinton may have paid some political price for her support of the plan.

So maybe it's a good thing that politicians are mad at economists. It might mean that they're helping to reign in the bad ideas, at least a little.

The Problem with Food Metaphors or Why Economists Shouldn’t Bake

Food metaphors are ubiquitous and often useful. They remind us that we can’t have our cake and eat it too and they warn us not to bite off more than we can chew. We long to make our opponents eat their words. One of the most common food metaphors is the economic pie; it is also the most sinfully delicious.

The appeal of the economic pie metaphor is obvious: the economy is a decentralized network of billions of actions and decisions, and it is one of the most abstract concepts discussed on a regular basis. What could be better than to relate this mess to something wholesome and American: the pie? Unfortunately, the economy is not a pie and thinking this way can lead us to errors in judgment.

The economic pie metaphor actually commits three fallacies. The first is the implication that there is some figure at the helm (I decided to spice things up with a sailing metaphor) cutting up the pie and doling out the pieces. There is, of course, some truth to this. The distribution of income throughout a society is affected by government policy, particularly tax policy. Paul Krugman, in his recent book Conscience of a Liberal, links growing income inequality to changes in the income tax code over the past 30 years.

This, however, is only one (arguably small) part of the story. Income distribution is highly effected by structural factors such as skill differences and premiums as well as technological change. Tyler Cowen, writing in the New York Times, states that the relative return on a college education has fluctuated over time. After declining between 1915 and 1950, it has risen more recently to its level from the turn of the 19^th century. One of the most important factors has been technology. Cowen writes, “Improvements in technology have raised the gains for those with enough skills to handle complex jobs. The resulting inequalities are bid back down only as more people receive more education and move up the wage ladder.”

The extent to which some individual or group can dish out the pie is limited. Rather, income is distributed in a disperse manner, the result of millions of economic decisions and incentives, sprinkled liberally with random fluctuations and a dash of being in the right place at the right time.

The second problem with the pie metaphor is the implication that the pie is fixed no matter what the distribution. A 16 inch pizza has the same diameter no matter how many slices are cut. But economies are different. For years, economic theory and empirical evidence has pointed to a relationship between the way the pieces are cut (the income distribution) and growth (the size of the pie). The prevalent view in the 1950s and 1960s was that inequality was good for growth since the rich saved and invested more of their income, which would lead to greater productivity in the future. More recent empirical evidence suggests the opposite, that inequality actually shrinks the pie. Among other reasons, this could stem from the untapped potential of lower-income individuals who lack the means to invest in their educations or start a business. The latter theory, in part, underpins the microcredit movement. Still further study has suggested a non-linear relationship, where inequality helps growth at certain points and hurts it at others. No matter what the relationship, however, the point is that the distribution of the pie affects the size of the pie.

The third problem—which is a corollary to the previous one—is that an actual pie is zero-sum: if my piece gets cut larger, than yours must get smaller. After all, there is only so much pie to go around. This leads us to think of economic exchange as a purely competitive, non-cooperative system, in which wealth is finite.

Russ Roberts (host of the world’s best economic podcast) recently described this fallacy, pointing out that wealth is most often a reward for adding value in a unique or efficient way. Sergei Brin [one of the founders of Google], Bill Gates and LeBron James have all become very rich, but they didn’t do it by stealing. People voluntarily buy software, use Google and watch basketball. They are not forced to consume these things, but rather they derive value from them. The lives of the average American are not worse because of all the money these three have made; in fact, they’re almost certainly better.

Metaphors are useful devices for succinctly explaining complex phenomena. But we should always remember that a metaphor isn’t the real thing. The economy may be like a pie, but it isn’t actually a pie. Food metaphors are great; we just need to take them with a grain of salt.