Economists Infiltrate the White House; Now What?

Last week, President-elect Obama dominated the news — and perhaps moved the markets — by spending the three days before Thanksgiving introducing one economist after another to the American public.

There were Larry Summers, Peter Orszag, Christina Romer, and Austan Goolsbee; and don’t forget Tim Geithner and Paul Volcker, neither of whom are Ph.D. economists, but neither of whom are slouches either.

The Economist has a very good roll-up of this economist inundation. It focuses on the contrast between the incoming and outgoing administrations:

Mr. Obama’s policies may not be any more successful at combating the financial crisis and recession than those of George Bush. But it does seem safe to say that economics will play a bigger part in the formation of those policies. … It is a striking contrast with the outgoing administration, in which economists never had much clout. Consider the Office of Management and Budget director, who as overseer of $3 trillion in federal spending plays a pivotal role in setting economic priorities. Mr Bush has had four: one was a pharmaceuticals executive, one did government relations for an investment bank, and two were congressmen. All four trained as lawyers. Mr Obama’s nominee, Peter Orszag, the outgoing director of the non-partisan Congressional Budget Office, is a professional economist known for such page-turners as “Saving Social Security,” a 300-page tome boasting 37 pages of footnotes and eight appendices.

I am obviously a fan of the art practiced by academic economists like Romer, Goolsbee, and Summers. So naturally I think these appointments bode well. But there are a lot of caveats here, as well as a lot of uncertainty.

Let me start by quoting a few people whose opinions I solicited in light of these appointments. First is David Warsh, the wonderful economics writer who plies his craft at EconomicPrincipals.com. Here’s what David had to say about the recent evolution of economists in the White House:

It was Clinton who beefed up the economic-advice apparatus when he created the National Economic Council director’s job in 1993 as a sort of counterpart to the national security adviser. Thereby he brought his chief economic adviser into the White House and out of the offices of the Council of Economic Advisers in the Executive Office Building next door, emphasizing the seriousness with which he took the job of management. He named investment banker Bob Rubin to the job.

Bush kept the N.E.C. apparatus but downgraded the traditional Council of Economic Advisers by moving it out of the Executive Office Building and into a nondescript building across Lafayette Square. Plenty of good Republican economists served in his administration, but he never found a place for the best of them, Martin Feldstein; indeed, he held Marty at arm’s length, passing him over for the chairmanship of the Fed.

Now Obama is bringing economics back to center stage, appointing Larry Summers to N.E.C. and emphasizing the centrality of the C.E.A. by showcasing the appointment of Christina Romer. Young as he is, Tim Geithner, a non-economist, has something of the markets about him, by dint of having run the New York Fed (and something of the world, for having grown up overseas).

But not since Richard Nixon chose Henry Kissinger as his national security adviser has a professor been thrust into so central a policy-making role as has Larry Summers.

The hierarchy is very clear, I think: Summers will be the architect, the general who conducts the campaign. Things will go smoothly for a time. In due course, there will be serious disagreements; there always are. Then things will get interesting.

I also reached out to Brad DeLong, the Berkeley economist who served as Deputy Assistant Secretary for Economic Policy in the Treasury Department from 1993 to 1995, during Clinton’s first term. Here’s the question I put to him:

The White House is suddenly lousy with Ph.D. economists; what will the effect be? (Implicit in the question is: how much will they be listened to, and by whom; and what sort of influence do you expect them to have?)

Brad’s reply:

The Bush White House was lousy with Ph.D. economists as well: they did not listen to them at all. Why Democratic economists seem to have a lot more power than Republican economists in administrations is an interesting question that I am not sure I know the answer to.

One possibility is that in the Bush administration, you did not have the kind of strong internal protests against administration policy that, say, Summers and Lipton made at Clinton’s acquiescence in Yeltsin‘s loans-for-shares program (see Strobe Talbott‘s memoirs) or the kind of strong external protests that Joe Stiglitz made after he went rogue. Thus it may be that the Bush economists were viewed as cyphers that could be ignored. Clearly the difference in the quality of economic policy made over the past generation by the two parties has been very, very visible.

If you think DeLong’s answer is a tad partisan, let it be noted that I put the same question to a couple of economists who served recently under President Bush. Unfortunately, they declined to comment. But I was able to squeeze something out of a fellow named Steve Levitt, who according to this Times article was “once offered a job on the Clinton economic team, and the Bush campaign approached him about being a crime adviser.” Here’s what he had to say:

Politicians don’t listen to academic economists because the solutions economists favor are rarely politically popular. Although Obama is one of the most intellectual presidents that we have had in a long time — which might predispose him to listen to economists — the policies that economists favor tend to be free-market oriented, which likely won’t sit well with his inner circle.

That being said, Larry Summers may be the exception to my rule that politicians ignore academic economists; because while Summers is, at his core, an academic economist, he has masqueraded as enough other things (Secretary of Treasury, university president) that maybe he will be able
to sneak in some good economic ideas under other guises.

Let me add a few things to these wise replies:

1. I believe that Levitt’s point about the politically unpopular solutions favored by economists is a big, big factor here. But I also think that the current recession (yes, it’s official) has so many people so frightened that Obama will be given a lot of room to make choices that wouldn’t be tolerated under sunny skies.

It’s also worth remembering what happened several months ago, during the presidential campaign, when high gas prices prompted the idea of a “gas tax holiday.” Although economists derided the idea, candidates McCain and Clinton embraced it eagerly. Obama, meanwhile, called it what it was: a populist gimmick that wouldn’t help anyone except a few politicians in the short run. So this combination of desperate times and a president who’s not fooled by economic gimmicks may work out well. That said:

2. It is not a slam dunk that academic economists are the optimal people, or even good people, to help navigate the economic mess we now face. There has been much made of the fact that few economists have “called” the current mess. Even more broadly, however, I think it’s safe to say that academic economists aren’t very good at making macroeconomic predictions at all. This is a topic for another day, but suffice it to say that ivory-tower economics has a poor track record of predicting the economy and not even such a great record of accurately describing recent economic events. If you ever get to thinking that the best economic minds in the world can, at the very least, make the financial markets bow down at their will in order to profit from them, just remember what happened to Long Term Capital Management. That said:

3. If you look at the kind of research that Romer and Goolsbee and Summers have done over the years, what you find is an incredibly robust body of work that covers many of the trouble spots the U.S. is facing now: volatile business cycles and the role of the Fed; how the 21st-century economy — and especially the internet — has changed pricing and competitive dynamics; the consequences, unintended and otherwise, of changes in tax policy; and how the government should best deal with an aging population that needs good health care and pensions. And that’s just a sampling. In other words: these are people who have drilled down deep to make empirical conclusions about the sorts of issues that, yes, are usually decided on political grounds.

So while I don’t doubt that Warsh and DeLong and Levitt are right — that the economists heading to Washington have probably just concluded the best week of their new jobs — I do hold considerable hope that the best instincts of academic economics can be harnessed to make a positive difference for the U.S. economy and even its political and social structure.

That’s not to say there aren’t a lot of bad instincts too — a certain arrogance that accompanies many economists’ arguments, a willingness to argue the minor points forever while forgetting the major goals in play, etc. — but if the U.S. electorate could choose its first minority president, is it really too much to ask that a little bit of the best economic research could trickle down into the White House?

[NOTE: I discussed this topic recently on The Takeaway.]

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  1. victoria says:

    While at this point its economists are the only ones who can fathom the markets and the systems that sustain them. the problem with economists and the reason they seem to be unable to predict long term macro-movements is their models (yes they use models not real life) calculate based on past performance and on a vision of human nature as a rational economic actor (home economicus). HUmans do not always respond as home ecnomicus, nor are their actions so easy to model. A person is embedded in the social world and human relations, and meaning may not run according to the economists vision of human nature, which they then invariable correct for in a new model.

    So while they can solve and address current situations, they seem unable to factor in the social and political in their models.

    Finally, for example, the level of ridiculousness is visble in that only yesterday could they call a recession. Did anyone doubt this. Did we need them to call it? In essence they flow behind the facts not in front of. For an understanding of the world one needs people schooled in other thoughts that can thing of the world and its structures not just of individual rational actors responding to economic incentives

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  2. Michael G. says:

    Truman rather famously asked for one armed economists since when asked what they thought should be done they always gave expert advice but then concluded by saying “… on the other hand.”

    Academicians are trained to consider all the possibilities and be prepared to debate “the other side”. As long as they are reasonable people they will give such nuanced advice that it cannot be translated into policy – unless they are extremist ideologues in which case you get extremist advice which (thankfully) is not politically viable.

    Fortunately, Obama is also a former professor and can understand where they are coming from, treat them as equals, and cut through the miasma of nuance to reach concrete politically viable policy (I hope).

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  3. Tom M says:

    I often wonder why academic economists with so many good ideas can even stand to work for the president or be that involved. They would probably have more of an impact publishing cutting edge research than they would convincing a democrat about the virtues of the free market. Obama has already said he doesn’t plan to cut benefits or raise the retirement age to shore up social security so why does it matter how brilliant his economists are? Clearly he is not going to listen to them, maybe he wants to be able to say that he at least consulted some of the best minds this country has to offer before touting his own liberal policies?

    Can anyone shed some light on this? Does it just look bad if an economist turns him down? Do they want the prestige of serving in the whitehouse?

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  4. Bernard Dayre says:

    Since the most immediate problem is the economy it makes perfect sense for Barack Obama to surround himself with eminent economists. Eminent however is not infallible and given the range and complexity of the issues success is not a given – but at least a probability.

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  5. David Brown says:

    Central to academic economics in America is a personality that does not exist, the rational maximizer. Absent the rational maximizer economic formulas have no predictive power. No wonder that economists are much more comfortable trying to make sense out of the past (regression analysis, anyone) than predicting the future. Economics is unfortunately a pseudo-science. The problem with having economists run the show is precisely that they have this fundamental, existential disconnect from reality.

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  6. Peter B. says:

    Notwithstanding the difficulties that economists (or scholars from any discipline) have in predicting the future, I’d feel a little more comfortable if Obama was appointing more economists who:

    1) Thought that de-regulating the financial system was a bad idea before the current crisis (rather than the recent converts to this view he has appointed); and

    2) Pointed out that the housing market was in a bubble and that lending standards were too loose while Greenspan was still of the view that the market was just a bit “frothy.”

    A number of economist did point out these problems BEFORE the mortgage crisis exploded. Personally, I think we’d be better off with a few more economists with this sort of vision advising our new administration.

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  7. Dave Buell says:

    In 2008 the Yankees looked good on paper, who would have thought the Devil Rays would win the pennet. These economists get good press, but we will need to see how they perform on the field.

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  8. Shane says:

    Economists are not experts in human nature. That’s where Greenspan and all his disciples went wrong. Academics tend to live in an unnatural social environment, a world of ideas and grand liberal dreams.

    People and Markets operate within society – red meat and white bread society. Emotional responses are part of that equation. Most of the pure “Economic” fixes work only if you ignore the human equation. And that’s great as long as people aren’t involved. People calculate “answers” by factoring in things like “fairness” and “equity” and “morality.” Those concepts have no part in the purely theoretical mathematics of Economics. But they are all too real.

    We need practical real-world hands-on problem-solvers. We need leaders who are informed by academic theory, but not enslaved by it. We need advice that takes into account not only the numbers, but the human response to “solutions.” In filling the room with like-minded academics Obama has made his first big mistake.

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