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.]


Joe Smith

The more the politicians do in this crisis, the more concerned I become that they are going to do something really stupid in pursuit of the unattainable goal of reflating a burst bubble and the more determined I become to not spend or invest for the time being.

Low risk free interest rates help nothing when the politicians are hell bent on creating additional risk for investors.

Dan Hirschman

One brief comment: The idea that economists advocate primarily free-market solutions stretches reality in an unfortunate way. Naive, Econ 101 based solutions generally involve the free markets. But more nuanced accounts involving externalities or imperfect information (for example) often give governments specific, but large roles. For example, former Bush CEA Chair and Harvard Economics Professor N. Gregory Mankiw is one of the biggest advocates of a Pigouvian tax on carbon dioxide emissions. While still a primarily market-based solution, Mankiw (a Republican economist) is advocating that the government raise taxes to solve a collective problem. Modern economics is not the laissez-faire place it once was.

DRDR

I think point (3) you made dominates points (2) and (1). These economists have spent plenty of time studying the political economy issues you raised in point (1) and are aware of the fallacies of "can't see the forest for the trees" thinking that you raised in (2). The "failure to predict" criticism of economists is phony -- are health professionals failures because people still get sick? I think Obama has picked exactly the right kind of economists for these positions.

Bobby G

I would personally amend to Levitt's statement the fact that the reason many of the economic suggestions made by administrative economists are unpopular is because of how uninformed the populace is. Quite frankly, people just do not understand economics. They don't understand how incentive structures work, as basic a concept as it seems. I'll admit, when I first began studying economics, it seemed pretty straightforward, but it took me years before my understanding coalesced into something more advanced.

It's been a running joke of mine for a while, particularly after seeing public and political reactions to, in my mind, sound economic theory and reasoning, that I want to start my own ... planet of economists. That way, sound free-market economic theory, in which I still believe, can reign at least more freely than it does today.

Bottom line: Economic wisdom deemed unpopular due to (rational? I don't know if I can call it that anymore) voter ignorance is a serious problem for modern day politics.

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Jen

I think it comes down to a matter of trust in academia. Republicans seem to have embraced their populist anti-elitist ethos even at the highest levels. Academics, economists included, certainly fall into the maligned elitist category. You're either a lawyer or from business, no more best and brightest. It's not surprising there is a certain disregard for even for academics with conservative background.

Without a diversity of opinion a political system is doomed to failure. Poor leadership (or lack there of) is enabled when decisions are not questioned. Partisanship grows. Principles stray (Medicare Part D anyone?) and self interests take over, it becomes difficult to past immediate needs. The devil's advocate will pay the political price for speaking truth to power. The only way to overcome this human tendency is to accept as many voices as possible, to give a naysayer the power to speak without fear of retribution.

I think the respect for economists in one party vs. the other reflects a desire for a diversity of opinion vs. keeping in lock step control. It's deeper that the respect for a profession, it's about a way of perceiving the world.

I've seen how the lack of respect for other opinions can destroy a government. I'm a homeowner in now bankrupt Vallejo CA, a town torn apart because no one questioned decisions that were made. Those that did were booted out the door for it. I'm happy to see the wide range of people Obama is pulling together for his administration - hopefully he will avoid the myopia of lockstep.

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Jeffrey

I've asserted a few of these same critiques of economists in comments before, but they're always deleted. They're incredibly intelligent, but sometimes don't have socially desirable preferences. Are they sacred cows?

chris

I think the economists are just window dressing for political decisions.

David

The median family income is only about $50,000 and many of the policies of economists while helping people in the long term do not help these people in the short term which is why people are resistant to economists in my view.

What I don't understand and perhaps Levitt or Dubner will help me to understand (I brought this up personally with Levitt once at a medical informatics HIMMS08 conference where he spoke) is why the brilliant economists don't propose that there be a "health service fee" added on to the price of cigarettes so that when a person smokes they pay for the health care costs that goes with that smoking so that non-smokers don't end up subsidizing their lifestyle choice. How much would that health service fee be? Dr. Leonard S. Miller retired of UC Berkeley had a study that demonstrated that 12% of health care costs were caused by smoking. 12% of last year's $2.1 trillion is $250 billion for 18 billion packs smoked in the US or about $13/pack. Even if Miller's calculations are off by a factor of two it comes to $6.5 per pack. This health service fee should go directly into the health care system. One chief advantage of higher cost cigarettes is that it helps to keep teens from starting to smoke and it helps adults to quit smoking so the health service fee would also help people to live healthier lives. Since the health service fee is part of the total cost of use of the cigarettes it can hardly be considered a tax.

Yet, I've never heard Larry Summers or Greenspan or Mankiw or any of the other brilliant economists propose this solution. Why is that?

David MD

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victoria

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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Michael G.

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).

Tom M

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?

Bernard Dayre

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.

David Brown

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.

Peter B.

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.

Dave Buell

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.

Shane

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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James A

1) Glad to see that we are surrounding ourselves with a bunch of textbook academics. Ever wonder why they spend so much time working at collegiate institutions instead of at major corporations? Ponder on that.

2) Even if they have the insight and knowledge to properly guide the economy, the fact that they will have to navigate, not only through the President (politician) but the congress (politicians beholden not the economics, but real people) does not guarantee success by any means.

Jamie M

Considering his experience working with Summers and Geith's, I'm sure Roubini will be an important member of the new team as well. And as Roub's has been the most prescient voice through this debacle, he'll be a very good addition.

I think you should further qualify the unpopular free market mantra espoused by economists. Most ecnomists have 1) favored the bailout, 2) recognize the need for greater regulation, 3) recognize the wrath enduced by repealing Glass-Steagall, and 4) recognize the damage done by not regulating the derivatives market. These policies should be addressed by the new team, although I'm skeptical of Summers doing anything given his role in opposition to each of these items above. Quite simply, Summers is one of the most instrumental figures in creating this crisis. I hope he's learned from his mistakes, but given his infamous personality, I have my doubts.

PG

James A,

"Glad to see that we are surrounding ourselves with a bunch of textbook academics. Ever wonder why they spend so much time working at collegiate institutions instead of at major corporations? Ponder on that."

Um, because major corporations don't fund research into the causes of the Great Depression or the Asian and Russian financial crises? What kind of pointless pondering are you requesting here?

Onglenator

Some of us don't always endorse "free market economics" not because we "don't understand" but because we believe that sometimes, for some institutions, there are issues more important than slavish adherence to an academic theory.

Such institutions include: public utilities; large financial institutions which are too important to be allowed to fail; and people buying homes and their lenders.

These institutions should be regulated sufficiently to provide stability and security. Leave the roller-coaster rides of the the free market to common stocks of lesser entities.