NPR’s “Planet Money” built an episode on the interesting if unoriginal premise that economists, across the political spectrum, agree on a bunch of policies politicians wouldn’t touch with a barge pole. To prove that they talked to Dean Baker of the Center for Economic and Policy Research, Kate Baicker of the Harvard School of Public Health, Robert Frank of Cornell, and two other players unknown to me (one a libertarian from GMU) and got them to more or less agree on a bunch of politically toxic ideas.
The implicit assumption is that the economists are right – the headline proclaims a “No-Brainer Economic Policy” – and that the political non-starter-ness of their ideas reflects the ignorance, folly, or selfishness of the voters and the cowardice of politicians who seek applause rather than practical solutions. It doesn’t seem to occur to any of the people involved that in some cases the voters and their representatives may know something the economists don’t, or that some actual problems involve phenomena and causal relationships different from those assumed and taught in Intro to Microeconomics.
[Update Not so. Dean Baker has thought about much of this, and posted a protest on the NPR website about some of the oversimplifications. I’m glad to know that in this case most of the arrogant carelessness came from journalists, for whom it’s a professional qualification, rather than from academics.]
When it comes to drug policy, for example, the five economists are just waving their invisible hands at a problem they don’t have a clue about.
Nonetheless, most of the proposals are probably right in principle: replace income and payroll taxes with a progressive consumption tax; if you keep the income tax, disallow home mortgage interest as a deduction and treat employer-paid health insurance as taxable compensation and eliminate the corporate income tax (presumably flowing through corporate earnings to shareholders’ tax returns); tax greenhouse gas emissions and other forms of pollution (and, I would add, congestion) to raise revenue while also discouraging socially harmful behavior, thus allowing both lower taxes on non-harmful behavior and looser regulations, since the Pigouvian tax can substitute incentives for commands.
I say “probably right in principle” because the devil is in the details. In particular, it’s easy to show, using comparative-statics methods, that all of this stuff outperforms the current system. I.e., if you were starting a fresh planet, you’d want to do it.
But that ignores both dynamics and political economy. Those lower housing-asset prices resulting from disallowing home mortgage interest as a tax deduction are good news in principle, but they’re very bad news to the people who get stuck with windfall losses because they just bought houses based on the old asset valuations. Progressive consumption taxes sound great until you consider how much someone “consumes” in health care when he gets an expensive disease, or try to figure out how to treat educational expenditures. In principle, a progressive consumption tax ought to include the imputed rental value of owner-occupied housing; but who’s going to run the national housing-assessment system that would require, and how are we going to treat the car elevator in Mitt Romney’s new mansion, which cost a ton to build but which an arm’s-length renter might not pay much for?
In steady state, it’s not hard to tax consumption; you just do the same calculation you’d do to tax income, and subtract savings while adding dissaving. But in the first generation, how are you going to measure Mitt Romney’s kids’ spending of all the money Daddy gave them?
As to polluter charges, I love them: for easy-to-measure point-source pollution. Now go ahead and try them on agricultural run-off, for example. The very same lawyers and lobbyists who do their best to screw up regulation will do every bit as much to screw up the effluent-fee system, as when companies were allowed to “offset” deadly micro-particulate emissions by paving dirt roads, which eliminates nasty-looking but fairly harmless-to-health macro-particulate (aka dust).
Of course, if you’re an academic or think-tank economist you can wave all this stuff away as administrative details below your pay-grade, and keep laughing at the voters and policymakers too stupid to appreciate the awesomeness of your magic blackboard. But if you’re on the Ways and Means Committee or at the EPA you need to find practicable answers to these questions.
I’ll happily concede that all the economists’ ideas are right in principle, if they’ll concede that their rightness in practice depends on details of program design not yet determined and is vulnerable to political-economic forces the proponents haven’t actually modeled. (I’m sure some of it is right, even after all the caveats; I’m just saying that the supply-and-demand curve-drawing is the sketch of an argument, not the argument in full.)
The only item not involving taxation is drug policy, which makes it a strange outlier. The five economists seem to agree on legalization, though exactly what they agree on isn’t quite clear. The NPR website talks about legalization of marijuana, but the actual conversation ranges from legalizing everything to merely decriminalizing pot. No concrete policy is proposed, and no one asks the “compared-to-what” question.
If consumers were perfectly self-controlled and perfectly rational decision-makers (which includes full foresight about the future consequences of current actions) with fixed preferences, and if the only external harms of drug use were things such as second-hand smoke, and if you take Mill’s Harm Principle as a moral axiom, then the Gang of Five is right that most current drug laws can’t be justified.
But of course the rational-actor assumption is a bad fit for the actual behavior of addicts with respect to drug-taking and of intoxicated people with respect to many forms of behavior, and the external costs of the abuse of the one addictive intoxicant we decided to legalize include auto accidents, rapes, and homicides.
Phil Cook of Duke – whom any of the five would recognize as a senor member of their guild – has written a book called Paying the Tab which argues that current alcohol policy is grossly too loose when it comes to drinking by problem drinkers. Cook’s argument for higher alcohol taxation is a lay-down, but since the Pigovian tax on the average drink would be greater than the cost of the drink it’s clear that taxation alone can’t really do the job: we need some heavy-duty regulation as well.
Does that mean I regret the repeal of Prohibition? No. But it does mean that I’m wary about the nitty-gritty of legalization.
Some form of marijuana legalization is very likely a good idea. (Not certainly a good idea, because there’s some risk that legal pot would substantially increase heavy drinking, and that the resulting losses would outweigh the gains from eliminating the illicit pot market and increasing the liberty and material satisfaction of tens of millions of non-abusing pot-smokers.) But reaching that conclusion requires much more fact-gathering and analysis than the NPR crew has even thought about doing. They simply give no evidence of having asked any of the interesting conceptual or empirical questions, let alone thought about the details of the post-legalization tax and regulatory regime. Those details matter.
It’s also possible that legalizing everything, including heroin and cocaine, would also turn out to be better than current policy. I’m skeptical, but you can certainly come up with non-outrageous predictions and scoring rules that make it look good. But that’s a much larger-scale social change, with much higher risks of going badly wrong. No sane person would just leap into it without some very careful planning and figuring, and maybe some experimentation.
I don’t want to pick on these five economists specifically: Dean Baker and Kate Baicker both – in the view of people better qualified than I am to judge – do first-rate work, and Robert Frank is among my intellectual heroes. Their views aren’t unusual: I’d bet nine out of ten members of the American Economic Association share their prejudices. But that’s all they are: prejudices. They’re not the conclusions of careful analysis.
I wish it were true that policymakers took the results of economic reasoning and research more seriously in making public decisions. But I also wish that economists were more careful than they sometimes are about distinguishing assumptions from facts and clever ideas from well-considered and practicable policy proposals.