Beyond the ‘Lamppost Theory’ of Economic Policy

Intelligence. Academic economists prize traditional intelligence as captured by things such as high IQ, good ideas, and the ability to express those ideas. Success in academic economics does not typically rely on people skills. Successful politicians, on the other hand, depend much more on their social and emotional intelligence. There are, of course, some politicians with plenty of the same kind of intelligence we prize in academia. But the good ones are smart enough not to demean voters by making them feel less smart by comparison.

Objectives. Economists who engage in policy are generally trying to maximize social welfare. Politicians, of course, are trying to maximize their prospects for election or reelection, which may not be correlated with social welfare.

Policy evaluation. The aspect of a policy that matters for economists is the substance of the policy: Is it really good for society? What matters in the political world are, naturally, the politics and the message involved in the policy. Does it sound good? Needless to say, what is good and what sounds good are not always aligned.

Concerns. Economists’ main concern is efficiency: we talk about it, think about it, dream about it. But efficiency doesn’t much interest politicians, who are far more concerned about fairness, or perceived fairness, which is a broad concept encompassing income distribution but also much more.

Interests. In whose interests should policies be made? For economists, it’s generally the national interest (if we’re talking about federal policies). But for politicians, it’s very often some narrow, parochial special interest, as I suggested with the hypothetical policy that handed a million dollars to 10 individuals.

The four-ring circus

I think of real-world economic policy as being made in a circus with four rings: substance, politics, message, and process.

As I have already suggested, economists often confine themselves to the first ring, substance—what’s really in a policy, and what are its likely effects? Now, I’m an economist, so I naturally think that the economist’s way of thinking about various social and economic problems is more or less the right way, one that will lead you to good policy most of the time. So my criticism is not that we do a bad job in the substance ring, but that we ignore all the other rings and consequently have precious little influence on the policies that emerge.

Economists struggle in the politics ring for at least three reasons. One I mentioned already: fairness is much more important in the political arena than efficiency. Another is that pure solutions don’t survive the political meat grinder, but some unprincipled compromises do, leaving us with policies that resemble some bizarre animal with the head of a cow, the body of a horse, and the tail of an elephant. Most economists would look at a creature like that and say, “That’s nonsensical.” But we need to get used to them.

There’s another important reason why economists fall flat in the politics ring. It’s that real people live in transitions for most of their entire lives, while we economists focus almost exclusively on equilibrium states. So I’ve become a bit of a proselytizer that economists need to stop talking dismissively about “transition costs”—the prices people pay, perhaps in jobs or income or community well-being, as the economy moves from the equilibrium state under Policy A to the equilibrium state under Policy B. These transitions really matter to people. So if we want them to pay attention to us, we need to pay a lot more attention to what happens to people during transitions.

In the messaging ring, economists often fail because we struggle with the idea that what sounds good is often more important politically than what is good. Further, economists are used to complexity and are comfortable with it, while simplicity is much easier to sell in political messaging. The KISS (keep it simple, stupid) principle is not very useful for getting things published in refereed journals, but it’s effective in policy communication.

The process ring—the actual mechanics of making policy—is one most economists don’t even think about, until they start working in government, at which point they discover that it’s tremendously important to the policy that will ultimately take shape. I can give you an example from my experience serving on the Council of Economic Advisers at the beginning of Bill Clinton’s presidency.

In the early days of the Clinton administration, we faced three principal economic-policy priorities. We had to deal with creating a budget, of course, and that budget included dozens or maybe hundreds of policy decisions. There was NAFTA, the North American Free Trade Agreement, which had been left by the outgoing Bush administration for the Clinton administration to finish under some tight deadlines. And then there was health-care reform, in which both the president and the first lady were keenly interested.

There was a battle inside the administration about the order in which we should address these priorities. I would argue that these three policies are examples of what economists would call “irrelevant alternatives”: what you think about NAFTA and what you think about health care are probably unrelated as a matter of logic. On substance, the order shouldn’t matter. But the three became related because of the policy-making process.

The administration decided that the budget had to come first. As I said, the budget had a lot of policy in it, and it needed to get pushed through a recalcitrant Congress. The health-care team argued for including health-care reform in the budget, but that argument was rejected as impractical by the president. Then NAFTA came along, with its tight deadline that was already established. The health-care team again argued, “We have to do health care next. NAFTA should wait.” But NAFTA was pressing and got done next.

As a result, health care got pushed off the end of the bench. By the time the administration turned its full attention to health-care reform, it had utilized a tremendous amount of its limited political capital on getting the budget passed and getting NAFTA passed. It was not the economics of the health-care reform, but the political process involved, that kept it from getting done.

Selling free trade

One of my favorite examples of economists’ ineffective role in public policy is free trade, which we have been touting since the British classical economist David Ricardo laid out his theory of comparative advantage 200 years ago. Almost all economists believe in it deeply. But a lot of other people don’t, and nobody would say that free trade in the way Ricardo described it is the norm around the world.

It’s sometimes said that the public is against free trade. That’s not quite right—it depends on what you ask. You get especially hostile answers from the public if there’s any mention or hint of job losses in the question. If there’s a suggestion that work goes abroad rather than being done at home, public opinion is overwhelmingly hostile to trade. But if you stay away from that completely and just talk about trading with other nations to get the things we want, you get much more positive evaluations from the public.

Still, the basic gestalt of the public on free trade is miles away from where economists are. Even in this day of horrible partisanship, there is one issue on which there’s bipartisan agreement, and that’s protectionism. There’s a long history in the United States of one party being for trade and the other being protectionist, but now both major parties are protectionist. We economists certainly haven’t made the sale. Why?

I divide the answer into two pieces, one having to do with ideas and the other having to do with interests. In the realm of ideas, comparative advantage is one of the few important principles of economics that is counterintuitive. In particular, people balk at the idea that one country could be less efficient than its trading partner at everything and yet still benefit from trade between the two countries. Wouldn’t there be massive unemployment as jobs moved abroad?

In the realm of interests, Adam Smith wrote of the “interested sophistry of merchants and manufacturers” regarding their self-serving ideas about trade policy. About 160 years later, Upton Sinclair observed that “it is difficult to get a man to understand something when his salary depends on his not understanding it.” And yes, there are often special interests that are hurt by free trade and helped by protectionism.

This brings me naturally to a further challenge to economists who seek to advance free trade: trade openings generally create both winners and losers. And the politics involved aren’t good because the gains from trade are typically diffuse, barely visible, and—for most people—very small, whereas the losses are concentrated and highly visible and they fall on well-defined groups. It’s precisely the opposite of my earlier example of political calculus, where policy created a new, small group of millionaires by making each member of a much larger group ever so slightly poorer.

Because the overall gains from trade normally exceed the losses, it’s possible to compensate those who lose out. But we don’t do that; we rarely even try. And even when we try it, the aid to losers is penny ante and often unpopular. Think of trade-adjustment assistance, which has been derided by labor as “burial insurance.”

A final difficulty in making free-trade policies politically palatable is that they allow people to focus blame for negative outcomes. The late economist Charles L. Schultze articulated the political principle of “do no direct harm”—no politician wants to make a decision that leads directly and identifiably to a loss for someone else. So while trade among nations is seen as a natural thing, something that just happens, trade agreements are identifiable policies that are made in Washington and in other capitals. So the losses from these agreements are seen as caused by deliberate government actions. Furthermore, and conveniently, damage from trade can be blamed on foreigners, who make great political scapegoats with nobody defending them in Congress.

These challenges go a long way toward explaining why economists have had so little success pushing for freer trade. But our struggle to sell better trade policy is suggestive of my broader point: there are still big opportunities for better economic policy making. But to turn these opportunities into realities, economists need to understand some of the customs and attributes of that rival civilization, the politicians, and be willing to step out of the one circus ring in which many of us feel most comfortable—substance—and into the others.

Alan S. Blinder is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton. This essay is based on the keynote address he delivered as part of a conference hosted by Chicago Booth’s Initiative on Global Markets in April titled the Role of Economics and Economists in Public Policy and Public Debate.