Economics on Trial
Dean Baker discusses the field of economics.
Dean Baker is one of the most important economists in the entire world—his ideas would really improve society if implemented. But strikingly, Baker never seems to go beyond Econ 101 in his urgent commentaries about our world.
See my past pieces on Baker’s ideas, including this piece.
I was honored/thrilled to be able to interview Baker. See below my interview with him. I edited the interview for flow, and added hyperlinks.
1) What are the most urgent/exciting projects that you’re currently working on?
I’m pushing for three things.
First, international sharing of patents/research—and production-technology—for coronavirus-vaccines. It’s essential that we get the world vaccinated as quickly as possible before a vaccine-resistant variant develops that would lead to a whole new round of infections, deaths, and shutdowns. It’s amazing that this point isn’t obvious to everyone doing policy-work.
Second, converting the basis for the corporate income-tax from profits to returns-to-shareholders. This would be a simple—and completely transparent—system that could be calculated on a spreadsheet. Returns to shareholders are well-defined (capital gains and dividends), whereas profits are not.
Third, getting some sort of tax-credit—at the national, state, or local level—to support creative/artistic work, including journalism. This would be an alternative to government-granted copyright-monopolies. It would be modeled on the charitable contribution tax-deduction. Progressives endlessly bemoan the outsized influence that the rich have on politics/policy, yet they have no remotely credible mechanism for countering it. This is a simple route that could be implemented even at the local level if we ever had a city where progressives had significant influence.
2) How would your tax-credit system counter the influence that the rich have on politics/policy?
The tax-credit would give progressives a lot of money to support creative work and to support news-reporting.
That would have a huge impact on public opinion. But nothing guarantees that progressives would use the tax-credit productively.
3) What are the most urgent/exciting projects that you know of that others are working on?
Raising minimum-wages is a really big deal, and progressives have successfully done that in many states/cities.
The efforts to get paid family-leave and paid sick-days have also made considerable headway in recent years.
We also see growing pressure for increased support for child-care—and home health-care for the elderly and for people with disabilities.
4) What are the biggest problems with the field of economics today? How pervasive are these problems, exactly? And what could be done to solve these problems?
The biggest problem is the failure to think clearly on major issues.
Economists routinely repeat what the honchos in the profession say.
There is zero career-consequence for being wrong—as long as you’re wrong in a way that’s consistent with the dominant views in the profession. This was seen most clearly with the Great Recession, where almost no one saw the housing-bubble or saw the risks its collapse would pose.
I believe in incentives. If people get big issues seriously wrong then it would be good if their careers were affected. I would generally not want to see people lose tenure—although that might be appropriate if people engage in unethical behavior (like not checking their Excel-spreadsheet)—but professors can be demoted.
5) What do you think about the alleged arrogance of economists? Noam Chomsky commented that scientists will urge “small-scale experiments” that can be “quickly called off” if there are “unexpected negative side effects”, but that economists (in sharp contrast) will “arrogantly propose and impose large-scale changes” on “highly complex societies that they don’t understand”. Chomsky pointed out that economists’ large-scale experiments often have “very harmful effects”—and are based on “dubious theories” with “very slight if any empirical support”.
This is a tough one. You’re always implementing policy—it’s not obvious that you want to privilege status-quo policies, and current policies have the advantage that we can see their effects.
Regarding major policy-changes, it’s good to be able to find ways to test them—or phase them in in a reversible way. For example, I’ve argued that if we want to implement a jobs-guarantee then we should experiment with it at the state/local level first and see how it works.
6) Does the point about the need to pilot things apply to progressives too? In the context of tax-policy, you commented: “When we make policies we never assume that every bad thing in the world will happen. You think of what is likely.”
Yes.
7) The most obvious criticism of the field of economics is that the people in the field—brilliant people who have extraordinary talent for math—seem to use their brainpower on things that have (frankly) nothing whatsoever to do with the world. What do you think about this criticism?
You can have a very successful career playing with complicated mathematical models that have little to do with anything.
And—more importantly—you often need complicated math to get important points to be taken seriously. I had this problem when I warned about the housing-bubble. The issue was too simple for anyone to take seriously.
And I had the same problem when I warned about the stock-bubble in the 1990s.
8) Many academics work on things that are related to the world, so maybe one has to be careful about the criticism that economists aren’t doing anything that’s relevant to the world. And yet, wouldn’t the world be a better place if economics was focused on policy-related things?
The bigger problem is that simple points require complicated math.
9) Once you start to look at the actual world, is there an issue of diminishing returns? How many “big” policies—of comparable magnitude to these policies that you laid out—are out there waiting to be discovered?
If you implement big changes, new problems will inevitably arise.
I’m not worried about running out of problems.
10) Intellectual property (IP) is a multi-trillion-dollar issue. You commented that the issue has bothered you since grad-school. What’s your story about how you first saw issues with the establishment-view regarding IP?
I was in grad-school at the peak of “rational expectations”, which had the view that any form of government-intervention in the economy is inefficient/wasteful and should be minimized. When you start with this view and then look at patent/copyright monopolies, it’s pretty hard not to see a contradiction. So this bothered me all through grad-school.
But I never tried to put numbers on this—and get an idea of the size of the “distortions” from these monopolies—until I started working in Washington.
11) Yanis Varoufakis made an interesting comment that economists are incentivized to rely as much as possible on the impressive equations (that separate economics from the rest of the social sciences). The more you rely on those equations, the more prestige you get. But these equations assume that “there’s no time” and that “there’s no space”. And so the result is “wonderful abstractions, aesthetically pleasing models” that have nothing to do with the real world. And Noam Chomsky commented that the “real hot-shot economics departments are interested in abstract models of how a pure free-enterprise economy works—you know, generalizations to ten-dimensional space of some nonexistent free-market system”. How much truth is there in what Varoufakis said and in what Chomsky said? Are these abstractions useless, and if so why are these abstractions so dominant? Math is wonderful, but I don’t see why you should get prestige for creating useless abstractions.
There’s a real premium placed on complexity. That’s a problem.
Fortunately, there’s been much more movement toward empirical work in the last couple decades.
This empirical work doesn’t rely on needless complexity. And has been accelerated by increased computer-power—and also by increasingly-available large data-sets from private sources.
12) Varoufakis also commented that Ken Arrow in the early 1990s presented a “highly mathematized paper” that one of the professors in the audience thought might bear on tax-policy—and that Arrow stopped the professor immediately and told him that he was “confusing that which is interesting with that which is useful”. What do you think about that story?
I haven’t heard that story. But I certainly have seen economists do theoretical analysis that they wouldn’t claim has anything to do with the world.
13) What are the most egregious cases of economic theory harming the world?
Probably the austerity-policies that the IMF imposed on many developing countries over many decades.
And also the austerity imposed in Europe—and to a lesser extent in the US—following the Great Recession.
14) Apparently two Nobel-laureate economists put forward the idea that “man-made capital is a perfect substitute for Nature’s capital” and that “you can never run out of resources” and that you don’t need to worry about the “whole notion of depletion or depleting the sinks in the environment”. Was that idea really pushed? Has that idea done any real-world damage? Why would Nobel-laureates push something so insane?
There’s a sane version of this and a crazy one.
The sane version is that we’ll never literally run out of oil, since we’ll develop substitutes—and improve conservation—in response to price-increases. That’s actually true, so that’s the sane version.
But when you talk about the planet as a whole, there’s no replacement when we eliminate habitats/species. And environmental destruction also threatens human civilization.
15) How much do you ever go beyond Econ 101 in your work? How much does Rigged ever go beyond Econ 101?
Very little. I don’t see much that Econ-101 concepts can’t explain pretty well.
There are occasions where you need more complex concepts.
Most of the worst stuff is justified by arguments that cannot withstand a rigorous Econ-101 treatment.
16) Paul Krugman is a Nobel-laureate economist. How much does Krugman ever go beyond Econ 101 in his policy-related work?
He got the Nobel for complicated work in trade-policy. The basic concept was actually pretty simple—that increasing returns to scale give countries comparative international-trade advantage. It was great to have a theoretical story to explain this.
But it really isn’t a great insight from a common-sense standpoint, and I would say the same about other useful theoretical work.
George Akerlof is a very good economist who got a Nobel Prize for his work on asymmetric information. His 1970 paper was called “The Market for Lemons”. The piece’s central item was the fact that new cars lost 1000s of dollars in value the moment they were driven off the car-lot. Akerlof argued that the reason someone sells an almost-new car is that it’s defective. That may or may not be accurate—people might have to sell a new car because they lost a job, a family issue, or many other reasons—but buyers assume that the person is selling it because it’s defective and therefore buyers will demand a discount of many 1000s of dollars from the new-car price. This was a great theoretical breakthrough in economics.
But every car-dealer had known this for decades. So you could say that we learned something from somewhat complicated math—it wasn’t terribly complicated—but the key fact was already well-known to people in the industry.
17) To what extent can you imagine fancy economics-theory ever bearing on policy?
In a best-case scenario, it’ll be like Akerlof’s work—it’ll show economists what we already knew.
18) To what extent does an economist’s ability to accurately forecast X/Y/Z tell us how well that economist understands the US/world economy?
Not much, since an economist might not be focused closely on the current data.
19) How often do you forecast things like GDP?
I have at times in blogposts and in other things that I’ve written.
You have to follow all the data very closely—which I have done at times in the past, but not recently.
20) How often do you make specific predictions that people can check against the data to see whether you were right?
Not sure.
It’s not important to me, so I haven’t tried to keep track.
21) How would you respond to the criticism that you relentlessly—and powerfully—poke holes in mainstream ideas but you rarely forecast/predict anything in a way that allows people to see if you really understand the US/world economy?
It’s not just about predicting the future—it’s about whether the data that exist fit a story.
If you make a claim about the world and the data fit that claim, then you have a pretty good case. But if someone shows how you misinterpreted the data—and that the data give you a different story in another context—then that undermines your case.
22) You were chillingly prophetic in this 2002 piece. Which other accurate predictions have you made?
The slow recovery.
The stock-bubble crash that caused a recession.
23) To what extent were you a lonely voice regarding the stock-bubble? You warned about the stock-bubble many times. Just look at this 1999 piece. Or this 2001 piece.
Very few predicted this.
24) To what extent were you a lonely voice in predicting that Obama’s stimulus would be inadequate? Look at what you said in 2009 and again in 2009.
Krugman and other left-of-center economists also said this.
25) How many things are impossible for any economist to forecast? What about GDP? What about productivity-growth? What about other things?
Think of it like the weather—we have a basis for beliefs about the future, but there are always large factors that can cause us to be off in a big way.
26) In 2019, you made a striking prediction. I remember thinking: “This is a great experiment. It’s Dean Baker versus all of these other people, and we’re going to find out who’s right and who’s wrong!” That would’ve been a great chance to see who was right and who was wrong, correct? Covid destroyed the experiment, of course, but it was a very clear prediction from you that clashed with what others were saying.
I’m not sure that I was much at odds with most economists.