An ongoing review of politics and culture

Homogeneous Economicus

Conor Clarke points to Greg Mankiw’s table of propositions to which most economists agree. This list is from Mankiw’s economics textbook, so I assume that it was not casually constructed. Mankiw says of the list that:

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

But there are several things that are striking to me about it.

First, it seems to me that, charitably, half (7 of 14) items on this are even falsifiable:

• Tariffs and import quotas usually reduce general economic welfare. (93% of economists agree)

• Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)

• A large federal budget deficit has an adverse effect on the economy. (83%)

• A ceiling on rents reduces the quantity and quality of housing available. (93%)

• Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

• The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)

• A minimum wage increases unemployment among young and unskilled workers. (79%)

In case you’re wondering, those are the falsifiable ones, assuming background technical agreement among all the people answering the survey about the meaning of pretty general terms like “welfare” and “adverse effect”.

The other seven statements do not seem remotely close to specific enough to be falsifiable, and are in fact mostly normative statements:

• The United States should not restrict employers from outsourcing work to foreign countries. (90%)

• The United States should eliminate agricultural subsidies. (85%)

• Local and state governments should eliminate subsidies to professional sports franchises. (85%)

• If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)

• The government should restructure the welfare system along the lines of a “negative income tax.” (79%)

• Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

• Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)

Further, most of those that appear to be technically falsifiable, can’t, in practice, be falsified. Consider “Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy”. We are now about to engage on a trillion-dollar stimulus program, and no matter what happens to economic growth over the next several years, the lack of the counterfactual means economists will still be debating the causal impact of the stimulus even after the fact. A material number of respected economists will continue to believe this statement, while others will dispute it. That is, we will continue to have Keynesian and non-Keynesian economists, with waxing and waning fashionability, over decades. If a one trillion dollar stimulus won’t resolve this, what will?

Further, even those that seem to be more practically falsifiable, are directional statements, while the size of the effect is crucial for actual policy-making. How much does a minimum wage of what level depress unskilled employment? How large an adverse effect of what kind does a budget deficit of what size have on the economy? We would need quantification of these effects to answer practical questions. As per the current stimulus arguments, how much impact stimulus spending would have, (i.e., what is the multiplier?) is the essence of the debate. Many economists who agree to the stimulus statement on Mankiw’s list have entirely different opinions on the best stimulus policy, because they disagree about the size of the effect.

And further, even if we could get good quantification for some of the statements on Mankiw’s list for specific instances, we still wouldn’t have useful decision rules, because the real answer would always start with “It depends on…”. We would need a more comprehensive model of the economy to be able say “If variable X changed, given current values for this long list of other relevant factors, this would be the predicted change”. Of course, I’m describing large-scale econometric models, which, to put it mildly, are not super-reliable.

If Mankiw’s list is the best economics can do, it sure seems like a naked emperor moment to me. Where’s the beef?

My challenge would be simple: please list 14 useful, non-obvious predictive rules that economics provides that have survived rigorous, replicated falsification trials.

If you were to provide this challenge to physics or biology, it would be easy to come up with 1,400. Hence, human invention of aircraft, space travel, mobile phones, antibiotics, vaccines, MRI scans, the internal combustion engine and so forth. This – not the attempt to create pressure on public officials to support the policy preferences of most economics professors – is why actual science education is so important.