What Went Wrong

February 10, 2020

Nicolas Lemann starts his book, Transaction Man, with a reminder:

There are moments in history when everything seems calm, when there isn’t obvious, bitter contention about big questions. It takes some effort now to remember that the dawn of the new millennium was like that, at least to the minds of fortunate people in the United States.

There were disagreements about the relative importance of the different factors that contributed to a century of remarkable progress in the United States, but everyone agreed that progress would continue.

No one then would have predicted that by 2020, life expectancy in the US would be falling.

When I agreed to write a review for Foreign Affairs of Lemann’s book and a complementary book by Binyamin Appelbaum – The Economists’ Hour – I knew that both would ask “what went wrong?” I expected both authors to criticize economists for failing to anticipate the possibility that the US might stop making progress. I anticipated that both would charge that even after the fact, economists have failed to diagnose the cause of the slide from progress to regress.

What I did not anticipate was the claim that economists were the cause.

Some people have expressed surprise at the attention my review of these two books devotes to one particular case where economists influenced policy by persuading those who set health and safety regulations to use a cost-benefit analysis with an explicit dollar cost for a lost life. I focused on cost-benefit analysis partly because it is a case where I suspect that economists did make a net contribution that was positive. But in truth, I did have something else in mind. It is time for economists to “eat their own dog food.” Cost-benefit analysis is the only way to answer the question, “has the economics profession done more harm than good?”

There is a clear logic to cost-benefit analysis that is obvious to economists when they impose it on others. Like it or not, this same logic still applies when we are the subjects. Among its implications:

To be sure, economists have also generated some big benefits. The two biggest ones suggested by thoughtful colleagues are:

  1. Better counter-cyclical monetary and fiscal policy now relative to the 1930s; and

  2. The adoption by many developing countries of policies that supported both the market and international trade.

Even so, at this point, there is no intellectually honest way for economists to shirk from the task of quantifying the effect that our profession has had on policy, and the value, positive or negative, of the changes we facilitated. Andrew Haldane’s estimate of the worldwide cost of the 2007-8 financial crisis – between 50 and 200 trillion dollars – is a good example of the work we could do.

By the way, I accept the argument that better macro-stabilization policy kept the cost of the financial crisis from being far higher. But stop and think about what a weak defense this is. Haldane’s estimates already net out the value of the stabilization policy to which economists arguably contributed. If we caused the crisis but kept the total harm to something on the order of $100 trillion, the cost we imposed clearly exceeded the benefit we offered.

Faced with such numbers, economists cannot simply dismiss as “absurd” or “impossible” the possibility that our profession has imposed total costs that exceed total benefits. And no, building a model which shows that it is logically possible for economists to make a positive net contribution is not going to make questions about our actual effect go away. Why don’t we just stipulate that economists are now so clever at building models that they can use a model to show that almost anything is logically possible. Then we could move on to making estimates and doing the math.

In the 19th century, when it became clear that the net effect of having a doctor assist a woman in child-birth was to increase the probability that she would die, western society faced a choice:

I do not want western society to get rid of economists. But to remain viable, our profession needs to be open to the possibility that in a few cases, a few of its members are doing enormous harm; then it must take on a collective responsibility for making sure that everyone keeps their hands clean.