Alan S. Blinder: Good Ideas that Come from Economic Reasoning

In Fellows

alan-blinder.249.167.sI want to talk about economics and public policy and, in particular, to develop a paradox—which, Webster reminds, us is an apparent contradiction, not an actual contradiction. The paradox is about the standing of economics within the social sciences. Many scholars in economics are very aloof—you might even say, disengaged from reality. Much of the work that economic scholars produce is completely impenetrable to almost everybody, including most other economic scholars. This is true much more so in economics than in any of the other social sciences, by a large margin I think. And yet economists are involved more in the public policy domain—as advisors, as commentators, and even as government officials—than people in the other social sciences. I personally have been involved in all three of those roles. In addition, I fancy myself as being a scholar. I can tell you these roles are very, very different. When you approach an economic problem as a scholar does, you want detachment. Objectivity is extremely important. Standards of evidence are very high. The time horizon is often very long—not only the time horizon of the problem, but also the time horizon of the research. I often cite the Robert Mondavi principle, that is, a good scholar releases no work before its time.

If you are a commentator on or an advisor about economic policy, you have to work on a rather different time horizon. You cannot be as detached as a pure scholar. Subjectivity creeps in, even politics creeps in. The standards of evidence necessarily fall, hopefully not to zero—that is the trick. The time horizon shortens dramatically, both the policy time horizon (over what time does this issue matter) and the time you have to come up with an answer. When I was on President Clinton’s Council of Economic Advisors, I used to tell incoming staff members that, if I tell you it is a research project, that means you have until Friday; the other things we needed much faster than that. And then, of course, at the end of all this you might have the misfortune—really the good fortune—that I had of becoming a public official yourself. Then you really do have to get down and dirty. Objectivity gives way to subjectivity. Politics, depending on where you are (not so much at the Fed, but in the political part of the government), is everywhere. The standard of evidence falls really low, hopefully not to zero—that is the art there. The time horizon shortens dramatically, and you just have to give the best answer you can now, whether or not Robert Mondavi would say it is time.

I want to close by taking a concrete example that was in this morning’s newspapers. The House passed yesterday a version of what is called “Cash for Clunkers.” I do not know how many of you know what that is. If you look it up on Wikipedia, it will tell you I invented either the concept or the name. This is not true. I did not invent either. The basic idea of Cash for Clunkers is to pay above market value to get people to turn in gas-guzzling old cars—clunkers. I wrote about this in The New York Times last July. It’s a program that I have liked for a long, long time. I lauded it, first of all, as environmental policy—which is probably the most obvious. Secondly, as fiscal stimulus—it was a way to spend money in a very sensible way, and you could get it out pretty fast, though not instantly. Thirdly, as something that did some income equalization because, if you think about who owns the clunkers, it is the low-income people, by and large—or rather, low-income people and some professors. And by the way, as a throwaway remark at the end of the piece I said, “You know, the auto industry is having problems. This would be pretty good for the auto industry.” That was last July. Now, there was some research base for these claims—but nothing that would pass muster with the referees of the American Economic Review, I can assure you of that—based on pilot programs that had gone on here and there. So this idea went into the policy hopper, and the policy hopper is a messy sausage grinder, as most of us in this room know. It just missed getting into the Obama stimulus package. It was then revived as part of the energy policy—it is, after all, environmental policy—at which point the lobbyists start descending on the idea and the economic analysis got pushed aside completely. The impetus for this program now, I think, is obvious to all—which is that the auto industry is now not just in trouble but on its knees, and Cash for Clunkers is now being thought of as a way to stimulate the demand for new cars. It was apparently very successful in this regard in Germany, this year or last year. And so all the rest, as Hillel would have said, has become commentary. This program is now about increasing the demand for cars; and the environmental, income distribution, and stimulus aspects have all gone by the wayside. The next step is for the House and the Senate to conference this because there are different bills in the House and the Senate. Again, I can assure you that economic analysis will be irrelevant in that conference. I can assure you of that, though I cannot predict what will come out of the conference.

But I want to close by explaining why I brought this policy up. In addition to its timeliness, I think it illustrates some of the interactions among analysts, advisors, commentators, and policy makers, that I was talking about. Cash for Clunkers is, after all, a good idea that came out of pure economic reasoning.

Alan Blinder is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University and co-director of Princeton’s Center for Economic Policy Studies. These remarks were prepared for his induction as the 2009 John Kenneth Galbraith Fellow of the American Academy of Political and Social Science.

Disclaimer: The views expressed herein are solely the opinions of the individuals and not those of the Academy

Press play to hear recording.