Have Economists Had Too Much Influence on Policy?

Hal Weitzman: Advocates of free-market economics say it has lifted billions of people out of poverty, increased liberty, and enhanced efficiency. Others say an excess of free-market policies cause extreme inequality, hindered economic growth, and has damaged the fabric of society. So have economists had too much influence over policy, and on balance, have free-market policies caused more harm than good? 

Welcome to The Big Question, the video series from Chicago Booth Review. I’m Hal Weitzman, and with me to discuss the issue is an expert panel. 

Robert Topel is the Isidore and Gladys J. Brown Distinguished Service Professor of Economics at Chicago Booth. 

Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance and director of the George J. Stigler Center at Chicago Booth.

Michael Greenstone is the Milton Friedman Distinguished Service Professor in Economics at the University of Chicago and director of both the Becker Friedman Institute and the Energy Policy Institute at UChicago. 

And Binyamin Appelbaum is a member of the editorial board of the New York Times and the author of The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. 

Panel, welcome to The Big Question. 

Binyamin Appelbaum, let me start with you. Thanks, first of all, for writing this book and giving us the opportunity to come together and talk about this very, very interesting subject. Your book is a history of economic thinking in the United States since the Second World War, and you describe the increasing influence of economists over policy making. You describe it as “a revolution that went too far.” Where or when exactly did it go too far?

Binyamin Appelbaum: So beginning in the late 1960s and the early 1970s, economists began to advocate with growing success for a turn away from government management of economic conditions and an increased reliance on market forces. They were initially responding to real problems in the economy and real failures of economic policy, but over time, those same solutions began to have consequences of their own, and policy failed to adjust. 

And so, over the course of the ’80s, the ’90s, the 2000s, the problems began to accumulate. I’ll give you a specific example. One of the areas of change in the ’70s was it turned toward focusing central banking on controlling inflation, holding inflation down at a very low level. Under Paul Volcker, the central bank in the United States, the Federal Reserve, drove down inflation to about 4 percent. Under his successor, Alan Greenspan, they continued to drive it down toward 2 percent, and Alan Greenspan stood before Congress and testified that 1 percent inflation was better than 2, and 0 percent inflation was better than 1. There was no evidence for that. The idea that low inflation was good was absolutely correct. The idea that the central bank should act to reduce what had been 10 percent inflation was absolutely correct. But by the time that policy is forcing inflation down toward 0, it has gone past the point of diminishing returns and is actively—

Hal Weitzman: So what’s the correct level of inflation?

Binyamin Appelbaum: Well, I don’t know that we know the exact number, but it’s clear that there’s no evidence that 1 is better than 2, and there’s some pretty good evidence that you want to be in that, you know, 2–4 percent range.

Hal Weitzman: OK, and more generally, you wrote this fascinating article in the New York Times that was headlined “Blame economists for the mess we’re in.” So you blame economists for the extreme economic inequality in the United States and even for damaging liberal democracy. Is that going too far? Were economists really the main people to blame for the polarization or the populism that we’ve seen?

Binyamin Appelbaum: Economists are among the people who should be blamed for those problems. I don’t think they were exclusively responsible. I think a whole host of factors came together to, you know, create the modern conditions that we’re dealing with. But I think economists contributed and they did so significantly and to an extent that is not widely appreciated.

Hal Weitzman: OK. Robert Topel, is it fair to describe economists’ influence as a revolution that went too far?

Robert H. Topel: You know, as I read Binyamin’s book, I tried to read it from the perspective of an economist, because that’s what I do. And two of the things we learn as economists is: don’t confuse correlation with causation, and what’s the—

Hal Weitzman: Are you thinking specifically of inequality there?

Robert H. Topel: Well, I’m thinking of it . . . You know, every chapter I read, I said, “Well what’s the point here? I finally got the point when I got to the conclusions, but in many of the chapters, it was trying to make a connection between what economists do and what outcomes are. From 30,000 feet, a lot of the theme of the book is that economics became more prominent, economic ideas became more prominent, our understanding of markets became more prominent, and at the same time, coincidentally or not, things that Binyamin finds distasteful happened. And so, but the connection between economists and the social outcomes he laments are—

Hal Weitzman: But just unpack that.

Robert H. Topel: You know, there’s a large distance.

Hal Weitzman: Unpack that a little bit for us. So as Binyamin describes in his book, economists had more and more influence. They shaped policy. You’re saying that they were responsible for some of the effects, but not other effects? Were there unexpected effects?

Robert H. Topel: Let’s take the example that you raised a moment ago: inequality. Economists are good at saying, “Well, here’s what we think caused inequality. There’s not total agreement about that, and they’re OK at analyzing policies that you might have to deal with inequality, but to the idea that economists and their ideas caused inequality is quite a logical leap, and I don’t think it’s supported anywhere in the book.

Hal Weitzman: OK. Luigi Zingales, you’ve been pretty critical of your own profession. You’ve criticized economists, and in lots of respects, is it fair to blame economists for the mess we’re in—or the many messes were in, perhaps?

Luigi Zingales: I think of course there are a lot of people that you can blame for that. I like the characterization of it as a revolution that went too far. First of all, because most revolutions tend to have this characteristic of going too far. Second, because I think that that’s true. 

I think that many of the things that were introduced in the ’60s and ’70s were responses to real problems in the ’60s and ’70s, and I think that was good of economists to point them out. It was good of economists, for example, to fight inflation. In this country, inflation was at double-digits. The country I come from reached 22 percent, very close to a level that could spiral into hyperinflation, so these were real problems. 

I think that, if I may say, this time there was a lack of political pushback. I think that you had to add some political motivation. You had the fall of the Berlin Wall, and then what [Francis] Fukuyama has said was the end of history, in which this dialectic between two sides immediately stopped, and basically there was no pushback, and I think that then it was more difficult to have a balanced point of view because we are for more free markets, but we know that we need some regulation. 

For example, in derivatives, I think that the scene that is described in [University of Connecticut’s James Kwak and MIT’s Simon Johnson’s book] 13 Bankers, where you see the head of the CFTC that is trying to introduce some regulation derivatives and then there is a coalition that goes from [former Secretary of the US Treasury] Robert Rubin to [inaudible]. Because this is what is interesting. It’s not a left versus right. There is a complete consensus on positions that turn out to be completely wrong. So, yes, I think there was a lack of pushback, and I think that it lacked politically.

Hal Weitzman: OK, but you . . . Actually, I’m glad you mentioned the word dialectic because now we definitely know we’re at the University of Chicago. But you raised the interesting point there. Michael Greenstone, so let me bring you in. Luigi seems to suggest that it’s not just . . . we shouldn’t just blame the economists. We should also blame politicians who failed to sift through the ideas, perhaps, and perhaps plan for some of the effects of some of the policies they were putting in place. What do you think?

Michael Greenstone: Yeah. I guess I’d make two points. One, having worked in government for one year, I was so excited to hear that anyone takes economists seriously because that was not always my experience in government. And so,

Luigi Zingales: But you were past the hour, right? You went after, at the end of the hour.

Michael Greenstone: The clock was ticking.

Luigi Zingales: A little too late. (laughing)

Michael Greenstone: So I think that’s terrific that anyone would invite economists, and I think an answer . . . One thing that I found, working in government, is there is . . . an economist can be seduced by the idea of efficiency to the disadvantage of ignoring important distributional issues. But without economists, I think there is often not a voice for efficiency or making the pie larger so that everyone can be better off. And I think that’s a really central role that economists can play and do play, and I think the world would not be better off if we were expelled from sitting at the card table in the back of the holiday dinner, which is the seat that I actually saw sitting at most of the time.

Hal Weitzman: But it sounds like you actually do agree that in some sense, it has gone too far because there hasn’t been, economics hasn’t been placed within a wider context in policy making in some areas?

Michael Greenstone: Yeah, I think what we have been seduced by sometimes is the possibility of: if the pie gets bigger, we can compensate the losers, and then we move on. And in most, in small cases, I think that’s almost always right. The tax code will kind of do it automatically. But what we weren’t so good at was thinking about if there were big changes. And you know, the most extreme example of that is that a 1 percent loss in income for everybody is the same as 1 percent of the population dying. Now, of course, those are incredibly different outcomes, and but I think the logic of “the winners can compensate the losers” sometimes gets perverted to treat those two things as the same.

Robert H. Topel: But any economists would tell you that those two are completely different.

Michael Greenstone: I understand, but we don’t always control the tools. We weren’t always in the room. And so I think that has been something that probably the profession should spend more time thinking about is the distributional issues, and when changes for some subset of people are large, not small. And we have excellent tools to do that, as Bob points out, and many of my friends, including two sitting here, are very good at doing just that, but I think maybe publicly we haven’t been as good at doing that.

Robert H. Topel: Well, let me push back on that a bit. When we think about the distributional issues, it’s just utterly false that economists don’t think about the distributional issues, and so you think—. We’ll come back to the same problem we talked about a moment ago: inequality. We have pretty good ideas why it happened, and then it comes to: What should we do about it? That’s a much more difficult problem, and some people in the New York Times that advocate redistributional tax policies or more aggressive redistributional tax policies, and other people would advocate for more investment in education to change the number of skilled people relative to less-skilled people, and we don’t have really good ideas of how those things would play out. 

So the problem itself is not something that economists did. The economists can try to understand the problem and they can try to think of remedies, and God forbid we’d come up with a remedy and then 15 years from now Binyamin will write another thing and say, you came up with the wrong damn remedy. It’s your fault. But that’s not what we do as economists.

Hal Weitzman: Binyamin, have you maybe been in danger of overstating the impact of economists? Michael Greenstone’s experience is just one anecdote there, but the thrust of your book is that economists kind of took over a lot of government policy. Is that fair?

Binyamin Appelbaum: I have been touched by the outbreak of modesty among some economists in response to my book. I’m concerned a little bit to hear that they no longer think that economic policy is an area in which they have influence. 

But listen, I’ve written a 300-page book trying to document as carefully as I can the case that economists have had a significant influence on economic policy. I think it’s very clear. I’m not gonna attempt to lay it out here, but in specific areas—monetary policy is one we talked about earlier—it is the case that the Fed, an institution that once had essentially no economists among its leadership, was turned over almost entirely to economists, who implemented a certain approach to policy, which among its consequences had a tolerance for higher levels of unemployment, which undoubtedly contributed to economic inequality in this country. 

It is the case that economists advocated for a flatter distribution of federal taxation, which contributed to inequality in this country. It is the case that they advocated for the deregulation of finance, which has contributed to inequality in this country. So it seems to me incontrovertible that there are respects in which economists have made important contributions to public policy, and that one of the effects of those contributions has been to increase inequality. 

Also, in a broader sense, I think there was an important philosophical contribution, which is that economists explicitly contrasted efficiency and equality. They argued that there was a trade-off, and that government needed to make a choice, and that it should focus on efficiency. As Michael says, I think it’s true that when economists aren’t in the room advocating for efficiency, it’s often the case that no one does, and it was important that they did so, but in setting aside the distributional questions or in postponing them for later discussion, they affected the way that the government operates in the economy, and I think also contributed to the rise of inequality. 

So do I go too far? I think that’s a perfectly valid question, but to suggest that economists have had no influence, I think, is just silly.

Robert H. Topel: I don’t think Michael was saying that, and I don’t think I was saying that. The economists have had influence, but I come back to my original question: What’s the but-for world? What’s the alternative in all these areas of policy, of taking advice from economists, as opposed to what? So let’s do a cost-benefit analysis.

Michael Greenstone: Let me give you an example. I think it’s fine to talk about now. There was the Waxman-Markey Bill, which was to have cap and trade for C02. Economists were largely kept in a pen. We could talk once in a while, but we’d be marched out, and we’d be put back in the pen. What happened in the final hours to pass it in the House, you know, 500 pages appeared out of nowhere that got tacked on to what was already a 1,200-page bill. Nobody had read them except whoever wrote those 500 pages. 

Now, those 500 pages were benefiting a very particular sector of the economy, and I think without economists in the room, what happened is it’s like a free-for-all where everybody is going for their narrow self-interest, and there is no voice for efficiency. You know, efficiency sounds technocratic, but what it really means is, like, every American citizen, and, like, there’s no voice for that, at least none that I saw.

Binyamin Appelbaum: To be clear, I’m not suggesting that economists should be excluded from the policy-making process. To the contrary, I think that they in many respects played an enormously beneficial role, and they’ve brought much good to the table, and cost-benefit analysis is a fine example of that. The counterfactual, I think, is not what if we didn’t have economists, but what if we had better economists, or economics performed in a way that was more in the public interest? And that’s where I think that there are opportunities for economics to make a better contribution.

Robert H. Topel: Well, I don’t know what you mean by “better economists.” It sounds a little bit like trying to outlaw friction. But you have the talent that you have, and there’s a lot more talent in the profession just in terms of bodies than there was 40 years ago when I first came here.

Michael Greenstone: Well, you know, I think actually one thing maybe, trying to bridge, if there’s a disagreement here—which is something certainly we’re trying to do at the University of Chicago and the Becker Friedman Institute—is that I think there’s tremendous ideas being produced inside universities. Now, often those are produced with languages that keep other people out because it makes it easier for us to communicate with each other, and the failure to find ways to communicate those ideas, sometimes much more subtle than the “Oh, markets should be free” ideas, which is a failure on economists’ part. I think it’s a failure on the broader world for disinterest in that, not having a very simple solution. I think there is an opportunity there, and that’s something that we’re trying to get better at, for sure.

Hal Weitzman: I was gonna ask, actually on that note—. Sorry, Luigi.

Luigi Zingales: I don’t know whether you call [former US Secretary of the Treasury] Tim Geithner an economist, but probably I would consider him an economist. I think that he shaped tremendously the response to the financial crisis and he shaped it in a way with enormous distributional consequences, without this being ever discussed in Parliament. I think that as economists we are good at looking at efficiency. We should delegate much more when it comes to distribution. We’re not willing to delegate. 

Tim Geithner and [former chief economist] Larry Summers were going around saying that it’s a terrible idea to forgive peoples’ mortgages, and we should save the banks because this is the most important thing. And I think that they completely ignored the distributional issue and the political issue that came from it. So I think that that’s an example of economists going too far without having the proper political balance. Now, the problem is, in my view, that Obama was weak in that situation because he should have fought back.

Michael Greenstone: So I wasn’t involved in that. (laughing)

Luigi Zingales: I wasn’t trying to blame you. (laughing)

Robert H. Topel: But isn’t that the operative point, Luigi, that economists can offer economic advice, and we can say, “Look, here’s how much efficiency you can get out of some policy, and that tells you the costs of redistribution in some units and politically, redistribute as you would like. That’s the political side of the equation, but it’s not so much the economists’ job to say, “Oh well, it’s gonna create this much efficiency or this much growth in the size of the pie, and, but we should do the following distributional things.” Those are political decisions, not economic decisions.

Luigi Zingales: Yeah, but the diffuse, the default of mortgages was causing significant efficiency reasons because of the distress of the costs and the maintenance of houses, so there were significant welfare effects. They were not emphasized in the debate, and the trade-off was resolved allegedly with economic consideration because they were going with saving banks was the most important thing, and that anything was a second order with respect to that. I think that there wasn’t enough political discussion, but in a sense, you can blame the economists for overdoing it, and I’m certainly willing to blame especially those two, but I think you want to also blame the political system to be completely absent. The political system should have drawn a line in the sand.

Binyamin Appelbaum: And there’s an important distinction here. You know the role of academic economists in informing the debate, I think, is an important one, and Michael spoke a little about the opportunity to do that better. It is the case, however, that economists also get brought into policy-making roles. When Larry Summers is acting as the president’s chief economic adviser, he’s not just an abstract economist, you know, offering, sort of, an evaluation of policy. His job was to make policy, and he did that, and the way in which he did it was consequential.

The fact that there’s a Council of Economic Advisers but not a council of any other discipline at the White House means, again, that economists have this influence to participate in the policy-making process in a way that’s very different from the function that other academics who are purely outside of Washington play. And so I think part of this is not just about the question of what role the academy can constructively play, but what role economists play in their very special role as a part of government, where every federal agency has its own economists and therefore is consulting economists in a way that it doesn’t consult other kinds of expertise.

Hal Weitzman: I understand that everything is all very mixed up, but Luigi’s point seems to raise, you know, the question about the politicians’ agency. It’s almost like they’re passive recipients of these ideas from Milton Friedman and others, and they just do what they’re told. In fact, in your book, you describe how Ronald Reagan became a zealot for these ideas. So he was very much at the forefront of pushing them. Without Reagan, they might not have had that influence. So what role did the politicians play?

Binyamin Appelbaum: Absolutely. I think there’s clearly an interaction here. You have economists proposing ideas and conceptualizing approaches to policy, but clearly there’s an interaction with the politicians who take hold of these ideas, make use of them, sometimes pervert them or take them far beyond their original purpose to the point where they’re unrecognizable even. Supply-side economics is an example of an economic concept that was articulated by economists and initially, you know, backed by economists but has become essentially a political construct that is employed for the purposes of a political party. 

So it clearly is the case that there’s an interaction between the needs of the politicians and the ideas of the economists. It’s a relationship. They both play a role. I don’t think it’s the case that politicians purely cherry-pick which economists and economic ideas they want to use. I think the ideas of economists can constrain the political debate and can direct and shape the political debate, but it’s unquestionably the case that politicians play a very important role too. Luigi blamed Obama. It’s also the case that Congress thoroughly disclaimed any responsibility for managing the use of those funds or for insisting they’d be put to the purposes. Congress could have intervened as well on behalf of homeowners—

Luigi Zingales: That’s true. 

Binyamin Appelbaum: —and they chose not to do so. And so, it’s clearly the case that politicians ultimately are in charge of making these decisions for us and need to do so.

Hal Weitzman: Your book is very focused on the US. You’re a reporter reporting about the US economy, so that makes sense, but you know, advocates of free-market economics often say that the main achievement has been to lift billions of people around the world out of poverty. How does that figure into the, kind of, when we think about whether free-market economics has been overall a positive?

Binyamin Appelbaum: I think that’s true and laudable, and it may make the case that on balance, the effects have been positive. I think in the context of any country, what you want to ask is: Is the balance being struck properly? There clearly were countries that needed a larger role for markets and that have benefited enormously from an increase in the reliance on market forces. There are also countries where that reliance went too far, and even much too far. 

And so, you can go around the world and see how that has played out in different places. Here in the United States, where we already had a significant role for markets, I think that we improved things to some extent, and then went much too far. In Chile, I think this reliance on markets went much too far. In other countries, it’s been predominantly beneficial, and I think it is a case-by-case study, and if you were to aggregate all of the experiences, perhaps you would conclude that it’s been net beneficial. I don’t exclude that possibility. I think it’s more valuable to look at it in each case and to think, you know, can we essentially get a better result by, in some cases, reducing the reliance on markets, and in others, continuing to push for more.

Hal Weitzman: Bob, were you going to make a point there?

Robert H. Topel: I think it would be hard to argue that it has not been net positive. You said, “Perhaps.” I think the evidence is pretty overwhelming that billions of people have been lifted out of poverty, and so a lot of the policy errors—even if they are policy errors—that have occurred in one country or another are a rounding error relative to the total.

Michael Greenstone: I just want to echo what Bob is saying, though. I think what is really important as, like, the most interesting academic questions are at the margin. Should we rely on markets a little bit more? Should we not? And those are being debated in rooms across the street, you know, probably right now—and all the time. And those are the hardest questions to answer. But what I think should not be missed is truly billions of people in a way that was unpredictable 20 years ago even are now no longer living with the ravages of extreme poverty. China is an incredible example of that. There’s effectively nobody left in 1.5 billion people who live with extreme poverty and that wasn’t true 25 years ago.

Binyamin Appelbaum: Absolutely. But that story should not be interpreted as a validation of American economic policies. It’s a validation of Chinese economic policy.

Michael Greenstone: I understand, and so if you want to narrow the conversation to “at the margin, in this setting versus that setting,” I find it a little complicated to do that at a high level, in the sense that much of what’s happened in academic economics in the last 25 years is we got computers now and we have data and we don’t have to have these debates at high rhetorical levels. We can pose very specific hypotheses, test them, find out what happens. I think in your book you say, in 1979, 90 percent of the economics profession thought the minimum wage was a bad idea. That came in a period when we basically didn’t have data. Now, I suspect Bob may still think it’s a bad idea, but we now have a lot of empirical evidence that would at least cause people to, you know, lean a little bit on the other side, and I think it’s a really good example of talking about these issues at this high level—markets, nonmarkets, too much market. We’re beyond that. We now have data that we can answer very specific ideas, and it’s hard to talk about at this very high level, I find. 

Bob, you wanna stand up for being against minimum wages?

Robert H. Topel: My concern with minimum wages is not the typical concern that you raise the wage and employment goes down. My concern with minimum wages is that, in all the industries where minimum wages bind, the pass-through rate of costs into prices is basically 1, and so the—. One of the other things that economists learn is you got to think about incidence. Who pays for this? And yes, there’s a significant number of people at the bottom of the income distribution who are gonna have their wages raised. But when you look at who buys the products of the people at the bottom of the income distribution who have the raised wages, it turns out it’s people at the bottom of the income distribution. And so, when I tell people—. I go down to Walmart in a small town in Arizona, where I have a house, and everybody complains about the wages at Walmart, but I’ll tell you, the people on the cash-register side working there are in a lot better shape than the people on the customer side buying stuff, and those are the people who are gonna pay for this. It’s not coming out of shareholders. The supply of capital is basically perfectly elastic across all these endeavors. The incidence is going to fall on the customers, and people really have to think about that before they advocate this kind of policy.

Hal Weitzman: We’ll have to do another The Big Question on the minimum wage, but—

Michael Greenstone: I just want to say. Exactly this exchange we’re having right now, that’s a concrete exchange. We could have a meaningful exchange about that. We could talk about the minimum wage. To talk about markets and The Economists’ Hour, and things like that, it gets really hard to have a precise and meaningful conversation, I find.

Binyamin Appelbaum: I share the concern. I think that it is still possible to, sort of, aggregate the effects and to speak about the broad consequences, but where I agree with you is I do think it’s the case that over the course of this period, one way of describing economics in the 20th century is that theory outpaced data significantly, and we ended up in some very wrong places, and over time, as the data has gotten better and our ability to analyze it has gotten better, I think we’ve been able to improve and refine a lot of those conclusions. That’s very promising. I don’t think it answers for all of the problems. 

You know, one area that it leaves unaddressed is that there are things that are not easily measured, and economics still struggles to incorporate those issues into its analytical framework. But there’s no question, you know—. In 1987, the New York Times editorialized against the minimum wage on the grounds that, we talked to all the economists and none of them was in favor of it. Today, you’d obviously get a very different picture if you went out and asked economists about the minimum wage. And as he says, the difference is purely that we’ve been able to use data to analyze the actual effects of minimum wage laws, and it’s complicated and added nuance to our assessment.

Michael Greenstone: OK, now let me turn this back on you. You write for the New York Times. There’s hardly a louder voice out there. A lot of these debates are actually somewhat nuanced and depend on data, and was the data from here? Was the data from there? Or what period? Part of our difficulty is we kind of understand all those nuances. Bob and I could have a very detailed discussion about the minimum wage and the incidence and employment and things like that, but can that make it in newspapers?

Binyamin Appelbaum: I think in the case of the minimum wage, it really has. There’s often a lag. You know, the academy’s understanding of these issues often takes time to filter out into the press and into the political process, but we do try to capture some of those nuances. I would say to you, however, that it remains the case that economists are remarkably unable to agree on what seemed to me basic issues of their own profession. So it is the case that we can still find people who will make diametrically opposed statements about the minimum wage. It’s not as if there is, for the most part, some body of absolute agreement among economists even on what seemed like fairly basic empirical questions, and so some of the difficulty for journalists is in figuring out how to perform quality control on a profession that sometimes seems to struggle to do that. 

Hal Weitzman: You guys need to hurry up and agree on more things. So I wanted to ask you. The Economists’ Hour: the hour is over. That’s no spoiler, if you haven’t read the book yet. Is that really fair? I mean, I think of these guys’ colleague, Richard Thaler, who’s had huge influence, not just over government policy but over corporate policy in all sorts of ways. Is it really fair to say that economists’ influences have waned over policy?

Binyamin Appelbaum: So I mean that in a very specific sense, which is that I think that there was this prevailing consensus about key questions of economic policy that remained in place for about 40 years, from roughly the late 1960s until the financial crisis in 2008, and we’ve now entered a period of ferment. There is a willingness to return to first questions, to reconsider issues that had been considered closed, to revisit the nature of the government’s involvement in the economy. What emerges from it remains to be seen, but much like the ’30s and the ’70s, we appear to be, again, in a moment when economists and others are debating our basic understanding of economic policy. So that’s the hour that I think has ended. 

It’s not that I imagine that economists have turned into pumpkins or that they’ll no longer play a role in the policy-making process. I just think the nature of that role and the assumptions that they’ll bring into it are now quite different. Richard Thaler’s a great example of someone who’s been advocating for a different approach to economics, emphasizing other points of view, incorporating psychological evidence into his work, and I think others are bringing other perspectives as well. You know, all of that, I think, will probably eventually result in a new paradigm of what economic policy looks like, but I don’t think we’re there yet.

Hal Weitzman: OK, so if we should blame economists for the mess we’re in, do we need economists to drag us out of the messes? I mean, what contribution should they play now?

Binyamin Appelbaum: We need them to help, for sure, absolutely.

Hal Weitzman: So it’s not—. You’re not advocating for less influence for economics.

Binyamin Appelbaum: I think in some respects, they should be less influential, yes, but that doesn’t mean they should be excluded. It doesn’t mean they shouldn’t play a role. It means that others need to play a role too. It means that we need to do a better job, as Luigi says, of, you know, engaging the normative questions politically, of engaging the distributional questions, of contextualizing the advice that we get from economists. There are things that economists do really well. There’s a reason they’ve been so successful. They bring real value to policy conversations, and it would be idiotic to ignore that value. I just think that we need to be aware of the limitations as well.

Hal Weitzman: Michael Greenstone, is that fair? Should economics be brought to bear, but put in greater context?

Michael Greenstone: I agree with one—as I tried to say from the outset, I agree with one of the themes. I think we—. The efficiency paradigm can be a little bit of a North Star and sometimes it could cause us to not pay enough attention to distributional issues, and I think that’s an important point. It is societally being generated, and that Binyamin’s book is also emphasizing and underscoring, and I think there’s lots of great research on that currently about how to incorporate that. 

But again, I’ll just come back to, if economists are removed, which is not what he’s advocating, I think the alternative what would happen, there’d be no voice for, kind of, the broader American economy or all the people who shop at Walmart or the broader American public. You would have narrow self-interests fighting with each other.

Binyamin Appelbaum: And if I could just add one point about that. This is not a theoretical conversation. That is happening right now. Economists have been excluded from many of these conversations in the current administration, in part because the current administration is a reflection of frustrations about the way we were making policy. There’s a real risk that if we don’t get better at technocratic policy making, the electorate will decide they don’t want it, and I think that there’s a real urgency—

Michael Greenstone: It cannot be true that you are saying that the election of Donald Trump was because there were too many economists involved before.

Binyamin Appelbaum: I think that it is in part because economists made bad policies.

Luigi Zingales: I agree. Technocrats in general, absolutely. And the fact that they all agree, and people don’t like what they see and so they reject everybody, that’s, in a sense, what populism is about. It’s a rejection of the current elite because the current elite is perceived to have failed, and we are part of that elite. There’s no doubt about that. When we talk about rounding errors in the outcomes of, you know, this turn toward markets, one of those rounding errors is called Michigan, and the people there are not happy about it.

Hal Weitzman: But one of the, some of the experts people have turned against are climate-change scientists, where there’s massive consensus, and you know none of us would disagree with what that majority says, and yet, they’re still treated with scorn, aren’t they?

Luigi Zingales: Of course. I’m not saying that that’s the only reason.

Hal Weitzman: It’s generally been a rebellion against experts.

Luigi Zingales: Yes, but also, in that particular sense, this is one area where economists do agree, and the survey that the IGM is running shows that all economists agree that the carbon tax is the greatest thing on the face of the earth. Now, people don’t like this—

Hal Weitzman: Just explain the IGM. You’re talking about the expert panel, which we run here at the Initiative on Global Markets.

Luigi Zingales: And they, the vast majority of economists in that panel agree that the carbon tax is the way to go.

Robert H. Topel: What should it be?

Luigi Zingales: I’m asking ordinary people. Ordinary people prefer, to the carbon tax, they prefer emission standards. Why? And when you ask them why they prefer emissions standards, it’s not because they don’t understand the carbon tax. It’s because they don’t trust the government to rebate the taxes.

Robert H. Topel: You and I are on exactly the same page on that.

Luigi Zingales: OK.

Robert H. Topel: Exactly. That’s why . . . Look it. I’m the government, and I’m here to help you, and the government’s going to get bigger. Half the population tunes you out and says, I don’t want to have this conversation anymore.

Luigi Zingales: Yeah, and this is a . . . But this is not based on my theory of government. It’s based on the responses of people, and I think to understand these responses and trying to keep . . . No, no, we are right. We import. So [French president Emmanuel] Macron followed economists, right? He is the technocratic thing. And what it does, it taxes the gasoline. And by the way, you know I just learned that kerosene that is used in planes is not taxed. So the rich people go on a (inaudible) and produce more CO2 and they produce it without taxes, but then they tax the people that actually need to use a car and they say, “We do it for your own good,” and then people are pissed off—can I use that term? (laughing)

Hal Weitzman: I think you just did. Bob Topel, what’s the correct role of economists in policy making?

Robert H. Topel: To provide reasoned advice and analysis.

Hal Weitzman: So in that sense it hasn’t changed since the days of Milton Friedman?

Robert H. Topel: It hasn’t changed and, you know, I’m the old guy here, so I knew most of the people in this—

Luigi Zingales: You’re the older guy.

Robert H. Topel: Yeah, well I mean, I got here in 1979 and, and a funny story: the Spartacus Youth League was marching outside my window chanting “Friedman, Friedman, you can’t hide. We know you’re on the Fascist’s side,” and I asked, “Does this go on every day around here?” And little did they know that Milton wasn’t even here anymore so he could hide.

But I want to come back to what Binyamin was saying that somehow we should provide better advice. Well, OK, that’s a great prescription. Think of that is the advice that’s coming from an economist. Yeah, we should have done better, and there’s a lot of 20/20 hindsight in this book that cherry-picks things, ignores the successes, looks at the failures, and says, “You should have done better.” Well, you know we’re a social science and I come back to my original question: What was the alternative? What other decision-making process or policy-making process can you look at even now and say, “OK, I have evidence that it would have been better had it been done this way,” and we listen to this guy over here who’s not an economist. I don’t think there’s any evidence, not one bit of it in the book, for that kind of perspective.

Binyamin Appelbaum: I’m just—. We’re gonna have to agree to disagree. I think if we had, you know, taken minimum wage laws seriously, that would have been beneficial. I think if we had balanced unemployment and inflation through the ’90s, that would have been beneficial. I think that if we had taken unions seriously, not just as some type of, you know, collusive scheme to steal wages from other workers, but recognized that they were an expression of political power and a mechanism for integration, that would have been better for our society.

Robert H. Topel: That’s your, you’re making my point.

Binyamin Appelbaum: If we had enforced antitrust laws, that would have been better for our society. I think that in many respects it is clear that there were an alternative set of choices that could have been made—not that economists wouldn’t have been involved, but if economists had operated under different normative assumptions, had incorporated a broader set of goals, that they could have offered a very different set of prescriptions, and we would have achieved a very different set of results.

Robert H. Topel: Let me give you an explicit example. You mentioned antitrust policy.

Binyamin Appelbaum: Yep.

Robert H. Topel: You mentioned our late colleague George Stigler and you said that he thought that collusion was virtually impossible and that in that, enforcement was kind of a waste of time. But I knew George and I know the papers you’re talking about. George’s perspective was completely different. He said collusion happens and, but people who collude aren’t gonna tell you that they’re doing it. It’s a secret, and so you need a method for going out and finding where it’s likely to occur. What rocks are you gonna look at? Well, you don’t want to go look at the wheat farmers because it’s virtually impossible there. You want to look at industries with particular characteristics: small number of firms, homogeneous products, ADM, the example that you raised, the exact kind of thing that George wanted to do was direct the resources of policy to where they could do the most good. That’s exactly what he wanted, and you mentioned Posner. [UChicago’s Richard] Posner even thinks that tacit collusion should be illegal, so it wasn’t the advice of Posner that said, “Oh, we shouldn’t enforce the antitrust—

Binyamin Appelbaum: But pause on Stigler, because what Sigler said is that collusion is fragile, and we don’t need to worry about it as a policy matter in many cases because it will collapse under its own weight. And that advice, importantly, irrespective of whether George thought that enforcement should be handled, his words ended up being taken by the Reagan administration and written into policy explicitly footnoted to Stigler. That policy of not worrying about collusion then becomes the Justice Department’s operating policy for the next 15 years, until someone at Justice decides to embark on the experiment of inviting companies that are engaged in collusion to self-report, grants them amnesty. The people who created that program—

Robert H. Topel: That was a brilliant idea.

Binyamin Appelbaum: Who happened to be economists, by the way.

Robert H. Topel: Right. That was a brilliant idea.

Binyamin Appelbaum: It was a brilliant idea. They say that when they created that program, they didn’t expect it to be widely used because of George Stigler’s work, and what happens is that the floodgates are opened, and it turns out that collusion is both stable and prevalent, and all of a sudden the government is dealing with more cases than it has the attorneys to staff. 

And so, you know, what I can tell you about George Stigler for sure is that he articulated an idea that proved enormously influential that was directly responsible for a change in federal policy that for a period of a decade and a half meant that the government was not even attempting to police collusion, and that ultimately resulted in the discovery that George Stigler had been, or at least that the advice that George Stigler had been understood to provide was completely wrong.

Robert H. Topel: There’s the operative word: understood to provide. That’s not what George prescribed. George didn’t say you don’t have to enforce it because it’s not going to happen. George says it’s very difficult to collude, and it has to be policed.

Luigi Zingales: But honestly, if you look at another experiment, which is Chile, where many people from Chicago gave advice, fighting collusion was not high on the agenda. In fact, Chile has a lot of collusion everywhere. It helps that it’s a small country. They all went to the same school. They all intermarried, so it’s just a big, big family. But in that particular case, Chicago took a more active role of advising, and this stuff was left out. I don’t know whether it was left out—I wasn’t there at the time—I don’t know whether it was left out because it was considered not a priority, but that was exposed as a mistake. Now, with the benefit of hindsight, everybody is brilliant. I agree with that. But it is a fact, it was left out.

Binyamin Appelbaum: And it was left out in part because [UChicago’s Arnold] Harberger thought that the cost of monopoly was de minimis.

Robert H. Topel: In a small, open economy, he might have thought that. I’ve never talked to Al about that.

Binyamin Appelbaum: I mean, he has a paper calculating the costs in the American economy in the late 1950s and he calculated it basically as a rounding error on GDP. So, you know, that proved very influential, that idea that the costs of monopoly were not something that policy makers should concern themselves with. Perhaps it shouldn’t have been translated—(talking over each other)

Michael Greenstone: Can I make a point I was trying to make before? What Stigler, what Friedman, a lot of other giants in the economics profession were doing is they were operating in a period where they had basically pencils and paper. There were no computers. There were no data. There were a lot of conjectures. They were laying a foundation for how to think about the problem. And all of those ways to think about the problem have assumptions built into them, which were inherently untestable. 

Where we are now is a completely different era, and it’s much more vibrant. It’s much more exciting. We can actually test those ideas, test those assumptions, and come up with  much more nuanced answers. And so.

Luigi Zingales: Mike, you are a little bit too optimistic.

Michael Greenstone: No, no. It’s—

Luigi Zingales: Tell me what this great thing is that’s reducing some of the cost of monopolies. Do we have a good eye—we have all the data in the world now—do we have a good sense of how costly monopoly is in the world?

Michael Greenstone: I think we have way better than people guessing in their office with pencils and paper.

Luigi Zingales: So give me—

Michael Greenstone: Oh no, I can’t tell you overall, but yes, we’re building it up with case studies. That’s, you know, that’s better than we had.

Binyamin Appelbaum: I mean, I share the optimism that economics is getting better in the ways that you describe, but I am also aware that if you go back through the decades, in pretty much every decade, at least one leading economist stands up and announces that the field has arrived. They’ve done it. They understand how the economy works. They’re ready—

Michael Greenstone: No, no, no. Hang on. I’m not the macroeconomist saying that the Great Moderation—. That’s a wholly different—

Binyamin Appelbaum: But that optimism. Surely the lesson of that optimism in generation after generation is that there’s still a lot we don’t know.

Michael Greenstone: No, I said we have the tools to begin to unpack it now. That’s very different than that we have solved it. Those are . . . You’re conflating two very different ideas.

Luigi Zingales: We have the tools but not the wealth. That may actually make it worse. (laughing)

Hal Weitzman: OK, well that’s a relatively optimistic note, at least the first part of your comment, Binyamin. So on that point, I’m gonna have to wrap it up. Our time is up. My thanks to our panel: Robert Topel, Luigi Zingales, Michael Greenstone, and Binyamin Appelbaum. 

For more research, analysis, and commentary, visit us online at Review.ChicagoBooth.edu. And join us again next time for another The Big Question. Goodbye.