Some Tips on Giving Economic Advice to Politicians
By Charles L. Schultze
Essays on Economics in Government is a series of occasional essays in which all SGE members are welcome to contribute original essays which draw upon and recall special experiences during their time in government.
No short essay, or indeed good-size book, could say something directly relevant for all of the varied activities in which government economists are engaged, and the diverse economic specialties they bring to it. So let me draw on my own particular experience and try to provide some tips, reflections, and suggestions about the business of giving economic advice to political decision-makers.
After fifty years of observing, and at times participating in public policy debates, I keep being struck by how differently economists analyze issues compared to most other participants. To most politicians the world is full of corner solutions. The economist’s world of supply and demand curves with non-zero elasticities seems alien. Moreover, some of the most important economic principles and their applications are counter-intuitive; for example, the propositions that the essential reason for a nation to export is not to increase employment but to import; that a country’s international trade balance is principally determined by the relationship between its saving propensities and its investment demand, and not by trade agreements, the extent of “unfair” trading by other countries, or the existence of low wage competitors. Similarly, the concept that there exists an optimum amount of “bads”, determined by the costs and benefit of reducing them, is often viewed suspiciously as a capitulation to special interests. And just try explaining the principle of comparative advantage.
Particularly on matters of microeconomics, including international trade, economists across a very wide range of the political spectrum draw on a shared body of economic theory and analytic tools which rest on the “rebuttable presumption” that in the long run markets tend to do a better job than other approaches in producing economic efficiency and growth. While the profession has recently been learning how behavioral economics can add realism to the bare-bones principle of rational maximizing behavior, that hasn’t fundamentally changed the fundamental corpus of the theory we share. On the other hand, the profession also has an organized theory of why market failures sometimes can and do occur, and that provides a highly useful framework for choosing the policy tools best suited to correct the failure -- often featuring changes in institutional or incentive structures. Non-economists, on the other hand, have a strong tendency to address market failures and externalities by imposing detailed regulations or through investments in brick and mortar. Trying to reduce flood damages by concentrating on building dams and levees rather than designing an efficient flood insurance program is a typical example, and most government economists can add many more from personal experience.
These considerations lead to several practical principles and “tips” that can guide economists who are called upon to give policy advice to elected and appointed political officials.
First, a well articulated application of basic economic principles, well-back from the latest research frontiers, can go a long way to improve the quality of the policy debate. On some occasions the economic advisor will indeed have to call upon the latest research in theory and econometrics to formulate advice or buttress an argument. But on most issues the greatest challenges are to recognize how to apply the relevant basic economic principles to the issue at hand, and how to explain the connection in language the other participants in the policy game can understand.
Second, few policy moves are Pareto superior, especially in the area of micro-economics. Actions whose aggregate benefits to the nation exceed their costs, still almost always create losses for some (Continued from page 5) workers, investors, or residents of affected localities. Considerations of moral hazard, together with the difficulty of identifying losers and measuring their losses, make direct compensation impossible. And taking each policy action in isolation, there is absolutely nothing in economic theory which would justify giving greater social weight to a large number of small gains than to a small number of large uncompensable losses. But by viewing each individual decision as one element in an endlessly repeated game, economic advisers can justify consistently advocating the more efficient solution, knowing that in the longer run, that course of action will improve the national welfare, while failing to do so will gradually impair national productivity and living standards. This view of the policy debate implies that the economist as policy adviser should not view her role as one of trying to balance efficiency gains against individual losses and political costs, but should rather act as a partisan advocate of efficiency. If my experience is any guide, most policy debates include more than enough advocates who emphasize the losses and the political costs, while concentrated losses often generate far more political attention than do the widespread gains. When economic advisers don’t push efficient solutions, who will?
Third, this view of the economic adviser’s role carries with it an important corollary. If, on a case-bycase basis, one is to be a consistent advocate for economic efficiency in the face of the inevitable losses for some individuals, one should also be a proponent of a well-financed and widespread safety net. Safety nets are not free. To use Art Okun’s felicitous analogy, we transfer resources from winners to losers in a leaky bucket. There are national income losses from the effects of such transfers on economic incentives and from the waste generated by imperfectly tailored safety nets (which, however, the economist can help reduce). But trying to minimize the human costs of the economy’s creative destruction by suppressing economic change and promoting the status quo will, over time, impose far higher losses on society than the cost of a robust and carefully designed economic safety net. And doing nothing about the losses is both politically infeasible and morally repugnant.
Fourth, while I think that economic advisers, at least those in the middle three-quarters of the ideological spectrum, are likely to get the sign right on the substantive merits of issues affecting the economy, especially on micro-economic matters, they will normally be dealing with a wide range of uncertainty when it comes to predicting quantitative results. When quantitative estimates are required, good economic advisers should be humble, and completely up front with decision makers about the uncertainty surrounding their estimates. That’s not only good public policy but it is likely to be highly conducive to job security. There may be superiors who insist on a single numerical prediction. Give them a number, but always with an error range.
My own experience suggests a final piece of advice, or more properly a comforting reflection. In the continuing game of policy decisions the economic adviser shouldn’t expect to have many clean wins. In part, this reflects the fact that the ultimate decision makers usually must balance economic considerations against other quite legitimate interests. There are, for example, “political opportunity costs” to be considered. Proposing and pushing hard to enact reform A might lead to the loss of high priority reform B, or require supporting unrelated and economically inferior proposal C. In addition to such substantive considerations, officials facing reelection tend to have high discount rates and risk premiums, raising the weight of the immediate losses and lowering the weight of the longer term and perhaps more uncertain gains. And so the influence of a successful economic adviser or advisory body has to be measured in subtle ways -- by converting an outcome from fifth-best to third-best, by screening out the “junk” proposals that often percolate up the line, or by making a bad but successful proposal less damaging. Not much glamour but eminently worthwhile.
Charles L. Schultze is a Senior Fellow Emeritus at the Brookings Institution. He has served as Director of the U.S. Bureau of the Budget and Chairman of the Council of Economic Advisers.