The dangers of fringe economics in government

President Reagan with a taxation program chart for the private American citizen, 1981

US president Ronald Reagan based his tax cuts of the 1980s on questionable ideas.Credit: Bettmann

When the President Calls: Conversations with Economic Policymakers Simon W. Bowmaker MIT Press (2019)

Arguing with Zombies: Economics, Politics, and the Fight for a better Future Paul Krugman W. W. Norton (2020)

Good Economics for Hard Times Abhijit V. Banerjee and Esther Duflo PublicAffairs (2019)

In November 2017, the economist Vera Shlakman died at the age of 108. Her 1935 Economic History of a Factory Town is a landmark in the field. Chronicling how textile manufacturing transformed Chicopee, Massachusetts, Shlakman zeroed in on working women’s lives, vaulting beyond analyses of data on wages and shift lengths to include the value of dowries and information in letters and diaries. Ousted from teaching economics during the McCarthy era of the 1950s, she never published another book.

I thought of Shlakman, and how far we have strayed from such integrated analyses of economic realities, while combing through Simon Bowmaker’s 2019 When the President Calls. Over the past half-century, Bowmaker shows, economic advisers to US presidents from Richard Nixon to Donald Trump have enabled central bankers and treasury officials to implement untethered ideas. Often described in terms borrowed from mathematics or physics (such as the ‘velocity of money’), these concepts neither command an expert consensus nor are they necessarily reproducible.

Two other new books, both by economics Nobel laureates, also capture the spirit of Shlakman’s diverse thinking: Paul Krugman’s Arguing with Zombies, and Good Economics for Hard Times by Abhijit Banerjee and Esther Duflo.

Banerjee and Duflo’s book appeared a month before they were awarded the 2019 Nobel, which they shared with Michael Kremer. It encapsulates nearly two decades of research bringing field trials of policies in low-income countries into the mainstream — from improving educational outcomes, to uptake of vaccination. Krugman’s tome, meanwhile, mulls over the mistakes of the past two decades. The ‘zombies’ of his title are economic theories and policies that should have been killed by evidence, but keep coming back — such as the idea that inequality is necessary for growth. In a world still reeling from the impact of the 2008 financial crisis, Krugman (who was awarded his Nobel that year) has harsh words for practitioners clinging to the old ways.

A prominent example is the ‘Laffer curve’, named after Arthur Laffer, who later became Ronald Reagan’s economic adviser. Bowmaker clearly relished the chance to quiz Laffer, who is reported to have sketched the idea out on a napkin over a 1974 lunch with two White House officials: Donald Rumsfeld and Dick Cheney. If governments raise taxes for people with modest incomes and cut taxes for the wealthy, Laffer argued, they can raise revenue and boost growth. The former, because lower-income earners far out-number the rich, thus amplifying their total tax contribution; the latter, because wealthy business owners are likely to use cash saved from tax cuts to invest in new products, more jobs or equipment, thus boosting growth.

Untested tax cuts

There is no consensus on whether the Laffer curve is accurate — even some leading conservative economists, such as Gregory Mankiw, are critical. Yet it became the basis for tax cuts, beginning with Reagan’s decision to slash the top rate of income tax from 70% down to 28% over the early to mid-1980s. Bowmaker found Laffer still buoyant. “That’s my baby and I just loved it,” Laffer said. “It was the best tax bill in US history.” Trump awarded him the Presidential Medal of Freedom in 2019.

As these three books reveal, however, the ideas that Laffer and others came to represent are now under severe pressure, even from the centre-right parties in high-income nations that initially backed them. Decades of falling or flat public spending, unrestricted free trade, relatively light regulations on financial institutions and low taxes on businesses and top earners have not translated into across-the-board prosperity. That is seen especially in the United States and Britain, now among the most unequal countries in their peer group. In 2016, six out of northern Europe’s ten poorest regions, as measured by gross domestic product per person, were in the United Kingdom.

Abhijit Banerjee, left, and Esther Duflo, right, in the offices of the J-PAL Poverty Action Lab at MIT.

Abhijit Banerjee and Esther Duflo advocate field trials of economic policies, notably in low-income nations.Credit: Jim Davis/The Boston Globe via Getty

Economic nationalism has emerged from these trends, under slogans ranging from “America First” to the UK “Take Back Control”. The real results are the Trump administration’s public disavowal and renegotiation of the North American Free Trade Agreement — and Brexit.

At the same time, the collapse of what were once seen as mainstream economic ideas by politicians right and left has opened up space for more conventionally green-left approaches to policymaking. That explains in part why the Italian American economist Mariana Mazzucato is being heard across political divides. In books such as The Value of Everything (2018), Mazzucato makes a strong case for the state as enabler in an economic policy that privileges well-being and sustainability. That is also the space into which Banerjee and Duflo enter in Good Economics for Hard Times. Like Krugman, they are critical of policies based on weak or non-existent evidence. But their approach is less argument than stepping back to let the research do the talking.

Consensus and controversy

The studies they cite probe hot topics such as climate change, immigration and the viability of continued economic growth. Banerjee and Duflo synthesize the literature on what is agreed and what is controversial in an accessible, often entertaining way. There are gaps, however. Mentioning the work of Kate Raworth and Tim Jackson on the environmental impacts of constant growth, and of Partha Dasgupta on the value of biodiversity, would have enriched and unified their thinking on the impact of consumption-fuelled growth on climate change, and on biodiversity and ecosystem services.

Grand narratives, which smack of the old economic thinking, are not the goal of Banerjee and Duflo. The authors do, however, need to articulate their approach in narrative terms, or they will struggle to be heard. As Bowmaker demonstrates, US presidents want to hear happy endings, rather than sit through a menu of options communicated seminar-style. Harry Truman is reported to have said that he preferred one-handed economists, because he didn’t like hearing “on the other hand”. Barack Obama was an exception, making decisions after hearing arguments pro and con.

Economist Arthur Laffer in front of an economic chart on a chalkboard, 1981

Arthur Laffer popularized a theory of the relationship between tax rates and the government income dubbed the Laffer curve.Credit: AP/Shutterstock

Sadly, neither Arguing with Zombies nor Good Economics for Hard Times tackles in depth what I feel is the defining challenge for newer generations of economic policy advisers. That is, how to mitigate the risks of expert-shopping by policymakers. If researchers with fringe ideas continue to validate untested theories, yet more zombies will invade the corridors of power.

This happens to scientific advisers, too — although perhaps less often. In the 1990s, governments with significant oil and gas interests joined the powerful fossil-fuel industry lobby in seeking experts who could cast doubt on human influence on climate change. The consensus view of the Intergovernmental Panel on Climate Change — backed as it was by a huge number of heavyweight researchers — was essential in preventing such dubious ideas from penetrating the mainstream (although it has not stopped Trump’s withdrawal from the 2015 Paris climate agreement).

Economists need to organize similarly across different schools of thought — and to include development economics as well as ecological and environmental economics and feminist economics. There is strength in numbers and robustness in diversity. That can go some way towards curbing the unworkable concepts that continue to emerge.

As these three thoughtful, timely books demonstrate in their own ways, a space has opened up for new ideas in economics at a time of widespread inequality, social and cultural schisms, and environmental crisis. That is an opportunity to avoid another 50 years of theories that inform the highest levels of policy as if evidence didn’t matter.

Nature 577, 311-313 (2020)

doi: https://doi.org/10.1038/d41586-020-00055-y


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