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Thursday, July 05, 2007

"Economic Policy and the New Century Public Discourse"

Richard Baldwin discusses how blogs and sites like VoxEU and LaVoce are beginning to bridge the gap between research and real-world applications. Comments by Andrew Leonard at Salon follow the essay, and there are interesting related comments from Angus Deaton on hopeful changes he's observed in the profession in recent years:

Economic policy and the New Century public discourse, by Richard Baldwin, VoxEU: Economics is more relevant to policy-making than ever before, but you would never know it from the public discourse. The internet is helping bridge the gap, and www.laVoce.info has led the change. But how will the internet’s role in the public discourse on economics change in the future?

More realistic economics Major advances in theoretical and empirical economics now allow economists to address policy issues with much more realistic tools.

On the theory side, new areas such as economics and psychology, and behavioural economics, experimental economics and the new institutional economics have taken the profession light years beyond the simplistic view of human society that dominated thinking just 15 years ago. When it comes to firms, contract theory has allowed explicit modelling of the firm’s organisation choices and their reactions to changing economic environments. Mechanism design has allowed us to think more clearly about how government rules affect equilibrium outcomes in realistic settings.[1]

On the empirical side, the emergence of enormous new data sets and powerful statistical tools have greatly advanced our understanding of exactly how real-world markets work as well as how people, groups and firms react to incentives. In the 1980s, a ‘large sample’ was one with more than a hundred observations. Now researchers routinely work with tens or hundreds of thousands of observations; sample sizes in the millions are increasingly common. One key aspect of all this new information is that it involves ‘panel data,’ i.e. data that track, over time, workers, firms or whatever.[2] Data that vary both across individuals and over time allow us to filter out much of the heterogeneity that marks individuals and time periods. What emerges is a much clearer picture of how things like tax policy or education actually affect economic outcomes.

The new tools don’t mean that we now have all the answers. We don’t. We still don’t know, for example, how economic development really works, or what determines productivity growth. But the new tools mean that we no longer are forced to rely on theory with crude foundations, e.g. firms as profit functions, consumers as utility functions (although there are still many problems where such assumptions are useful abstractions that permit the research to focus on the key trade-offs).

With all these excellent tools at hand, one might have expected the newspapers and Parliamentary debates to be filled with new insights, new results and new approaches. Alas, with few exceptions, the public debate has not moved much beyond the simplistic pro- vs anti-market exchanges that have dominated Europe since the post-war rise of welfare states. Case in point? The 2007 French Presidential election debate.

In the 1980s, brilliant young economists like Paul Krugman, Larry Summers, Jeff Sachs and Joe Stiglitz felt obliged to write Brookings or Economic Policy articles, to sit on government panels, to write policy reports, and to send Op-Ed pieces to the Financial Times. At the time, it was part of the definition of a being a leading scholar. It helped you get tenure at Harvard. It also bridged the gap between cutting-edge research and the public debate on trade policy, exchange rates, current account dynamics, etc.

Today’s brilliant young economists are much less interested in participating in the public debate in these ways. I have no empirical evidence to back up this opinion, but I think it is shared by many economists involved in economic policy issues and I had first-hand experience of it during my five years as a Managing Editor of Economic Policy. Young people need publications in good anonymously-reviewed journals; everything else is a luxury.

Hypotheses on why abound. My belief is that a major intensification of competition among the top US economic departments has occurred over the past two decades, and this led to an overwhelming emphasis on scholarly output that can be easily quantified – journal articles in particular. Things like sitting on Select Committees, testifying to Parliament, or writing policy-oriented books and reports have impacts that are too hard to measure, so they get excluded from the rankings. Oversimplifying to make the point, what does not matter for the rankings doesn’t matter for academic promotion, prestige or pay. While things have not yet gone this far in most of Europe, the trend is starting. Some European economics departments pay a bonus of thousands of euros to faculty whose work gets published in top journals. Writing an influential analysis of a legislative policy proposal gets a pat on the back.

To outsiders – people in the policy world, but also our fellow social scientists – this trend may appear to be a classic case of ‘blinded by science.’ Like the protagonist in 1983’s pop song “She blinded me with science,” the use of mathematics, Greek letters and econometrics seems to be an attempt to deliberately confuse by giving the impression of highly complex knowledge. That is surely overstating the case, but it captures the flavour of the world’s reactions to the increasing divide between today’s best economic research and real-world policy issues.

Why not do it like the doctors? Medical science faces a similar disconnect between recent advances in hard science – where the big breakthrough may be identification of a particular molecule – and real-world implications, say the concerns of the average family doctor. Medical journals address the problem in a very different way – each article includes the hard science, but it also includes a less formal discussion of what the results mean for medicine and how they fit into the bigger picture – the “Discussion Section.” The International Committee of Medical Journal Editors has called this the “IMRAD” structure (Introduction, Methods, Results, and Discussion) and state that the structure is “not simply an arbitrary publication format, but rather a direct reflection of the process of scientific discovery.”[3]

In the top economic journals, “Policy Implication” sections have fallen out of favour. Including such conjectures in a manuscript is unlikely to raise the probability of publication. Given the natural conservatism of the leading economic journals, there is probably no hope that the journals themselves will encourage authors to draw out the policy implications of their work. In any case, there is a widespread perception that policy analysis is not really the business of scientists. For example, the NBER Working Papers explicitly prohibit policy recommendations. The discussion of research results that does not take place in the journals has spilled over into cyberspace.

The internet as a very public Discussion Section On the bright side, the internet has two features that make it an excellent vehicle for bridging the research-reality gap. Feature No.1: its technology makes publishing very cheap. Feature No.2: its global span makes it possible to find an audience that is both large and homogenous in terms of background knowledge. On the dark side, these two features have produced a cacophony. Bloggers – embracing Feature No.1 and hoping for Feature No.2 – have set up a shocking number of sites. A bewildering mixture of insight and nonsense is spread over literally thousands of sites (technocrati.com lists 1,745 blogs about economics with 281,823 posts). One can spend some pleasant hours browsing the various blogs – and even learn a lot from the big blogs, like “Economist’s View”, “New Economist”, ”Marginal Revolution”, and the sites of Brad DeLong, Greg Mankiw, and Nouriel Roubini. But this is not the profession’s response to the Discussion Sections of medical journals. It is more like the collegial coffee-room discussions we used to have when there was time for such things.

What Tito Boeri, the founder of www.laVoce.info, discovered 5 years ago, was that there is a large demand for high-level public discussion of economic policy, higher than the level in newspapers or blogs. Something much more like the Discussion Section of the British Journal of Medicine: discussion of real-world, policy-relevant issues by researchers that is screened by researchers. Tito also found that there was a large supply of researchers willing to devote time – for free – to such discussion. We would probably need psychology-and-economics experts to understand the motives, but whatever they are, these economists are doing Italy a pubic service.

The Consortium Tito’s idea – gathering research-based policy analysis that is written by researchers and screened by researchers – is spreading fast. A French site – www.telos-eu.info – was set up a couple of years ago and an English-language site – VoxEU.org – was set up four weeks ago. The three sites have formed a consortium for sharing of columns, translating the best ones into the local language. This way the best research-based policy analysis – regardless of its original language – can reach much deeper into the policy-making world (language still matters). A Spanish site is being set up by Juanjo Dolado and a Dutch and a German site are scheduled to launch later this year. The Consortium has opened discussions on a Swedish partner, a Japanese partner and most recently a South African partner. There may be a dozen more by the end of next year.

Happy birthday LaVoce; it has been an inspiring 5 years.

Andrew Leonard at Salon reacts with a bit of disagreement:

Does the econo-blogosphere matter?, by Andrew Leonard, Salon: I haven't kept track of exactly how many National Bureau of Economic Research "working papers" I've read since I started writing How the World Works -- a dozen or two, I'd guess. But I didn't realize until today that NBER specifically forbids its authors from making "explicit policy recommendations." That nugget comes from Richard Baldwin, a professor of international economics at the Graduate Institute in Geneva in an essay commemorating the fifth anniversary of the founding of the Italian economic policy watchdog LaVoce. (Thanks to Trade Diversion for the link.)

Baldwin mentions the NBER policy in the context of outlining a shift in how today's economists connect their work to the "real world." The short version: they don't, or at least, not as much as they used to.

In "Economic policy and the New Century public discourse," he writes:

In the 1980s, brilliant young economists like Paul Krugman, Larry Summers, Jeff Sachs and Joe Stiglitz felt obliged to write Brookings or Economic Policy articles, to sit on government panels, to write policy reports, and to send Op-Ed pieces to the Financial Times. At the time, it was part of the definition of a being a leading scholar. It helped you get tenure at Harvard. It also bridged the gap between cutting-edge research and the public debate on trade policy, exchange rates, current account dynamics, etc.

Today's brilliant young economists are much less interested in participating in the public debate in these ways. I have no empirical evidence to back up this opinion, but I think it is shared by many economists involved in economic policy issues and I had first-hand experience of it during my five years as a Managing Editor of Economic Policy. Young people need publications in good anonymously-reviewed journals; everything else is a luxury.

And in those good journals, adding a section on policy recommendations or implications is unlikely to improve one's chances of getting published, if it isn't actively discouraged. The state of affairs, argues Baldwin, is a shame. In his view, economists have never had more to offer the world, but they have fewer and fewer opportunities to midwife their knowledge into practical application.

With one major exception, which Baldwin grudgingly concedes. The Internet. Economists have taken to the Internet , and in particular, the blogosphere, with a vigor unmatched by any other social science discipline.

On the bright side, the Internet has two features that make it an excellent vehicle for bridging the research-reality gap. Feature No.1: its technology makes publishing very cheap. Feature No.2: its global span makes it possible to find an audience that is both large and homogeneous in terms of background knowledge. On the dark side, these two features have produced a cacophony. Bloggers -- embracing Feature No.1 and hoping for Feature No.2 -- have set up a shocking number of sites. A bewildering mixture of insight and nonsense is spread over literally thousands of sites (technorati.com lists 1,745 blogs about economics with 281,823 posts). One can spend some pleasant hours browsing the various blogs -- and even learn a lot from the big blogs, like "Economist's View," "New Economist," "Marginal Revolution", and the sites of Brad DeLong, Greg Mankiw, and Nouriel Roubini. But this is not the profession's response to the Discussion Sections of medical journals. It is more like the collegial coffee-room discussions we used to have when there was time for such things.

I must disagree with Professor Baldwin. The econo-blogosphere is more than a collegial coffee-room discussion. It's closer to an internationally-distributed graduate seminar, in which the lucky students get to watch -- and participate in -- a round-robin debate featuring scores of professors duking it out. It is also an early-warning system for new academic papers of note and an instant provider of context and analysis for each new blip of economic data. It is, to put it most simply, an education.

Does that mean it has an impact on policy? That's where it gets tricky. Politics, especially as practiced in the United States, appears to care little for the consensus opinion of economists, especially when that runs counter to polling data and focus group results. But maybe it's just too early in the history of the Internet to make a definitive call. We need more data.

And, to end on a promising note, here's Angus Deaton of Princeton by way of "The economics of everything, by Andrew Leigh":

Random walks by young economists, by Angus Deaton, RES Newsletter: As I write, the economics junior job market is winding down. At Princeton, we had the unusually large number of eighteen candidates come visit and present their work... One of the most remarkable features of the market in recent years has been the breadth of topic that currently falls within the ambit of applied economics. ... Among the topics presented on this year's job market were studies of the prison parole system in Georgia, (several) of HIV/AIDS in Africa , of child immunization in India, of the political bias of newspapers, of child soldiering, of racial profiling, of rain and leisure choices, of mosquito nets, of malaria, of treatment for leukemia, of the stages of child development, of special education, of war and democracy, of the effects of TV coverage on democracy, of bilingualism and democracy, and many others. (Among the leading departments, only Stanford’s graduate students appear to be working almost exclusively on traditional topics.) Twenty years ago, there was essentially none of this. Applied theses were mostly applied price theory, using a set of generally agreed-upon (preferably ‘frontier’) econometric methods. Issues that seem central now, like poverty, inequality, national and international health, education, the environment, and much of economic development) were left to other disciplines on the grounds that (standard) economics had no framework for analyzing such ill-defined topics.

Data versus theory So what is it that economics brings to malaria, child soldiering, or the consequences of parole boards? Price theory is certainly no longer our comparative advantage. It is not that it cannot be applied to a wide range of topics, as Gary Becker and others have repeatedly shown. But if current graduate students know anything of price theory, it would have had to have been self-taught, because it is no longer on the curriculum in the ‘best’ American departments. (Except Chicago where it hangs on by a whisker, and where in a last ditch attempt to preserve it from extinction, Becker, Kevin Murphy, and Steve Levitt are running an intensive price theory summer camp for graduate students from outside of Chicago.) The advantage that economists have, if advantage it is, is their data handling skills (most social sciences are far from comfortable with millions of observations, to say the least), as well as their well-developed armoury of econometric techniques. If the typical thesis of the eighties was an elaborate piece of price theory estimated by non-linear maximum likelihood on a very small number of observations, the typical thesis of today uses little or no theory, much simpler econometrics, and hundreds of thousands of observations. (The amount of computing time has remained more or less constant.) The extent to which data can effectively be substituted for theory is clearly a topic that is being actively explored, at least empirically.

And now real experiments In recent years, the dominant econometric method has been instrumental variables; there is much to the jibe that students no longer look for a thesis topic, but for an instrument. As instruments have become ever more baroque, and their justifications ever more strained, and in the face of deeply serious critiques, particularly by Jim Heckman, the popularity of the method seems finally to be on the wane. In its place, there is a fast growing effort to replace econometric methodology, which can be thought of as a set of ex post fixes for non- experimental data, with real experiments, which require no such fix, and whose results are thereby transparent and convincing. There is lively work in laboratory and field experiments, often to test theoretical propositions, fed and encouraged by the growing collaboration between economics and psychology. But nothing has expanded so rapidly as the Poverty Action Lab at MIT, now the Abdul Latif Jamil Poverty Action Lab (J-PAL), founded in 2003 by Esther Duflo, Abhijit Banerjee, and Sendhil Mullainathan (now at Harvard.) Born of a frustration with the inherent unreliability of econometric work, as well as by a perceived failure of the World Bank and other development agencies to evaluate their project work seriously , J-PAL runs an extensive program of randomized controlled trials (RCTs) to evaluate social programs of many kinds, focusing mostly on health and education in poor countries, but with an eclectic overall portfolio of topics. J-PAL has got off to a flying start. It has projects in a dozen or so countries... And the use of RCTs among graduate students and young assistant professors is expanding like wildfire; one Princeton student even persuaded a Mexican city to pave a random selection of its streets.

The movement is not modest in its claims, and it has attracted a good deal of acclaim from outside the profession. Banerjee has argued that the World Bank should cease to fund any activity (including presumably macro policy advice) that has not been previously subject to evaluation by an appropriate RCT. Among other plaudits in the press, The Lancet, noted that ‘The World Bank is finally embracing science’ (if only The Lancet would do the same in its treatment of economic issues!)... There is much to be excited about in this program. J-PAL and other experimental researchers have come up with several surprising results that upset previous beliefs. And by replicating similar experiments in different settings they are beginning to create an impressive and valuable body of evidence. As might be expected in the first flush of enthusiasm, there has to date been less attention to some of the problems..., nor to the extent to which RCTs really do solve the standard problems of econometric analysis. ... And the jury is still out on whether RCTs are any better than large data sets as substitutes for theory.

In the end, it is hard not to think that the quality of research owes more to people than to methods. Certainly, the best of the job market candidates this year made important advances and showed great imagination and skill, irrespective of the unresolved methodological debates that divide the profession. Given this abundant talent, and the new-found (or re-found) commitment of young economists to the great issues of poverty and health around the world, there is surely no fear for the future of economics. And perhaps one day soon, there will once again be a closer dialogue between theory and application.

    Posted by on Thursday, July 5, 2007 at 01:17 AM in Economics, Methodology, Policy, Science, Weblogs | Permalink  TrackBack (0)  Comments (13)

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