Do economists make better policies?

A blog of Bridge Environment, updated most Thursdays

John Taylor, creator of the Rule

Two weeks ago, I wrote about the economics of fiscal stimulus and how the current debate surrounding it looks a lot like an environmental policy debate. Though we face a fundamental trade-off between the risk of future debt weighing the economy and that of current austerity stunting growth, these trade-offs have not been directly addressed. I suggested that we might have a more productive debate about fiscal stimulus policy by highlighting this trade-off with an emphasis on uncertainties and how we would like to address them. The current debate, though, looks a lot like the dysfunctional negotiations we have over most environmental policy issues.

What is surprising about the dysfunction around fiscal stimulus is that economists often do a better job. One of the pleasures I had in going back to school to study economics after a career as an environmental scientist and policy adviser was the chance to experience an entirely different academic culture. Ecologists are often driven by field observational or laboratory skills, with statistics and mathematical modeling relegated to simple approaches or specialists within the field. My own math skills were what made me stand out as an ecologist and environmental scientist. At the same time, despite some general platitudes towards conservation issues, most academic ecologists keep arms-distance away from environmental policy processes. I raised concerns about the inability of ecologists to provide effective advice under these circumstances as a graduate student, and in 2003 in a letter published in the journal Frontiers in Ecology and the Environment and believe my observations and suggestions are still relevant today.

In contrast, though many academic economists focus on theoretical work and stay away from policy matters, there are well-respected academic economists at the very top echelons of policy-making (e.g., the Federal Reserve Board plus typically at least two Cabinet-level positions in the White House) and public commentary (e.g., Paul Krugman of the New York Times). Also, whereas my math skills are well beyond those of most ecologists, they only barely keep me afloat among my economic colleagues.

No doubt as a result of these two characteristics, economic policy debates generally do a better job of addressing fundamental trade-offs and acknowledging uncertainty than environmental debates. The public is often only vaguely aware of the details. Take the Taylor Rule as an example.

            i_t – π_t – r^*_t = a_π(π_t – π*_t) + a_y(y_t – y^*_t)

This rule calculates an interest rate goal (nominal interest, i_t, minus inflation, π_t, and an assumed/targeted real interest rate, r^*_t) for the Federal Reserve based on the degree to which inflation (π_t) and economic growth (y_t) are matching targets (π^*_t and y^*_t, respectively). The adjustment-rate parameters, a_π and a_y, establish the responsiveness of the policy to divergences of inflation and economic growth rates from goals.

Don’t worry if the equation looks Greek. The concept is this: interest rates are adjusted down if inflation is low, economic growth is weak, or some combination of the two; and up if the opposite conditions hold. This rule was proposed as a way of setting monetary policy objectively and dispassionately, and has benefits both in terms of stabilizing policy choices and making them more predictable for people and industries affected by these choices. Interestingly, the equation specifies a general framework rather than a specific policy. In particular, policymakers must choose target levels for inflation and growth, and adjustment rates for how to respond to being off-target. Sound like rocket science as applied to fisheries? It should. The principles are identical. Monetary policy was not an area I studied in depth, but I was always curious whether analysts had explored the implications of different policy choices within a Taylor Rule. From a cursory scan of the literature, it seems that most work has focused on whether interest rates should respond more to inflation or growth deviations, rather than a comprehensive analysis of the costs and benefits of more or less responsive policies in general.

Regardless, the existence of this rule and its widespread use and sometimes direct application when the Fed considers its monetary policy choices serve as evidence that economists really do a better job of informing public policy debates than ecologists and environmental scientists.

To improve the situation for the environment, the necessary changes are pretty obvious and yet far from easy to enact. We need whole groups of trained environmental scientists in decision-making positions. We also need an environmental science field that elevates its quantitative skills so that more ecologists are proficient with highly technical statistical and mathematical models. These changes will not be easy to enact because, unlike the field of economics where academics are recognized and rewarded for their efforts to understand and address the nuances of real-world policies, ecologists still mostly work in ivory towers. Until the profession changes to better-reward ecologists for working on and publishing results from detailed policy analyses, there they will stay.

Best,

Josh

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