Scott Sumner  

Economics is held in low repute

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Matt Yglesias has an excellent post discussing the views of Peter Navarro, who was just named head of Trump's National Trade Council:

"When net exports are negative," Ross and Navarro write, "that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth."

They believe that, therefore, we can boost growth by curtailing imports:

To score the benefits of eliminating trade deficit drag, we don't need any complex computer model. We simply add up most (if not all) of the tax revenues and capital expenditures that would be gained if the trade deficit were eliminated. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.

Trump proposes eliminating America's $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion.


Reading this, you might wonder why it is that in the real world, economists actually do try to develop complex computer models of the economy. The answer is that the alternative method Ross and Navarro are proposing doesn't even remotely work.

A simple sanity check

Here's a quick way to tell that something has gone wrong with the Ross/Navarro argument. Last year, the United States imported $180 billion worth of petroleum products -- oil and such.

According to Ross and Navarro, if the United States made it illegal to import oil, thus wiping $180 billion off the trade deficit, our GDP would rise by $180 billion. With labor constituting 44 percent of GDP, that would mean about $80 billion worth of higher wages for American workers. So why doesn't Congress take this simple, easy step to boost growth and create jobs?

Well, because it's ridiculous.


Navarro and Ross are making the EC101 mistake of drawing causal implications from the famous GDP identity:

GDP = C + I + G + (X - M)

Students often assume that trade deficits subtract from GDP, because there is a minus sign attached to imports. What they forget is that the goods imported then show up as a positive in either the consumption of investment category. Navarro also seems to have forgotten this fact.

Navarro's claim is not just wrong, it's nonsensical. Naming him to lead the NTC is akin to appointing an Energy Secretary who believes cold fusion can meet all our energy needs, or putting an astrologer in charge of NASA.

But that is not how the pick will be viewed outside the economics community. Why not?

I see a number of reasons:

1. Peter Navarro has good credentials. He's a Harvard educated economist who teaches at UC Irvine, a respected research university.

2. Other economists such as Paul Krugman have occasionally pointed to the trade deficit with China as a problem.

3. Economists often disagree about important issues like fiscal stimulus, supply side economics, the minimum wage, and the national debt. This leads outsiders to believe that economics is "not a science".

As far as I know, leading economists (liberal and conservative) do agree that Navarro's reasoning is inaccurate. When people like Krugman have pointed to the issue of trade deficits, they've been careful to state that deficits are not generally a problem, but that measures to lower saving in surplus countries can shrink their surpluses and improve AD when the world is at the zero lower bound. Navarro is implicitly relying on an aggregate demand side argument. But with the Fed in the process of raising interest rates, it's not applicable to the US, even in the most primitive Keynesian model.

To return to the example above, the neo-mercantilists believe that if we stopped imports from China, consumption would not decline. Instead all those toys and sneakers and iPhones would be built in America with American workers. But Janet Yellen has made it clear that the Fed regards 4.6% unemployment as roughly full employment, and any attempt by Trump to boost AD will be met with tighter money. The only way to boost output significantly is supply-side policies, and mercantilism is certainly not a supply-side policy.

It's often said that all sciences are just "applied physics". But as systems get more complex, it becomes harder to make precise predictions. Thus when physics is applied to global warming, the predictions are less accurate than when used to derive the optimal orbit for a satellite. Hence global warming is a political issue in the way that NASA orbiting decisions are not. Obviously economics deals with a complex, hard to predict system, and is more akin to climate science than to simple physics.

Economists are like the boy who cried wolf. By insisting that Keynesian stimulus is "science" and supply-side tax cuts are "voodoo", they have discredited themselves in the eyes of the public. When an actual charlatan comes along, no one will believe us. Especially since trade deficits do seem like a problem, from a common sense perspective.

If we are unhappy with how we are viewed, then we first need to get our own house in order.

PS. It's not at all clear that Navarro's ideas will actually be implemented. Some people believe that Trump is more likely to govern as a traditional Republican. The next four years will provide a test of the "Great Man" theory of history. I'm in the camp that believes presidents are far less consequential than most people assume.




COMMENTS (18 to date)
pyroseed13 writes:

This is a good post, but I would quibble with one part:

"Economists often disagree about important issues like fiscal stimulus, supply side economics, the minimum wage, and the national debt. This leads outsiders to believe that economics is 'not a science."

The claim that economics is "not a science" strikes me as basically correct. Almost all claims by economists are value-laden in some way. I don't think economics is useless, or else I would not have studied it in grad school, but you are not going to, say, solve the "efficiency vs. equity" tradeoff by appealing to mathematical models. I agree with you though the "lack of predictive power" is an unfair criticism of economics, because any kind of applied science will have to deal with the reality of working within a complex system. That being said, it would nice if economists were a bit more humble on that point and careful in their analyses. When you have guys like Justin Wolfers saying "the markets will do x, y, z" if Trump is elected, and then this doesn't happen, it makes the profession look foolish.

Scott Sumner writes:

pyroseed13, I agree that values play a big role in economics, but they also play a big role in nuclear physics (think about the nuclear bomb) or in medicine (genetic engineering). That's not really relevant to the question of whether economics is a science.

On the other hand, since nobody seems to agree as to what the term 'science' actually means, perhaps nothing is relevant to the question of whether economics is a science. Maybe it's a meaningless question.

Philo writes:

"If we are unhappy with how we are viewed, then we first need to get our own house in order." I think what this means is that the economics profession is largely responsible for the low esteem in which it is held by the public, and that if each economist would start making only moderate claims while criticizing colleagues who make immoderate claims he would make a (minuscule) contribution to raising the public's perception. But it sounds like a collectivist call for action by the whole profession--which is silly, because the profession is not organized at all like a real agent, but rather is a very loose collection of individuals.

"I'm in the camp that believes presidents are far less consequential than most people assume." My estimate of the importance of Trump's election is provided by the subsequent rise in the stock market. I hope the market is right!

pyroseed13 writes:

@ssumner

But questions of whether the development of a nuclear bomb or genetic engineering are morally good things strikes me as being outside the realm of "science," which merely describes how those things work. Similarly, in economics someone could show that the effect of a tax will be x, although whether x is a desirable outcome will depend on our values. The "science" part is illustrating those tradeoffs, but anything beyond that I would not consider a science.

Jeff G. writes:

I like to think about Peter Thiel’s utopian island nation. In this nation, Peter will be importing food, yachts, movies, and whatever else makes him happy. Say it is $1M worth of stuff. And of course he pays for all this with investment income or facebook stock. The national accounting of this nation will record $1M in C and -$1M in M for a total GDP of $0. And this is an accurate measure all goods and services that are being produced domestically—zilch.

Now suppose the new finance minister gets the bright idea that he can increase GDP by $1M if we stop importing stuff. Will this help Peter? Of course not, the island has no ability to produce anything, he will literally starve. M will fall to zero and so will C. Is GDP the best way to measure the well-being of Peter? No. Is there some long-term benefit to increasing the productive capacity of the island? Probably not. No matter how hard Peter tries, he’s not going to be able to grow tomatoes like California, makes Germany like Italy, etc. It would seem Peter’s number 1 priority is that he doesn’t start pissing off the U.S., Germany, and the rest of the world, so much so that they decide they all don’t want to trade with him anymore.

Allen Ramsey writes:

It is premature to presume that Peter Navarro's ideas are "ridiculous." The GDP Identity or GDP = C + I + G + (X - M) is merely an heuristic, meaning an hypothesis to solving a problem via a "practical method, not guaranteed to be optimal but sufficient for immediate goals." Let's give the man time to see if his ideas shall yield solutions to our economic problems (Wikipedia). I do think his "hawkishness" toward China is ridiculous.

Yaakov writes:

Thanks for the post. I particularly like and strongly agree with the last sentence: "presidents are far less consequential than most people assume".

Gordon writes:

"If we are unhappy with how we are viewed, then we first need to get our own house in order."

While that would be one necessary step, I believe more needs to be done to popularize economics. Too many prominent public figures mis-characterize economics out of ignorance or for political reasons. Whenever Bernie Sanders complains about establishment economics, I see it as similar to the way in which anti-vaxers complain about establishment medicine. And a friend in Facebook shared a video of prominent environmentalist David Suzuki calling economics a kind of brain damage because he did not understand externalities. I quickly posted a comment to explain how Suzuki was way off base. But my reach is only to a small number of people while several million people saw Suzuki's horribly erroneous diatribe in Facebook alone.

Scott Sumner writes:

Philo, It most certainly was not a "collectivist call for action"

Pyroseed, The same applies to economics. There is the "scientific" question of whether the minimum wage causes higher unemployment, and the ethical question of whether a higher minimum wage is desirable.

Jeff, Yes, that analogy applies.

Allen, I don't think it's premature to conclude that.

Thanks Yaakov.

Jon Murphy writes:

@pyroseed: Check out Jim Buchannan's writing on the positive ("does minimum wage cause job loss"?) vs the normative ("is minimum wage good?"). It's a great essay (I'd give a link but I can't find one. I believe the essay is called "Is Economics a Positive Science?"

Andrew_FL writes:

@Jeff G.-Brilliant thought experiment. Which only makes it more baffling that Thiel supported for President a guy who couldn't understand it.

27chaos writes:

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EB writes:

@Jeff G.- Your experiment shows why economists got a terrible reputation. It reads like "If I locked myself in my bedroom I'd never produce anything". Your experiment avoids the real problem of finding a new source of income when you have lost the one that you had lived on for years. What would you say to a friend that has lost his source of income?

Scott ends the post with a call to put the house in order. It means nothing. You don't tell other economists what they should be thinking and talking. If you are one of my many frustrated colleagues --yes, in 51 years upon graduation I have seen a lot of them around the world-- because politicians don't pay attention to what you have to say, then either become a politician or understand why good politicians will ignore your advice. I think they ignore us because we prefer to ignore both what politics and government are about (few have paid attention to what Buchanan wrote in the 1950s and 60s as the foundation for Public Choice) and how little we know about many issues (including Money and Banking). Anyway, politicians like to use economists for their own purposes --and thus why I never worried about my own employment.

Steve F writes:

It does not appear to me that Ross and Navarro's argument is that reducing imports has a ceteris paribus positive effect on growth.

Steve F writes:

The idea that presidents don't matter a whole lot is probably derived from the fact that the last few presidents have been not that dissimilar.

In a few years, it will be obvious what a better president can do.

Jim Glass writes:

But that is not how the pick will be viewed outside the economics community. Why not?

Because nobody cares what economists think.

I'm not being cynical but empirical.

When the Evangelical Christians didn't care about the plenty they know about what Trump thinks of women ... fully matching how the Feminists didn't care about the plenty they knew about how Clinton treated ... do you imagine that any of them cares at all about what they don't know about what economists think?


Jim Glass writes:

Back in his Slate days Krugman wrote about NYC's trade deficit being larger than the total US deficit so if New York was kicked out of the country the USA would be in trade surplus.

Don't know the data these days, but surely a million Manhattanites living high on the hog while not manufacturing a damned thing are making the USA poorer by the Trumpista Import-Export logic, then add in the 7 million in the other boroughs manufacturing next to nothing...

So kick the rich consuming but manufacturing nothing NYCers (like the Trump family) out of the country and the USA will become richer by accounting identity.

What does a city like NY, Hong Kong, London, add to the welfare of a nation anyway, when it just ramps up the trade deficit?

LD Bottorff writes:

I hold economists in much higher regard than I hold climate scientists. Economists actually engage in reasoned debate about issues and try to get at the truth. That's why I spend time reading this site.

On the other hand, large numbers of climate scientists seem quite comfortable shutting down debate.

Which approach is more likely to lead to the truth?

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