Scott Sumner  

So you want my opinion?

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When people find out that I'm an economist, they often ask me for my opinion on some issue. Unfortunately, they almost always ask the wrong sorts of questions:

1. What do you think will happen to interest rates?
2. Do you think stocks are likely to fall?
3. When will the next recession occur?

Economic theory suggests that economists are unable to answer these questions. Asking me to answer these questions is like asking an astronomer whether June is a good month for a Libra to start a new endeavor. I'm often tempted to respond by saying:

I can't answer that question, but I can tell you that:

1. We should legalize a market for kidney transplants.
2. We should move toward a policy of free trade.
3. We should stop putting people in prison for drug violations.
4. We should eliminate all rent controls.
5. We should legalize, indeed encourage, price gouging.

And I have hundreds of other suggestions that I'm extremely confident are useful. But I usually hold back, because I've learned that people simply don't care what economists think about these issues. They regard our opinions as being essentially worthless. They have their own opinions on these sorts of questions, and see no reason why our opinions are more valuable than their own policy views.

I once served on a committee for MBA education at Bentley College. There was a discussion of the appropriate coverage of topics in the one semester intro to economics course. The course covers micro and macro, which is difficult to do in a single semester. (The same material is covered over two semesters at the undergrad level.) I suggested that perhaps we should just teach micro, which seems much more relevant to MBAs. The other (non-economist) members of the committee were surprised by my suggestion, as they sort of thought that macro was better for MBAs.

Years later, I figured out what they were really thinking. Micro covers lots of material that is also covered in other business courses, but in a different way. Thus professors of management, marketing, accounting, etc, already have strong opinions on how firms should behave, and think very little of the economists' perspective on this issue. But they don't have strong views on macro, which is not really a part of their discipline.

Thus it seems like economists ought to have some really useful things to say about macro, especially macro forecasts, whereas micro seems like something on which anyone could have a reasonably well informed opinion. In fact, it's nearly the opposite. Macroeconomists do not have very much useful knowledge (especially the real side; we do know what causes hyperinflation.) In contrast, microeconomics has lots of useful things to teach society, but society could not care less as to what we think about legalizing prostitution, or removing barriers to entry into the beautician industry, or relaxing zoning laws in California, or a million other issues.

Tyler Cowen interviewed Jonathan Haidt, who said:

The basic fact about moral argument is that we're not really listening to each other, we're not actually open to reasoning. We start with our gut feeling or our partisan loyalty, and at that point we become lawyers. We're really good at being lawyers and knocking down the other guy's arguments, and giving them our own.
That's what economists are up against.

In a post about abortion, Bryan Caplan recently made this observation:


What's going on? This heated discussion is a special case of a more general pattern of "back alley regulation" that I discussed five years back. Governments strongly prefer to concentrate their coercion on dehumanized "businesses" rather than human beings... even though businesses are, in fact, composed of human beings.

This also applies to drug laws, where for some bizarre reason the penalties for selling drugs are far more severe than the penalties for buying drugs. Economics can help people to see more clearly what's actually going on---any transaction is two-sided, it's symmetrical.

When I ask average people about his, they struggle to explain their support for being tougher on drug dealers. One argument is that users are addicted to drugs, and hence are victimized by selfish dealers. But this argument is unpersuasive, as there is no evidence that drug users are any more addicted to the drugs they buy than the dealers are addicted to the money they "buy" when they sell drugs. Indeed the evidence points strongly in the other direction. When I was young, lots of yuppies liked to use cocaine. As they got older, this habit got in the way of their ability to become successful in business or other professions. Most choose money over drugs, as the lure of money is much more powerful.

If we were actually going to use the "addiction" criterion for who we avoid sending to prison, it would make far more sense to imprison the yuppie cocaine users, and give pass to the poor inner city kids desperate to get money by selling drugs. Of course I'm not recommending this policy, but it would at least take the violence out of the drug trade, and hence be less bad than current policy. Instead, affluent drug users go to "rehab" clinics and poor drug sellers go to prison.

Another argument is that drug dealers are more violent than drug users. But they are more violent precisely because we send them to prison. Dealers who legally sell cigarettes and alcohol are generally not violent.

It's the same with allowing the selling of kidneys, or ending rent controls, or free trade. When I hear the arguments of people who disagree with me, it's clear that most simply don't understand the issues. In contrast, even very well-informed people often disagree with me on macro issues, such as NGDP targeting. That's why I am far more confident of my policy views in microeconomics, even though I am a macroeconomist.




COMMENTS (34 to date)
John Hall writes:

"Economic theory suggests that economists are unable to answer these questions. "

I would say that there are answers to those questions, especially for the interest rate one because you can get information implied from yield curves. The problem is that - particularly for the last two - the error bars are too wide to be as specific as people want. If I say, well I think stocks will have a lognormal distribution with mean x and standard deviation y, then that may be a good density forecast even if the point forecast of x is way off the actual realization. It's the bigger problem of people wanting to know the realization of a random process when the density forecast of the random process is usually good enough to make decisions.

mbka writes:

Scott,

I very strongly believe, and from experience, that most businesspeople have a poor understanding of micro, and zero understanding of macro. They usually have a great empirical understanding of their immediate economic environment and its constraints, but it doesn't involve any theoretical insights. It's quite literal trial and error with no understanding why something worked or why it didn't. Even pure "business" subjects such as strategy, don't bother. It's all "just-so" explanations of why this or that business succeeded or failed.

But as you say, since any micro class would be up against entrenched "common sense" opinion, it's a tough subject to approach. I gave up on trying to shoot down even the most common platitudes.

MikeP writes:

Great post. One really striking example of this ignorance among the media and policy makers of what economists know is climate change.

Media and policy makers may not realize they are doing it, but they seek and trust the economic judgments of climate scientists much more than the economic judgments of actual economists. When climate scientists advocate a policy on climate change, what are they doing but making judgments on multi-generational cost-benefit analysis regarding their pet interest? Yet climate scientists pretty much have the final say on what climate change policy should be, with no cost they suggest too great. Anyone who does not agree is a denier.

Meanwhile, actual economists like Richard Tol are driven from the IPCC because the scientists who run the show really don't get economics and persistently bias the findings. And economists who do want to address climate change like William Nordhaus are utterly ignored when their results find that pretty much any climate change policy more aggressive than internalizing the social cost of carbon -- i.e., pretty much every climate change policy currently implemented or debated -- is wealth destroying.

Philo writes:

Wise; insightful; an appropriate blend of modesty and self-assertion. It is depressing how few, even among economists, share your (microeconomics-based) policy views.

Matthias Görgens writes:

Philo, what Scott enumerated were pretty orthodox positions on policy. Not sure what you mean by few economists sharing them.

(But indeed, market monetarists could almost be defined by the-people-who-take-econ-101-serious.)

Ricardo writes:

LOVE this post!

I will also add that when Eric Garner died during an arrest by the NYPD, he was being arrested for... selling untaxed cigarettes.

E. Harding writes:

"When I ask average people about his, they struggle to explain their support for being tougher on drug dealers."

There are fewer of them, so less police expenses on arresting all of them.

bill writes:

I'm pro-legalization.
I chuckled at the thought of changing drug laws to jail people for possession of small quantities and left people with large quantities alone. Incentives would change. :-)

Floccina writes:
This also applies to drug laws, where for some bizarre reason the penalties for selling drugs are far more severe than the penalties for buying drugs. Economics can help people to see more clearly what's actually going on---any transaction is two-sided, it's symmetrical.

Thank you Dr Sumner, I have been making this argument to my friends for years and BTW once faced with this argument they seem to accept that maybe they are wrong. I am as sympathetic to the poor guy who just wants to make a buck as to the user who has been warned.

Mark Z writes:

It may just be that there's a greater general interest in macroeconimics for policy reasons. Micro-related policy issues (occupational licensing, minimum wages, zoning laws.) tend to be more local, and macro issues more national, and national issues get a lot more attention, partly because the stakes are higher because their consequences are national.

Fred Anderson writes:

I think you subtly err when you say, "They regard our opinions as being essentially worthless. They have their own opinions on these sorts of questions . . . ."

I suspect most laypersons regard **everyone's** opinion as essentially worthless; and not because they have their own.

Rather, micro- questions involve more specific issues which (usually) are irrelevant to the specific layperson. E.g., Legalizing kidney transplants is somewhat irrelevant to me since I don't anticipate donating or needing one.

However, these laypersons are all embedded in the macro-economy of interest rates, stock markets, and economic booms/recessions. And hence they would appreciate some "expert's"/clairvoyant's truthful foretelling of that **relevant** reality.

Sadly, the truthful answers run along the lines of "Well, it's complicated . . . and/or "on the one hand / on the other hand." These answers, while truthful, aren't very satisfying to that layperson because they don't help answer the question "What should I do?"

MikeP writes:

I think the interest in macroeconomics is indeed for policy reasons, but the logic is not national versus local.

Microeconomics is largely the study of things the government can't do to effect social or economic policy. Macroeconomics, on the other hand, is imagined by policy makers as the study of things the government can do to effect social or economic policy.

They are wrong, of course. But the opacity and distance of the aggregations from reality allows them to believe what they want.

Taeyoung writes:

Re your last examples, isn't it that, from an enforcement perspective, you get better returns from concentrating scarce enforcement resources on supply than on demand? Prosecute 1 dealer, vs. prosecute 20 users?

There's a similar phenomenon at work with the efforts to restrict access meth precursors (i.e. cough medicine). Prosecuting people who make meth (i.e. supply) is more efficient than prosecuting each individual user. But cutting off supply is even more efficient, from an enforcement perspective, even if it imposes significant burdens on ordinary, innocent people who just want to buy cough medicine. It's also cheaper, because you can offload a lot of the burden (and cost) of enforcement onto large businesses which are incentivised to build out expensive compliance departments. One government agent can restrict access for 1,000's of users at once in multiple markets across the country, whereas a strategy targeting all those 1,000's of users individually would consume an awful lot of scarce police and prosecutorial resources.

It's the same basic logic that underpins efforts like "Operation Chokepoint," or efforts to penalize gun manufacturers for gun violence.

It's actually kind of rare to see prosecution efforts like "Broken Windows" or efforts to lock up every single member of a gang, because the resources you have to spend on each individual prosecution seem disproportionate to the minute incremental gain in public safety. It's only once you get sufficient penetration/scale that such a strategy really becomes effective.

perfectlyGoodInk writes:

Policy proposals imply a forecast that your proposal's future looks better than the alternatives. So why should people pay any attention to economist policy proposals if they cannot forecast without any reliable accuracy?

Justin writes:

"Thus professors of management, marketing, accounting, etc, already have strong opinions on how firms should behave, and think very little of the economists' perspective on this issue."

This is a very ignorant view of those fields. Pretty much any marketing or accounting professor took PhD level microeconomics courses as part of their core training. The insights are deeply ingrained in the research, and many in those fields consider what they do as a subfield of microeconomics.

Alex writes:

Great post!

Its also worth noting that its common for drug dealers to be themselves drug addicts who become dealers because that's the only way they can afford the drugs.

Mark Bahner writes:

Hi Scott,

A good post, as usual. But I have a quibble with this:

Asking me to answer these questions is like asking an astronomer whether June is a good month for a Libra to start a new endeavor.

I don't think that's a good metaphor. Astrology is not science. Your questions:

1. What do you think will happen to interest rates? 2. Do you think stocks are likely to fall? 3. When will the next recession occur?

...are all questions that *can* be addressed by science. For example, if the whole stock market is trading at extraordinarily high P/E ratios by historical standards, presumably they would likely to go down...unless there was some evidence why "this time is different."

In contrast, there's no rational scientific case for knowing whether June is a good month for a Libra to start a new endeavor.

Michael Sandifer writes:

Scott,

I agree with the post, except for a comment about addicts. There's significant evidence that some genotypes are wired for certain chemical addictions, gambling, or addictive behavior generally. While some can dabble with opioids or stimulants, for example, others not only can't control their intake after a single use, but also find the prospect of trying the drug irresistible in the first place.

Drug addiction is extremely highly genetically determined.

MikeP writes:

I don't think that's a good metaphor. Astrology is not science.

But neither is macroeconomics as a predictive endeavor.

If you believe in the efficient market hypothesis, as you likely do if you trust microeconomics, then there is no reliable answer to time-bound questions that can be drawn from macroeconomics qua macroeconomics. The market already has the predictions priced into it. Macroeconomics doesn't help because anything that can be divined from macroeconomics has already been incorporated into the market.

Hence your behavior when faced with those macroeconomic questions should be independent of the answer a macroeconomist would give you.

It is exactly like the astrology question. Using the efficient astrology hypothesis, an astronomer will answer that June is a good month for a Libra to start a new endeavor if and only if it is a good month for a non-Libra to start a new endeavor.

ChrisA writes:

Of course I agree with pretty much all your recommendations Scott, but I think the general public are right to be skeptical of policy recommendations from experts based on logic rather than empirical evidence. We have seen many policies fall due to unintended consequences that were not seen by their proponents because they had never tested their ideas outside of a seminar. People don't argue with bridge builders about the engineering of their bridges because they can generally show with practical experience why they are correct.

Mactoul writes:

How come the moral imperatives like "we should legalize market for kidney transplants" be output of any science?
Sciences seek at understanding causes of things but are generally silent as to moral imperatives. Physics makes no such pronouncements.
So, the "should" of microeconomics comes from certain assumptions as to some notion of the ideal
embedded in micro and perhaps this ideal is not well-regarded by the non-economists and hence the moral opinions of economists are held to be worthless.

Thaomas writes:

I agree, but why not give them a conditional answer, "I don't know when there will be another recession, if the Fed would adopt GDP targeting then ...

Dylan writes:

I'm partway into an MBA and just finished up with the Economics class. Scott's observations pretty much match my own unfortunately, the content was pretty limited but skewed micro, but my classmates seemed to want to get things out of it that were more macro oriented, but not really the kinds of questions that macro even tries to study, let alone answer. We had the opportunity to pick whatever topic we wanted to for our final paper, but from what I saw most people didn't even pick a question that appeared related to economics, let alone try to answer it in the way an economist would go about it. And many of my classmates have an undergraduate degree in Econ!

Jeff writes:

Economics teaches you how to run the world, but of course no one is going to let you do that, so it's not as useful as it should be.

The appeal of economics to me has always been that it explains more about how real civilizations work than anything else does. And it tells us a lot about how to make things better than they are now. The trouble is that as soon as you start trying to influence political decisions, you run into other people whose interests do not coincide with yours.

Maybe the way to combat this is to get in early by teaching the economic way of thinking to high school and middle school students. We don't need to get very technical. Just show how and why price controls are a bad idea, explain the market for lemons, comparative advantage, a little bit of public choice theory, externalities (and why Coase thinks they're often not a problem) and a few other things I'm sure I'll think of right after I post this.

Stress the idea that in a free market, every exchange between consenting adults benefits both parties, else the exchange wouldn't happen. Those who want to forbid some exchanges should have to prove that either (i) they know better than the parties involved what's good for them, or (ii) there are some massive externalities involved that can't be contracted away. They should also have to prove that their remedies do more good than harm.

If we could get just this much into people's heads, it might improve public policy quite a lot.

Mike W writes:

@Jeff Maybe the way to combat this is to get in early by teaching the economic way of thinking to high school and middle school students.

That does seem an obvious proposal but, secondary education does not even teach consumer finance let alone econ. Ordinary folks finance houses and automobiles without considering much beyond the monthly payment. My inner conspiracy theorist thinks there is something going on.

Alan Goldhammer writes:

Scott wrote:

5. We should legalize, indeed encourage, price gouging.
In an absolute free market this would work as there 'should' be competing seller who will undercut the price gouger and prices on the item will seek a 'normal' level. Unfortunately, the market in the US is not totally free because of regulation and intellectual property protections. In my own field of pharmaceuticals we recently have seen huge rises in the price of a number of drugs from both upstart manufacturers as well as established pharmaceutical companies.

A second point on this, is that one must still have administrative anti-trust protections to prevent price fixing.

I agree with all the other points in particular the decriminalization of 'illegal' drugs.

Justin writes:

--"1. What do you think will happen to interest rates? 2. Do you think stocks are likely to fall? 3. When will the next recession occur?

...are all questions that *can* be addressed by science. For example, if the whole stock market is trading at extraordinarily high P/E ratios by historical standards, presumably they would likely to go down...unless there was some evidence why "this time is different."--

I would say that science actually can't address these sorts of questions, not only because there are too many variables to model, but also because if people can have confidence in a particular forecast, it will change their behavior such as to make the forecasting tool unreliable.

Consider your assertion on stocks. Too many factors determine their total returns for us to be able to model stock returns accurately. The macroeconomic environment, news (disasters, wars), interest rates, investor sentiment, earnings and other fundamentals, etc., are all relevant factors, many of which we can't predict with any accuracy.

We know simple rules don't work. The S&P 500, with a brief exception in 2009, has been trading at extraordinarily high P/E values since 1995. The 10yr cyclically adjusted PE ratio (CAPE10) from the late 19th century through late 1994, was 14.8x earnings. Since then, it has averaged 27.0x earnings. In March 2003, the CAPE10 was 21.3x, nearly 50% above the long term average. Therefore, we might have expected returns since then to be poor. However, the S&P has produced 10.2% annualized returns over the 15 years through March 2018, compared with 10yr Treasury yields from that time of 3.8%.

But anyway, suppose you build a model that could predict stock prices with precision, and it tells investors that stocks will go up 22.7% over the next year. Investors' reaction to this information will inevitably alter the forecast and make the model useless.

The same is true of predicting recessions or forecasting interest rates.

David R Henderson writes:

@Dylan,
What school are you at?

Bill Conerly writes:

Re Economics for MBA Students:

Macro seems less useful because the course is typically aimed at policy rather than business, as if the students would become Fed governors, Congress people or president.

The macro that MBA students need to know covers how different industries respond to business cycles differently; how the different causes of recession affect industries differently; how to figure out a company’s risk from a recession or upside potential from a boom. How inventory cycles can accentuate a particular business’s situation, first downside and then upside. How business is affected by inflationary processes. And other stuff like that.

Similar issues exist for public administration and non-profit executives.

MikeP writes:

The macro that MBA students need to know...

I nominate Bill Conerly to formulate this course curriculum.

Scott Sumner writes:

Taeyoung, You said:

Re your last examples, isn't it that, from an enforcement perspective, you get better returns from concentrating scarce enforcement resources on supply than on demand? Prosecute 1 dealer, vs. prosecute 20 users?"

If only that were true. Instead the policy actually causes more harm, more violence, more political instability, than would a policy of targeting drug users.

Scott Sumner writes:

perfectlygood. Economists can make conditional forecasts, not unconditional forecasts.

Musca writes:

Isn’t the basic reason the dealer is punished more than the user because benefitting in monetary terms from any transaction is perceived as unseemly, even morally suspect? In other words, there’s a fundamental bias in most people’s minds against profit-making, even when the other party in the transaction is pleasure-seeking and both are involved illicitly.

Dylan writes:

@David,

I'd rather not say the school on a public forum, but it generally is ranked as one of the top 20 programs in the world, sometimes top 10. And I will have the honor of having one of Scott's colleagues as a teacher next semester...which might be enough info for the truly motivated to figure out the school.

Going in I knew that the MBA is all about breadth over depth, but I've still been surprised at just how surface level the coverage of many topics is, and unfortunately they are trying to cover so many topics there just isn't time for much more. For economics we had 4 half days in class, and that was it. Everything else had to be covered through assignments or reading the text book.

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