On Signs And Magnitudes
Reflections on last week's Cato conference
Greeting, The War on Prices subscribers,
Last Thursday, I hosted the conference: New Challenges to the Free Economy (from left and right) at Cato. As set out here recently, the aim was to bring together a diverse group of pro-market economists to explore the ascendant threats of progressivism and national conservatism to the free economy in the United States.
You can catch-up on the full conference by video here, with panels on antitrust, trade, the politicization of business, the regulatory state, and the public finances, as well as keynote speeches from former President Obama CEA chief Jason Furman and former CBO director Doug Holtz-Eakin. Today, though, I thought it might be useful to set out some of the highlights of the conference’s keynote speeches and consider what we might take from them.
Where do the left and right go wrong on economics?
Jason Furman’s speech set out what he sees as the classic mistakes of the progressive left and the “right” on economics. For him, liberals’ biggest error is that they ‘often get the sign wrong,’ whereas conservatives ‘often get the magnitude wrong.’
What does this mean? Well, the progressive left is often guilty of denying real trade-offs and thinking that “all good things must go together.” That is, left-wing commentators and politicians often fall into the trap of thinking that because a policy achieves an objective they value, it achieves every one of the objectives they care about.
A good example given by Furman is in thinking about the best way to deal with climate change. Progressives often champion investing in green technologies, claiming not only that this would cut carbon emissions, but also deliver well-paid green jobs and increase economic growth. Another example is the pandemic: many of the more extreme progressives took it as an article of faith not only that lockdown restrictions would save lives, but that this would always be good for the economy too.
Furman didn’t mention this, but I think there’s another example that NetChoice’s Jennifer Huddleston mentioned on our antitrust panel. The Neo-Brandeisian/Hipster Antitrust movement seem to think that more aggressive antitrust laws would not just be good for consumers and innovation, but also for attempts to reduce online harms, improve privacy, and secure better content moderation too.
All this is either motivated reasoning or pure trade-off denial. You want to reduce carbon emissions to try to mitigate the possibility of more global warming. But investing in otherwise currently uneconomic technologies brings efficiency costs, not just benefits. These policies would not have been desirable in a world where there was no externality from emitting carbon dioxide - so they bring a clear trade-off.
Lockdowns likewise brought a host of unintended consequences and, in many countries (such as the UK), using them on and off seemed to actually exacerbate the peaks and troughs of the waves of infections and deaths. And there’s no reason at all to think a world with more numerous, smaller online digital platforms would see fewer online harms or better content moderation (whatever that means).
Indeed, there’s a great irony in this sort of wishful thinking. If you really took evidence seriously and applied rigorously the principle that the only things worth doing were those that improved a whole raft of indicators simultaneously, then you’d do far less public policy, not more. That progressives advocate for such an interventionist agenda indicates that they simply get the sign wrong about the effects of major policies they desire. Per Furman, it’s this inability to conceive of the constraints and downsides of policy that saw some advocating for a large fiscal stimulus in 2021, despite the severely supply-constrained economy.
This actually ends up harming progressives politically, at least according to Furman. For they trick themselves into thinking that their policies will and can only have good effects, meaning they do not expect any opposition or adverse consequences from their ideas. This weakens their resilience, and leads them to often do deeply unpopular things. Losers of policies, Furman says, aren’t fooled by their happy talk.
If the progressives get the sign wrong, Furman says that historically conservatives get the magnitudes wrong. The most obvious example is the supply-siders’ faith that tax cuts will boost economic growth. It may well be true that cutting marginal rates improves certain incentives to work, produce, or invest. But, unfortunately, a lot of the right seem convinced that tax cuts will have such a big effect on economic growth that tax cuts will “pay for themselves.” This can be true for individual taxes in certain situations at certain times, but is broadly untrue as a general principle.
Too often, Furman said, conservatives talk as if any new tax or regulation will destroy the economy, not recognizing the small marginal impact of most changes. Despite their historic rhetorical commitment to the wonders of the market, they seem to have an outsized view of how much government policy change can affect output. Yet you can’t have a meaningful debate about the very real trade-offs if one side thinks the costs of a measure are extraordinarily high.
What about the National Conservative Right?
The answer to both afflictions, Furman believes, is more economics education and more participation in policymaking from economists.
Yet he highlighted how, on the progressive side, a lot of the sub-movements (the Modern Monetary Theory crowd and the neo-Brandeisians, for example) explicitly reject standard classical economics, believing it to be “neoliberalism.” I doubt exposure to more economics would convince these groups to abandon their beliefs. And while greater economic literacy is no doubt valuable on the margin, I’ve debated enough people to realize that it is no panacea.
What’s more, while there’s a lot of truth to Furman’s analysis of the sorts of errors left and right have historically made, my colleague David Boaz’s question to him was the correct one: isn’t the new ascendant “national conservative” right different?
It’s not that they get the economic sign “right” according to empirics but just exaggerate the effect. It’s that they are explicitly in favor of the sorts of protectionism, industrial policy, weaponization of the regulatory state, and restrictions on immigration that actually goes against what mainstream economists would typically recommend.
That’s where Doug Holtz-Eakin’s speech came in. He sought to get to the heart of what this new movement means when it comes to policy. Rather than just talking about the relative economic benefits of the sort of competitive market economy that national conservatives are eschewing, he thinks one must highlight its virtues as a political institution.
The democracy of the market in producing, say, candy bars leads to outcomes that don’t require politics. No committee is needed to determine how much we spend on Twizzlers, or what inputs are required to go into them. In fact, no legislator could conceivably come to these conclusions.
When one strays from free-markets - say, in the provision of public goods - politics must of course decide “how much” to produce and what to deliver. We might disagree on the contours of this pretty strongly, according to our own values. But if we have a strong competitive market economy for most goods and services, we can accept the limited number of areas where the state must act and where we will not get what we want. There is a derived legitimacy to the state action.
“Limited government” is not some aim that helps deliver competitive markets, but is the consequence of allowing markets to operate in the domains that they can. When you start from that premise, there’s only a limited number of activities left over that the government has to deal with.
National conservatives attempt to substitute for that market-led value discovery process with a very subjective conception of what’s valuable: usually based around the “national interest.” They sweep away all the private, subjective valuations that can be expressed in markets, to tell us: this is what the country should look like.
The primary consequence of this is that it really ups the stakes of politics. If there is one legitimate “national interest” that can be clearly expressed, then other ideas or political programs are naturally seen as illegitimate. [Doug didn’t say this, but it doesn’t take huge leaps to see how this can quickly lead to places where, say, election results are seen as illegitimate too.] And because, ultimately, someone has to decide what the correct values and national interest are, it should not surprise us that this sort of politics lends itself to a cult of personality or dictatorial tendencies.
There are other inevitable consequences of this foundational approach to government, per Holtz-Eakin. First, large amounts of industrial policy becomes inevitable. If market signals are not considered valuable or, at least, not representative of the “national interest,” then the conclusion will be to override them to channel resources towards industries that leaders deem are. Similar thinking will lead to a high degree of protectionism too.
Second, and related, you’re not going to get government policies that are efficient from an economic perspective. Economists tend to not like distorting prices, for example, because prices are important signals of what is valuable in markets, providing an incentive about what to buy and sell. But if market values are considered “wrong” or at least not reflective of the true values that the national interest compels, then price controls and other “inefficient” measures become much more likely.
Third, major tax rate rises become more likely. If you want to override what the market is doing then you need extensive government subsidies, or will suffer a lower level of national output as economic controls reduce the economy’s productive potential. Without any sort of limiting principle over the role of government, spending will grow. Given the real budget constraints governments’ face, taxes will rise.
What comes with lots of industrial policy and a lack of respect for taxpayers’ funds? A lot of cronyism - of government-granted favors and privileges to those deemed favorable by the regime. Or plenty of efforts to "reward friends and punish enemies," as the national conservative Josh Hammer puts it. That sort of cronyism ultimately leads to corruption.
The “good news,” Holtz-Eakin says, is that given the foundations of this type of movement, it sows the seeds of its own destruction. There is a political legitimacy that comes from making decisions primarily through a competitive market economy. And it generates a virtuous circle of more prosperity and natural limits on government action. Once one substitutes away a pluralistic market that can serve multiple values for the idea of one “national interest” that is imposed by the state, you create the dynamics that lead to economically destructive policies, a disregard for taxpayer dollars, and a political corruption that will eventually bring an end to that sort of regime.
Any conclusions?
It’s worth watching and musing on both speeches, because there’s a lot of wisdom in there. But they were really cold comfort for the economic policy threats we face from these ascendant progressive and national conservative movements.
I’m less inclined to believe that economics education can mitigate these intellectual trends significantly. It can perhaps smooth the edges of the excesses of the progressive left and the traditional right, particularly if you have open-minded people in the White House and Congress. Yet few would imagine that true believers would be swayed by talking through basic economic theory.
And when it comes to national conservatives, it’s clear (as Holtz-Eakin’s speech implies) that arguing on the field of economic efficiency just won’t wash. For many of that group this isn’t about what policy “works,” at least in terms of being grounded to an aim such as economic freedom or overall output. Their disagreement with us is one of values.
Certain outcomes are deemed “good for the nation,” perhaps because of the cultural values they reflect, or the “resilience” or toughness they engender. What I took from Holtz-Eakin’s speech is that to debate these ideas at the right level requires attacking those very foundations - in particular the concept that, outside of a limited range of policy areas, there is a clear and obvious “national interest” that a central authority can determine.
Interestingly, a similar conclusion is reached by Dr. Samuel Gregg in his excellent new book, The Next American Economy. “The case for free markets will lose if it remains narrowly economic in its content and emphasis,” Gregg writes. “Instead, that case needs to be wrapped into a broader story about America.” Holtz-Eakin tried to explain why the historic American impulse for limited government stemmed from the plurality of the market order. Will that line of reasoning convince anyone? Maybe or maybe not. But what’s clear is that debating the deadweight losses of various proposed policies doesn’t appear to be holding back the tide.
Notable and quotable
Here’s some other quotes from the conference to whet your appetite…
Rob Atkinson on why politicians are politicizing business:
“The progressive side is really the bigger engine of the politicization of business. They really want to politicize business. And the question is why? The short answer is: the left knows it can’t get what it wants through Congress.”
Adam Posen tried to put trade dislocations into the broader context of economic change:
“for decades…displacements on large scales would happen when technology or trade broke through, like all the secretaries who got replaced by personal computers…These kinds of churn, as economists put it, never were decried. They never got political attention. They never got much notice. But when it started being the white male manufacturing people in the so-called heartland, which by definition was not urban, then suddenly this was a crisis.”
Bryan Caplan on national conservatives’ desire to use the state to enforce their values:
“A lot of what’s going on with conservative groups that want to use government to achieve their ends, is they just don’t want to come to grips with the fact that whatever regulation you create or whatever bureau you create will be in the hands of the other party half the time. And the bureaucrats running it will be on the other side all the time. What are you thinking?”
Elisabeth Kempf on what her research says about political homogenization in corporations:
“we also see an increase in political silos in corporate America. So increasingly companies are led by all Republican or all Democratic teams…this trend towards homogeneity is not within the financial interests of shareholders…it is destructive to firm value.”
Other things
My Times article this week looked at how Google Trends in search are being used to “nowcast” the economy. And fairly accurately!
My colleague Scott Lincicome had a great long-read piece on the general war on price signals.
That’s all for now!
Ryan