Thursday, August 5, 2010

A note on the role of economics for decisionmaking

Some friends were debating the merits of John Perkins' "Confessions of an Economic Hit Man". I find it hard to take seriously - I think it's just a bunch of crappy conspiracy theories that ignores everything that ever happened in emerging market default scenarios. If you read it, realize it's fiction and you'll enjoy it.
One friend liked it because it peripherally asks the question "Why do we need to justify development policy decisions (or any policy decisions) based on economics?" To quote her, "While I completely agree that economics can be a valuable lens to view a policy problem through, I don't understand why we use only this lens.  A lot of my econ professors argued that economics is so powerful because it allows one to quantify a problem, compare outcomes in commensurable terms (dollars, or another currency), and is free of value/ethical judgments.  The problem is—at least in environmental and development policy--that this mindset severely limits or even prevents any sort of actual discussion about values and ethics from taking place.  People spend so much time squabbling over numbers and economic analyses that the larger questions of ethics, equity, and fairness are often given a backseat.  Though it was not the main focus of the book, I appreciated Confessions of an Economic Hit Man because it at least attempted to raise this point."
My response went something as follows:
Economics is supposed to be a tool, not an end. A hammer can be used to build a hospital or a tobacco factory. In this case, it's a tool to calculate rational decisionmaking, but you certainly need to calibrate what you set as a good or a bad to see what's rational. And I agree that a lot of people lose sight of that in their assumptions. There's almost always some sort of tradeoff between equality of opportunity/growth/future well-being (one bucket) and equality of outcome/ current safety nets (another bucket), and that's something worth thinking about more than a lot of people do. This split underlies a lot of differences of opinion. I admit freely to usually prioritizing the first bucket because I think it helps more people in the long run as long as you've cleared some basic hurdle in the second category. Others think differently. Some would even disagree with the dichotomy, though I think they'd probably be climbing an uphill battle in many cases, given what we know. Admittedly, climate is a very reasonable exception to this dichotomy - it's my generalization, not a rule.
That said, maybe my view of economics is more expansive than most - I see economics as the science of decisionmaking and if you're making a decision - any decision - you should be using what I see as economics, and the normative aims are just the inputs into that process.
More specifically to climate policy, I can see why it's frustrating as an enviro person to see the debates raging over carbon and climate. Economics is abused by both sides to justify preconceived opinions, but I blame ideology for that, not economics. Bluntly? both sides aren't approaching this very smartly - climate deniers for a million reasons (literally - economy, security, risk/reward, science denial, etc), and climate change activists for not thinking hard enough about whether they're focusing on supply and infrastructure vs demand. (I've talked about this before - I am very skeptical about demand-focused carbon initiatives like cap-and-trade, which is a split nobody ever talks about)
Not to harp, the stimulus was the biggest missed opportunity from this perspective. It should have been composed of three things: 1) aid to states to keep teachers and police officers and people functioning, 2) massive infrastructure development to aid a comprehensive energy policy (not just from a climate perspective, but an economic and security one as well) - we're talking a complete smart grid overhaul and subsidizing the installation of battery charging stations nationwide to get gasoline out of cars, and 3) payroll tax cuts to keep the economy going until those very non-shovel-ready infrastructure projects were ready. It's a tragedy and a disgrace that the stimulus put together by Congress and the Administration got caught up in political pet projects. Ironically, the Democratic supermajority (vs a simple majority) may have been the worst thing to happen to the climate in a long time because it facilitated this outcome. (In the US, anyway... emerging markets are a whole different kettle of problematic fish)
I wonder if we won't look back on Obama and the climate/economy the way we look at Hoover and the depression or Carter and oil policy/inflation - a man naturally brilliant in his field (in Obama's case, social issues and con law) who means well, but who has incompatible knowledge and priorities with what we needed at the time (which, ignoring Iraq and Afghanistan for a moment, I'd assert is some cross of Teddy Roosevelt-style combat of special interests/partisanship and safeguarding of the environment and Reagan-esque economic vision).

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