Economists Do It With Models

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Episode 2 In My “Economists Don’t Say That” Series, And A Potential Explanation…

December 15th, 2012 · 2 Comments
Behavioral Econ · Policy · Uncategorizable

Ok, I get it- it’s for some reason trendy to use economics and economists as straw men to try to prove that you really “get” the world or whatever…I mean if Michael Sandel is going down that path, it’s got to be a thing, right? The next installment in this trend piece is an article entitled Has ECON 101 turned Americans into Lemmings? Let’s go through and analyze…

The title in an of itself is pretty hysterical to me, since it makes the (sadly) incorrect assumption that people pay enough attention in Econ 101 so as to exhibit such consistent behavior as a result. (In reality, there are a number of studies that show, again sadly, that economics courses don’t raise scores on tests of economic proficiency a whole lot.)

The real content of the article begins with a simple enough principle:

One of the first lessons of introductory economics is a simple truism: Savings is Deferred Consumption. It is intuitive and obvious. Wealth is value; when one obtains or creates wealth one can choose to either consume it today, or save it for the future.

Okay, so far so good…not groundbreaking, but at least true. So why is the author talking about savings versus consumption?

At what point and on what basis have modern economists concluded that savings requires and deserves government subsidy? Perhaps it is simply a puritan ethic that sees virtue in self-denial and deferred gratification? Whatever its rationale, I believe it represents group think and flawed dogma.

I have been advised that I will be unable to find a living economist anywhere who doesn’t believe that sound economic policy demands and deserves preferential tax treatment of savings over consumption. Initially I found it hard to believe that any three economists could find complete consensus on any common principle. I was incredulous at the idea that all economists could agree on a single principle. But now, having researched the issue at some length, I posit that universal agreement on a flawed proposition may be the proximate cause of our progressive decline.

Not surprisingly, I’m not going to be handing out gold stars to either the author for his research skills or his advisers for their advice. (Also, if you’ve researched an issue at length, why wouldn’t you include some of what you learned in your article? It’s quite perplexing.) I don’t know about you, but my go-to source to check statements of the “economists say X” variety is the University of Chicago’s Initiative on Global Markets Economic Experts Panel. This panel brings together 40 or so leading economists and periodically asks them agree/disagree questions on economic matters. So let’s see what the panel has to say about differential taxes for savings:

Question B: Despite relabeling concerns, taxing capital income at a permanently lower rate than labor income would result in higher average long-term prosperity, relative to an alternative that generated the same amount of tax revenue by permanently taxing capital and labor income at equal rates instead.

Okay, I get that this question technically didn’t ask about taxing savings versus consumption, but taxing capital is equivalent to taxing the returns to savings, and taxing labor is equivalent to taxing consumption and the base of savings that is not tax exempt. Luckily, the author of the original article made my job pretty easy by claiming that not one economist would disagree with the preferential treatment of savings, since that only requires me to find one counterexample. Just from this sample, I’ve located five:

In case you’re curious, the usual reason given for taxing capital gains and dividends at a different rate than taxing labor is that wages are paid out to workers before corporate taxes whereas the returns to capital are accrued after corporate taxes, so the differential mitigates double taxation from the system to some degree.

An additional potential justification is that lower taxes on saving is beneficial on an individual level because people wouldn’t necessarily save enough for retirement otherwise (and would then become the government’s problem to some degree). The article author doesn’t seem to buy it:

On what basis have we decided that individual self-interest is not an adequate incentive to ensure that people prepare for the future?

I’m glad you asked! While some economists do have reason to believe that households are not grossly undersaving for retirement, their data is based on the already favorable taxation of savings. Therefore, one can’t conclude that people would still save enough if the differential tax treatment were not there. Other economists, however, are concerned that changes to the structure of savings programs is going to result in suboptimal saving for retirement:

As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving.

So, if I’m reading this correctly, the basis includes bounded rationality and self control. It’s worth noting, however, that the authors of the study (Richard Thaler and Shlomo Benartzi) aren’t calling for preferred tax treatment of savings and are instead proposing programs to specifically overcome the behavioral biases that lead to undersaving.

It baffles me how people who claim to do their homework can be so unaware of what economists actually think and say. That said, I was offered a potential explanation by Ezra Klein:

Of the 503 guest appearances during segments identified as primarily about budget negotiations, only 22 — about 4.4 percent — were made by economists. The lack of economist representation was similar across networks. Economists accounted for 6.3 percent of guest appearances on CNN, 3.1 percent on Fox News, and 7.3 percent on MSNBC. No economists appeared on ABC, CBS, and NBC during the period analyzed.

You can see more graphs of this sort here. In case you’re curious, the study defined “economist” as follows:

We defined an economist as someone who either holds an advanced degree in economics or has served as an economics professor at the college or university level. In cases where it was unclear whether or not the guest held an advanced degree, they were classified in the next most descriptive cohort.

For economists who also fell under the definition of a political guest (such as former U.S. Secretary of Labor Robert Reich) or journalist, Media Matters coded those guests only as economists.

I feel that this definition is a little too narrow in a few cases- for example, Ezra Klein wouldn’t be counted as an economist in this study, since he only has an undergraduate degree in economics (Update: Apparently Ezra was a political science major rather than an econ major, but I think he should take it as a compliment that I thought otherwise. :)), but he is clearly knowledgeable enough to speak intelligently on the subject. That said, I don’t think it’s narrow enough to account for the vast under-representation being shown here.

My suggestion? Ask more actual economists to come talk about economics and policy, since maybe then people will have a better view of what economists have to say (and might even learn something useful) and I can stop writing ranty articles like this. If nothing else, it will give The Daily Show and/or Saturday Night Live plenty of material.

Tags: Behavioral Econ · Policy · Uncategorizable

2 responses so far ↓

  • 1 Russ Nelson // Dec 16, 2012 at 10:47 am


  • 2 Jake // Dec 17, 2012 at 2:01 pm

    I’ll bet many, if not all, economists feel this way.

    Policy makers and TV Hosts cherry pick their economics to suit their audience and agenda (no secret, they are all guilty of this).

    The economics profession needs to come to, what I call, a “Grand Consensus”. Doing so would leave less wiggle room for misconstruing bad economics for good economics.

    I don’t see either of those things happening anytime soon.

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