Economics explained, unfortunately

The debate over Obama's proposed stimulus bill has sparked a public clash of academic economists the like of which has rarely been witnessed in modern times. The gods have descended from Olympus and are hurling thunderbolts of rage.

Against the stimulus: Nobel laureate Gary Becker, probable future laureate Eugene Fama, John Taylor (of "Taylor Rule" fame), and assorted Republican party hacks. And, of course, Greg Mankiw's entire blog.

For the stimulus: Nobel laureate Paul Krugman, Brad Delong of UC Berkeley, Mark Thoma of Oregon, and a whole lot of other respected economists, who have declined to speak out on the matter because they know the stimulus plan is going to get passed anyway.

But the really interesting thing about the stimulus debate is that it has exposed something important about the economics profession. For decades, economists have striven to bury their field's historic ideological tinge under a mountain of mathematic formalism and bland "given-these-assumptions" professionalism. Which is exactly what they should have done. Economics should be a science, dedicated to the pursuit of truth.

Problem is: it's not. The ideological divisions of the Cold War were ignored but refused to die. There was still an undercurrent of "Keynesians" (i.e. believers in a mixed economy and the importance of government in counteracting recessions) vs. "free-market fundamentalists" (who believe that government action is a pure drag on the market). Here's how it basically went down.

After the Great Depression, Keynesian economics reigned supreme (John Maynard Keynes is pictured above right). Keynesians would look at big economic aggregates - consumer spending, gross investment, etc. - and try to draw relationships between them. The idea was that if the government could change the big aggregates - by printing money, say, or by taxing and spending - then, via the established mathematical relationships, the economy would avoid recessions. That "mixed economy" idea seemed to work pretty well until the 70s, when Keynesian techniques failed to pull the developed world out of a long period of stagnation (and even seemed to make things worse by causing inflation). A guy named Robert Lucas (above left) pointed out that the aggregate relationships were observed before people expected the government to interfere; once people started anticipating government involvement, government became part of the system intead of being able to change it from outside.

What grew in place of Keynesian economics wasn't named after a single person (though I'd call it "Lucasian"). Macro models, instead of relying on aggregates, now had to be based on models of individual action ("microfoundations"). Of course, the easiest microfounded models to construct are ones in which A) the government doesn't matter, B) people have rational expectations about the future, and C) business cycles are caused by something outside our control. So that's largely what we ended up with - the "Real Business Cycle" models and efficient markets theory (both of which yielded Nobels in the 90s). People did the most mathematically simple ("tractable") models, and essentially stopped there. The Keynesians were relegated to the basement (OK, to Harvard and Berkeley), where they spent much of their time doing careful empirical work, trying to prove that the Lucasian paradigm didn't fit the data. No one, of course, paid much attention...

But again, the real world has intruded, in the form of the current financial crisis and global recession. Keynesians popped out of the woodwork, Paul Krugman won the Nobel, and any policy advisor who mentioned the words "Real Business Cycle" got laughed off the stage (literally; my friend saw it happen). The fact that famous academics like Becker and Mankiw and Fama have resorted to half-baked public attacks on the stimulus package is an indicator of just how threatened they feel. Their worldview is in grave danger of being labeled an absurd 30-year exercise in intellectual masturbation.

But it gets worse. The abrupt exposure of "free market fundamentalism" as a fraud would leave a lot of people asking why that view was pushed so hard in the first place. Mathematical tractability is only a legitimate excuse for so long...wasn't there some Ulterior Motive that made free-market fundamentalists so eager to establish their ideas as canon? Paul Krugman thinks there was:

Needless to say, [most economists who publicly oppose the stimulus are] politically conservative. That’s their right: economists are citizens too. But it’s hard to avoid the conclusion that all of them have decided on political grounds that they don’t want a spending-based fiscal stimulus — and that these political considerations have led them to drop their usual quality-control standards when it comes to economic analysis.

And if that's the case, we have to ask: "Why?" Why was laissez-faire economic policy so important to the American conservative movement, especially since conservatives in other rich countries are often the most interventionist? And if we ask that question, a lot of people are going to come up with the answer Lee Atwater gave when he ran Ronald Reagan' campaigns:

“You start out in 1954 by saying, ‘Nigger, nigger, nigger,’ ” said Atwater. “By 1968, you can’t say ‘nigger’ — that hurts you. Backfires. So you say stuff like forced busing, states’ rights, and all that stuff. You’re getting so abstract now [that] you’re talking about cutting taxes, and all these things you’re talking about are totally economic things, and a byproduct of them is [that] blacks get hurt worse than whites.”

So there's the story. White tribalists refused to pay taxes that would end up going to blacks, so the Republican party offered them "limited government." In order to justify the policies of "limited government," free-market fundamentalists came up with stuff like Real Business Cycle models that took decades to disprove. And the Keynesians who opposed the free-market fundamentalism were hampered in their efforts to counteract this coup, since the real economy is a lot more mathematically complex than the too-simple models the free-marketers were pumping out. So Keynesianism stayed in the basement, white folks moved to the exurbs, and George W. Bush was able to pass his giant tax cut for the rich. Until the whole thing collapsed like a house of cards, of course, leaving Krugman and the Keynesian crew to pick up the pieces over the loud squawks of the free-marketers. Again.

And leaving economics to quietly rebuild its respectability as a science.

The only remaining question in my mind is: Why, why, why did so many brilliant academic economists sign on to the Republican party agenda, to the point of secretly compromising their intellectual integrity? Don't tell me they bought that Grover Norquist crap about taxes being a threat to freedom. Did they really manage to convince themselves of the truth and usefulness of the models they made? Were they blinded by the beauty of closed-form equation solutions? Did the Republican party manage to hand out job and money sufficient to sway even Nobel laureates? Or were economists, too, subtly infected with the virus of white-tribalism?

We may never know.