Both Noah Smith and Matthew Yglesias have weighed in on my earlier post in which I speculated that one reason that economics faculty are sharply more conservative relative to faculty in other departments on college campuses is that the facts and analysis in economics tend to lead to somewhat more conservative interpretations of the world. The posts by Noah and Matthew both have good points and I wanted to comment on them briefly before moving on.
First, I should point out that my original post was really about the different political viewpoints of college professors, not typical members of the Democratic or Republican Party. Both Noah and Matthew point out correctly that the facts actually roughly agree with what an informed policy analyst would believe (either a moderate Democrat or moderate Republican). Despite the usual public disputes between Republicans and Democrats, better informed members of these parties (e.g., people like Peter Orszag and Douglas Holtz-Eaken, or even Paul Krugman and Greg Mankiw) would actually have surprisingly similar policy assessments. The range of differences in policy recommendations among mainstream economists is overall pretty narrow. This is also probably due to the disciplining nature of quantitative facts.
In Noah’s response, he says that in the 1980’s,
conservatives moved away from the facts because they could, and liberals moved closer to the facts because they had to.
I think this is correct though the question of why this occurred is left open. It’s possible that the electorate simply became more conservative and this forced both parties to realign. Alternatively, it could be that the accumulation of facts may have forced liberals to adopt a more conservative tone as our understanding of the world was refined. Republicans in contrast could afford to adopt a less realistic view that was even further to the right. I thought initially that Noah’s quote was more like the latter view but I’m not sure…
Both Noah and Matthew suggest that there are many facts which fit better with modern liberal agendas. Matthew mentions a variety of standard market failures that are typically highlighted in “Econ101” texts. I’m not sure I entirely follow his line of reasoning – my original reaction was that it seems like he’s agreeing with Noah’s statement above. That is, the modern liberal approach to economic policy is to start with a basic free-market approach and then perhaps use corrective (Pigouvian) taxation to improve the allocations as needed (is Matthew channeling his inner Greg Mankiw?). You won’t find many economists who would take issue with this view but at the same time this seems like he is conceding the point — start with Milton Friedman and then season lightly with a little bit of Paul Krugman?
Noah points out that because many of the incentive effects are small that liberals are tempted to ignore them as we pursue our goals. The problem with this argument is that it applies equally well to jelly doughnuts and cigarettes. One jelly doughnut, or one cigarette, does no appreciable health damage. This doesn’t mean that you can eat jelly doughnuts (or smoke cigarettes) without worrying about their long-term health consequences. If you pile on tax after tax, impediment after impediment and so on, then the costs will end up being relatively high even if the costs associated with any one regulation are small.
Noah also points out that wealthier nations typically have greater fractions of GDP allocated by the government. The implication, I guess, is that this is a sign that more government involvement can’t be that bad if the wealthier countries are opting for it. I don’t think I agree with this statement. It’s true that most European nations have greater government involvement in their economies but it is also true that, on the whole, these nations are not as productive as the U.S. Many prominent European nations (e.g., UK, Italy, France, Germany, Spain) have per capita levels of GDP which are roughly 65 – 75 percent of U.S. per capita GDP. This is a comparison of average GDP per capita. I would anticipate that median GDP per capita is much closer (since income distributions are much more balanced in Europe on average), but even then, these economies are starting out with much less average output per person to allocate (these measures include government provided goods and services).
I would encourage Noah and Matthew (and anyone else who’s interested) to take a look at the papers by Djankov and Shleifer (and many coauthors) linked below.* These papers present an empirical analysis of economic performance across nations together with measures of corporate taxation, labor market regulation and regulation of business entry. Of course, making such a comparison is difficult – there is no sense in which we can take these measures as causal. Even more problematic, there are many variables that are changing simultaneously. There are hundreds of policy differences, cultural differences, etc. This will make interpreting the results extremely difficult. Nevertheless, there are noteworthy patterns in this data and the basic message is not encouraging.
From the abstract of the corporate tax paper:
[High corporate tax rates have ] a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. … Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy.
From the abstract of the paper on regulation of business entry:
Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have fewer entry regulations.
From the abstract of the paper on labor regulation:
richer countries regulate labor less than poorer countries do, although they have more generous social security systems. The political power of the left is associated with more stringent labor regulations and more generous social security systems. … Heavier regulation of labor is associated with a larger unofficial economy, lower labor force participation, and higher unemployment, especially of the young.
Of course, many European nations are trying to undo some of the policies they have adopted over the years because they are looking at the same data we are looking at. Unfortunately, we don’t really know which particular policy (or policies) is to blame for resulting in a stagnant labor markets but this is little comfort to a nation if it has low labor force participation, low productivity and high unemployment. Hopefully this more mature liberalism that Noah argues now characterizes the center left in the U.S. has learned from the experience of its forerunners.
*These papers are a bit out of date. The most recent one was from 2008 but the earliest one dates back to 2000. There are probably more up to date papers looking at these topics. If there is an expert who wants to weigh in I would be interested in hearing about more current work.