Thursday, June 19, 2008

The Usual Suspects

A minor controversy arose last week when the Obama campaign announced the hiring of a new economic policy director, Jason Furman. As the New York Times explained, a group of union leaders expressed disappointment that Furman was chosen, because they perceive that he represents the more corporate-oriented wing of the Democratic party and will skew policy against the interests of workers, especially union members. Furman, for his part, assured everyone that his job is not to make policy but to consult with a wide range of experts on Mr. Obama's behalf. ''My own views, such as they are, are irrelevant,'' Mr. Furman said.

This is the right thing to say, of course. It echoes very closely the playbook of, among many others, John Roberts in his confirmation hearings for Chief Justice: "Just calling balls and strikes, folks. Nothing interesting to see here." While the stakes in Furman's job are surely lower than Roberts's, there is every reason to believe that Furman's assurances are no more true than Roberts's have turned out to be.

This is not an attack on Furman or his honesty. I've met him several times, and we appeared on a panel not too long ago at an academic conference on low-income policy issues, where he presented some solid policy analysis. His academic work is of very high quality. (Although we both received Ph.D.'s in Economics from Harvard, we did not overlap as students.) In his new position, it is surely necessary to make reassuring comments to the press. The idea, though, that Obama's economic policy director is merely a traffic cop, directing people and ideas into Obama's office without having any effect on which views are emphasized or de-emphasized, is hard to swallow. The whole reason to hire someone like Furman, after all, is not just because of whom he knows but what he knows. And what he knows is safe, centrist technocratic economic theory. After finishing his graduate training, his work since then has put him in the orbit of Democratic policy heavyweights like Robert Rubin and Larry Summers.

Indeed, Summers is a good comparison. Before joining the Clinton administration, Summers (who was tenured by Harvard's Economics Department while still in his 20's) had cut his policy teeth in the Reagan administration. He then moved smoothly into the administration of the first New Democrat, rising to Treasury Secretary after Rubin moved back into the private sector. Summers was famously (and largely unfairly, in my opinion) criticized for a comment that, under the orthodox economic model taught in every department in the land, poor countries in Africa are under-polluted. Furman has been criticized for arguing that Wal-Mart's business model is a good one, which arguably makes sense from the point of view of the received economic models.

What makes those two minor scrapes significant is that they both reflect just how much standard economics training makes people think alike. A tiny handful of men learn their economics from an even tinier handful of men, and then they go off to advise both Republican and Democratic administrations. This is ideal if one believes that differences in economic policy simply boil down to personal preferences over the degree of progressivity in the tax system and a few other issues.

In other words, a technocratic approach to economics, in which everyone learns and believes the same models and disagrees only over some empirical questions and some non-technical philosophical priors, makes sense of Furman's assurances that he will not really affect economic policy. It is that very assumption, though, that is in dispute. It is indeed reassuring that Furman, as he reports, contacted Jamie Galbraith and Jared Bernstein, two economists with orthodox training but whose work sharply questions the bipartisan orthodoxy. It is difficult to believe, though, that Obama's choice of Furman as his traffic cop will not ultimately affect traffic flows and -- to extend the metaphor -- future highway designs.

As a final thought, it is not easy to see what other choice Obama could have made. His approach to governance all but requires him to hire people who are viewed as mainstream and unthreatening. Hiring a protege of Jamie Galbraith, i.e., someone who actually questions the shared orthodoxy of Republican and New Democratic economists, would be too provocative. In economic policy, probably more than any other policy area, there is a narrow group of usual suspects. Furman is a solid choice from among that group.

Posted by Neil H. Buchanan


egarber said...

I sometimes wonder if new models are forthcoming to account for the sea changes we've seen over the past 20 years.

With instant electronic trading, we can trade derivatives on anything we determine has underlying value. Further, as the mortgage mess has shown, we have a growing agency problem (I think that's the right term), where originators in credit activity have little skin in the game. Hence even builders got into the loan game, giving money to anybody regardless of risk, knowing they'd be clean of it as soon as their loans were resold.

And this of course taps the securitization mania, where there are secondary markets for all types of debt. But it doesn't end there, because those debt pools are sliced and diced into high / low risk tranches (all of which gives me a headache).

I guess my question is: how do the old economic models hold up against the virtual / instant nature of the new economy.

Maybe I'll kick-off a new economic theory: quantum economics :)

As I type this, I'm thinking I may be asking more of a regulatory question than an economic one. But I'll post this anyway.

Sobek said...

That's all well and good, but the real question is whether Furman is a fan of Winnie the Pooh, or if he prefers more cautious theorists like Eyore.

Neil H. Buchanan said...

In response to egarber:

(1) You're right that economists need to update their basic financial models to take into account changing financial markets. Moreover, there is plenty of evidence that the leading models failed miserably even before the financial markets were so completely revolutionized by technology. Remember the BCCI scandal? Some of the biggest names in economic finance, having won the biggest prizes in the discipline, went down in flames trying to apply their model to the real world.

(2) No need to apologize for asking a "regulatory" question rather than an economic one. Especially when talking about financial markets, you don't have economics without a legal framework, and that's simply another way of saying that by definition we are choosing among regulatory frameworks, not whether or not to regulate at all.

Both of these points are extremely important. I plan to follow up on each of them with blog posts in the near future. Thanks for sparking these further thoughts.

egarber said...

I'm also reminded of the 87 crash, when the combination of portfolio insurance and program trading caused everybody to basically hedge the same way, causing a downward spiral. Of course, it's easy to blame technology there, but the hedging strategies were programmed by people :)

Another idea for a possible post: the whole Enron loophole debate -- i.e., how much is speculation really behind high gas prices?

Paul Scott said...

"you don't have economics without a legal framework"

How so? Or are you considering the complete absence of a legal framework a kind of legal framework? (in which case, of course, the statement "you don't have X without a legal framework" is always true).

It seams to me that economics functions separately from law - though, of course, both can and do heavily influence each other in any developed society. But your statement appears to me to mean that economics cannot exist outside of a society that has a legal framework. Is that what you mean to suggest. (This, of course, has nothing to do with anything related to Obama, but the statement struck me as curious).

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