The public role of academics

About 36 years ago, when my career as a historian was just getting going, I remember thinking what a privilege it was to be able to spend my time thinking about great events of the past, present, and future.  The best professors I had had had a way of linking the past and the present, and I have tried to do the same thing ever since--particularly here on this site.  Historians in particular, it seems to me, should be able to help the country face its problems by pointing out similarities and differences with those of the past.  In those days political scientists tried to do the same thing, especially with respect to foreign policy. So did economists.  The men who taught economics at Harvard when I arrived 48 years ago had grown up during the depression, and they thought they now understood how to make sure nothing like that ever happened again.  While microeconomics was not particularly interesting, macroeconomists like Paul Samuelson, Otto Eckstein and John Kenneth Galbraith were important  public figures.  All this has changed as academia has increasingly become its own closed intellectual world.

I thought of all this early last week, when I read an op-ed by a young Harvard economist in the New York Times commenting on the controversial award of the latest Nobel Prize in economics.  I am going to reproduce the column in full, for non-commercial use only of course.

Yes, Economics Is a Science

By RAJ CHETTY

CAMBRIDGE, Mass. — THERE’S an old lament about my profession: if you ask three economists a question, you’ll get three different answers.

This saying came to mind last week, when the Nobel Memorial Prize in Economic Science was awarded to three economists, two of whom, Robert J. Shiller of Yale and Eugene F. Fama of the University of Chicago, might be seen as having conflicting views about the workings of financial markets. At first blush, Mr. Shiller’s thinking about the role of “irrational exuberance” in stock markets and housing markets appears to contradict Mr. Fama’s work showing that such markets efficiently incorporate news into prices.

What kind of science, people wondered, bestows its most distinguished honor on scholars with opposing ideas? “They should make these politically balanced awards in physics, chemistry and medicine, too,” the Duke sociologist Kieran Healy wrote sardonically on Twitter.

But the headline-grabbing differences between the findings of these Nobel laureates are less significant than the profound agreement in their scientific approach to economic questions, which is characterized by formulating and testing precise hypotheses. I’m troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions.

That view is unfair and uninformed. It makes demands on economics that are not made of other empirical disciplines, like medicine, and it ignores an emerging body of work, building on the scientific approach of last week’s winners, that is transforming economics into a field firmly grounded in fact.

It is true that the answers to many “big picture” macroeconomic questions — like the causes of recessions or the determinants of growth — remain elusive. But in this respect, the challenges faced by economists are no different from those encountered in medicine and public health. Health researchers have worked for more than a century to understand the “big picture” questions of how diet and lifestyle affect health and aging, yet they still do not have a full scientific understanding of these connections. Some studies tell us to consume more coffee, wine and chocolate; others recommend the opposite. But few people would argue that medicine should not be approached as a science or that doctors should not make decisions based on the best available evidence.

As is the case with epidemiologists, the fundamental challenge faced by economists — and a root cause of many disagreements in the field — is our limited ability to run experiments. If we could randomize policy decisions and then observe what happens to the economy and people’s lives, we would be able to get a precise understanding of how the economy works and how to improve policy. But the practical and ethical costs of such experiments preclude this sort of approach. (Surely we don’t want to create more financial crises just to understand how they work.)

Nonetheless, economists have recently begun to overcome these challenges by developing tools that approximate scientific experiments to obtain compelling answers to specific policy questions. In previous decades the most prominent economists were typically theorists like Paul Krugman and Janet L. Yellen, whose models continue to guide economic thinking. Today, the most prominent economists are often empiricists like David Card of the University of California, Berkeley, and Esther Duflo of the Massachusetts Institute of Technology, who focus on testing old theories and formulating new ones that fit the evidence.

This kind of empirical work in economics might be compared to the “micro” advances in medicine (like research on therapies for heart disease) that have contributed enormously to increasing longevity and quality of life, even as the “macro” questions of the determinants of health remain contested.

Consider the politically charged question of whether extending unemployment benefits increases unemployment rates by reducing workers’ incentives to return to work. Nearly a dozen economic studies have analyzed this question by comparing unemployment rates in states that have extended unemployment benefits with those in states that do not. These studies approximate medical experiments in which some groups receive a treatment — in this case, extended unemployment benefits — while “control” groups don’t.

These studies have uniformly found that a 10-week extension in unemployment benefits raises the average amount of time people spend out of work by at most one week. This simple, unassailable finding implies that policy makers can extend unemployment benefits to provide assistance to those out of work without substantially increasing unemployment rates.

Other economic studies have taken advantage of the constraints inherent in a particular policy to obtain scientific evidence. An excellent recent example concerned health insurance in Oregon. In 2008, the state of Oregon decided to expand its state health insurance program to cover additional low-income individuals, but it had funding to cover only a small fraction of the eligible families. In collaboration with economics researchers, the state designed a lottery procedure by which individuals who received the insurance could be compared with those who did not, creating in effect a first-rate randomized experiment.

The study found that getting insurance coverage increased the use of health care, reduced financial strain and improved well-being — results that now provide invaluable guidance in understanding what we should expect from the Affordable Care Act.

Even when such experiments are unfeasible, there are ways to use “big data” to help answer policy questions. In a study that I conducted with two colleagues, we analyzed the impacts of high-quality elementary school teachers on their students’ outcomes as adults. You might think that it would be nearly impossible to isolate the causal effect of a third-grade teacher while accounting for all the other factors that affect a child’s life outcomes. Yet we were able to develop methods to identify the causal effect of teachers by comparing students in consecutive cohorts within a school. Suppose, for example, that an excellent teacher taught third grade in a given school in 1995 but then went on maternity leave in 1996. Since the teacher’s maternity leave is essentially a random event, by comparing the outcomes of students who happened to reach third grade in 1995 versus 1996, we are able to isolate the causal effect of teacher quality on students’ outcomes.

Using a data set with anonymous records on 2.5 million students, we found that high-quality teachers significantly improved their students’ performance on standardized tests and, more important, increased their earnings and college attendance rates, and reduced their risk of teenage pregnancy. These findings — which have since been replicated in other school districts — provide policy makers with guidance on how to measure and improve teacher quality.

These examples are not anomalous. And as the availability of data increases, economics will continue to become a more empirical, scientific field. In the meantime, it is simplistic and irresponsible to use disagreements among economists on a handful of difficult questions as an excuse to ignore the field’s many topics of consensus and its ability to inform policy decisions on the basis of evidence instead of ideology.

Raj Chetty is a professor of economics at Harvard. 

There are few people whose email addresses are more readily accessible than academics, and I sat down and wrote the following message to Prof. Chetty.

Dear Professor Chetty,

       I am not an economist, but I'm a historian and a veteran of nearly half a century in academia.   During that period I have seen both the intellectual approach and the social role of academics in the humanities and social sciences change a great deal.  Your op-ed, and the controversy which it addresses, seem to me to illustrate this.

       I certainly would not dispute the points you make in the latter part of your piece.  Studies such as the ones you describe certainly can tell us important things about the impact of one particular economic policy change upon the general welfare.  They can, of course, be good or bad depending on who is doing them and how many questions they ask about their data.  I must say I have trouble believing the results of the absent teacher study, even though I can still remember my outstanding elementary school teachers myself, but I will take your word for them.  The problem is that the controversy between Shiller and Fama is on a completely different level.

        During my adult lifetime the United States has been transformed economically, thanks in large part to the idolatry of the free market.  It so happens that I am just finishing a book on Franklin Roosevelt,. and although the book isn't about economic policy specifically, I have become very familiar with the spirit of that period.  The men who led the nation at that time had gotten an unforgettable lesson in the failure of free and unregulated markets to serve the public good, and neither they nor their children (the so-called "greatest generation") ever forgot it.  They levied 90% marginal tax rates and took legislative steps drastically to curb the power of the financial community. Those steps worked.  The financial community ceased for several decades to be a place where a young man could go to become fabulously wealthy, we had no stock market panics for quite a few decades, and the country grew at a steady and high rate of economic growth.  Beginning in the 1980s, however, certain dissenters from the established  orthodoxy became popular among a younger generation (my own) and found new ways to promote greed.  Tax rates went down and down, regulations were tossed out, Glass-Steagall was repealed, and the financial community now enjoys unprecedented power once again.  As a result we had another stock market crash with devastating consequences--because we had learned to trust the free market above all else.  And to date, the free market orthodoxy has largely survived this new threat.

        Now to me, the message the Nobel committee sent was roughly as follows: no matter whether Shiller or Farma is right, they are both distinguished economists, they will remain so, their students will get jobs, etc., etc., etc.  That is the way current academia works.  But in fact, they cannot both be right, and the question of which one is right is crucial to the future of the country and the world economy.  It isn't just part of an academic game that rewards its players very lavishly whether their arguments have much relation to reality or not.  Perhaps some microeconomic arguments can help us here: economists at leading universities have suffered very little from the economic collapse of 2007-9.  Thus they can treat it merely as more intellectual fodder.  In the long run, by the way, I think they will be affected, because the economic model that higher education now runs upon is not sustainable, because it relies too much on borrowed money.  (Student loans are another example of the w y the power of the financial community has grown.)
 

        If economists are not willing to take the great questions before us seriously, they will not be able to solve them. By suggesting that it didn't matter who was right,. the Nobel Committee did the whole world a disservice.

                                       Sincerely yours,

                              

                                      David Kaiser

 

I then mentioned my intention to post this letter and asked him to let me know if he didn't want to post his reply.  The reply arrived the same day--and he did not. Here it is.

 

Dear Professor Kaiser,

I appreciate your thoughtfully reasoned perspective and willingness to
engage in these issues.  It is true that the answers matter a great
deal, but my view is that these are incredibly tough questions and
people are making genuine progress, even if it may not appear that way
to those outside the field.

On the teachers study, see
http://obs.rc.fas.harvard.edu/chetty/value_added.html.  I shared your
skepticism going into this, but the evidence turns out to be quite
convincing, largely due to the amount of data here.

Best regards,

Raj

        I wish him--and us--well.