In Defense of Economists

with Steven Rhoads

Economists get a bad rap. People sometimes think we prize efficiency over all things, including happiness and safety. We’re often caricatured as know-it-alls who think only of the bottom line without any concern for less easily quantifiable human values. But as an economist, I can tell you that isn’t the case (at least not for most of us). In fact, I’d argue that economists are more attuned than most to the potential human costs of well-intentioned but misguided policies. Free healthcare—free anything—sounds great at first, but when you start doing the equations, you might find that you actually end up paying for it anyway, and in ways you might not expect and might not like.

My guest this week is Steven Rhoads, a political scientist who’s well-acquainted with the benefits of seeing the world the way economists do. In fact, he wrote an extremely influential book about it, The Economist’s View of the World, which has just been reissued in a substantially updated form. In this excerpt from our conversation, Steven and I talk through a few issues where economists have been known to take unpopular stands: unemployment benefits, nuclear energy, and healthcare. Hopefully when you hear our reasoning, you’ll see we’re not such bad guys after all.

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GLENN LOURY: Let me ask you a question about incentives, 'cause I often get this argument, sometimes from my lovely wife. My wife LaJuan is a Bernie Sanders, left-wing Democrat, and I get this argument.

I'll say incentives. I'll say you cannot extend unemployment benefits indefinitely. You have to have a date-certain determination. If it's one year, maybe in a recession it should be 18 months. Maybe it's two years at the outside, but you cannot extend unemployment indefinitely, because if you do, the ranks of those who are not looking for work and not working will swell, because the incentives to work will have been undercut by extending unemployment indefinitely. And she'll say, “You're calling people lazy by saying that they'll respond to incentives.”

Same thing about welfare. I'll say, you can't have the welfare benefits be too generous, because if you do, you'll produce more poverty. People will change their behavior. It will be affected by… And the response is, to invoke the behavioral reaction to social policy being too generous is to condemn the people who are in need of help based on some moralistic judgment about their behavior. Have you heard this argument, and how do you respond to it?

STEVEN RHOADS: Yeah, sure. And the point is, I think ultimately you hate the people you're giving the money to, because, you know … I look to the guy, what's his name? Summers. Arthur, not Larry. Arthur [Brooks] who gets at, what makes people happy? One of the reasons he criticizes economics, he says, they're all about cost versus benefits. Cost is the labor, benefits is what you can spend it on. He says, most people love their jobs. Most people, if they win the lottery, say they wouldn't quit their jobs. Now that's kind of what your wife is saying.

But I think a lot of the people who are unemployed, who would be tempted to be unemployed, are going to be miserable. That's what he also finds. You know, if people don't have a job, they don't have those relationships they get from ordinary, regular contact with people. 40% of Americans say they're lonely. That's amazing. And they're going to be lonely. They're not going to have enough to do. And they're going to miss seeing people and feeling that they're somehow doing important work.

[Brooks] finds that even people with low-income jobs say, mostly, “I will keep my job, even if I got a whole lot of money.” Now, a lot of them wouldn't, or you wouldn't have a good argument. One way to think about it is if, instead of two weeks of vacation, you're going to have six weeks vacation. Would people say, “Ah, you know, I'd rather only have four. I love this job. I'd miss it”? That doesn't happen very much. That works for your wife, right? For you. And you could say, well, there's going to be a lot less produced, then. And they're not going to think about that in the global sense, just in their own wallet.

But I would say it's very easy for people to be lazy. That's why parents tell us so much, you gotta work. You gotta work for the future. You got to go to do the lawn, so you don't have to do something else later. You gotta do your homework, or you're gonna be doing the lawn forever. You want to do the lawn forever? All right. You better go out and get a good grade, then. I can tell you, then you'll be able to get something better.

You know, we have to have incentives to get ordinary, nice people to do what adults think they ought to do and would make them happier in the long run. And that's why Arthur Brooks is so interesting, I think, because he says, “Unemployed people, no matter how much welfare they get, are not happy people.” Therefore that's what I throw back to your wife. And one thing I wish people were doing—good labor economists like you ought to get into it—there were studies after welfare reform. Some of them said—I know because I read them—that the people who were on welfare reform and then got jobs were glad they got off and got jobs, even though it wasn't paying a whole lot more. If we could get that kind of evidence, then we'd know whether you or your wife are right, I think, because I didn't read the whole literature and maybe this was the paper, but I don't think it was.

I think, if it's true that unemployment makes people miserable, then getting a job where they feel they're doing a good job. That's another thing that makes people happy, according to the Brooks. “I feel I'm pretty good at my job.” You don't have to have a college degree. If you're a baker, and you're good at your job, think of how many smiles you get. “You got those brownies this time. Good for you! Hey, I'll have three of those.” All these people smiling at your good work. And he says people who think they're doing a good job at their job are happy. You know, statistically, he could say they're 40% more happy than people identical to them in all other ways, but they're not happy with their job and they don't think they're particularly good at it. So I think his work is really interesting. And that would be something you and your wife should both read, I think.

Arthur Brooks. I'll consider it. What do you make of nuclear power?

Well, I'm not an expert, but my first quote is to say ...

I mean, are we rational in our decision-making about availing ourselves of that technology, and does economics have anything useful to say about that question? That's that's what I'm trying to ask you.

I think it does. Because it looks at, well, what's the alternative? How many people die in coal mines? How many people have died in nuclear accidents, are living near a nuclear power station? That's why that physicist wanted to find out. There was only one. If the whole country lived for a year within 20 miles of a nuclear power station, one person would die. People who live in Denver, far more die just from the soil. I wonder how many in Denver even know that.

But I think we overdo it. It's, again, trying to get things where there's no risk. What are the alternative risks? All this pollution, all the people dying from pollution. And of course you can say, “Well, we don't need all the things we buy,” and so on. Well, the people who buy them think they need them. And I think they're probably right, that a lot of the things we don't need, and the most important things to life, what I get into more in my critique. The psychologists also get into this. They say it's friends and family. Relationships. And the worst problem we have is loneliness. 40% of Americans think we're lonely. Gives me a chance just to dig at economists. What do I think is important? You know Meals on Wheels?

Yes.

There's a program. You take meals around, a hot meal, and economists say, “What is this? A whole apparatus just to give people hot meals? Give them some money, they go buy some Stouffer’s.” And it's interesting to talk to the people who deliver that meal. I didn't talk to them, but there were articles written about them. And they say, “If you saw how happy people were when I come there with a meal. There's smiles, like, ‘Thank you so much! Come in and talk a while, will you?’” Some of them haven't talked to anybody in a week.

Yeah. These are people who are shut in, not so mobile, elderly.

Many really get benefits from it.

It's not just the meal that that's being delivered. It's also some social contact, that's true.

Now, I'm sitting here thinking, we're talking about incentives and markets, that the healthcare sector of the US economy, any economy for that matter, is huge. I don't know, 15% of US GDP, something like that. And I don't see prices anywhere in the decision-making about whether a surgery should be undertaken. I mean, eventually the bill will be paid, because there's no free lunch, as we know. But the patient is not sitting with a calculator asking whether or not the marginal benefit and the marginal cost, the physician and so on is making a decision, insurance companies are making decisions about what they'll cover and what they won't. And it just strikes me that there's potential for greater efficiency and resource usage within the healthcare sector if more reliance on the price signals to make healthcare decisions could be encouraged. What do you think about that?

I think you're absolutely right. And I think people do studies and say exactly what you do, how much of healthcare is completely wasted. You know, they do studies in this part of the country. There's twice as many operations for such-and-such as there are down here. But what do you know, there's twice as many surgeons doing those up there. In other words, the thought that there's illness, and you've got to get rid of it, and everybody knows when they're ill and every doctor knows when they're ill. It's not right.

I mean, when the price is lower, people buy more of something, and price is next to nothing these days. Now the problem is, what's the incentive of the politicians? We used to kick ... “kick” is not the way that the people would want to think about it. But, you know, think about people who have had a baby. It used to be, you'd keep them, make sure they're all right, let 'em get recovered a little bit. Four or five days might be fine. Now I think you're kicked out, or told you oughta go because you're healthy, in a day and a half.

Now, when that kind of change happens, people object. And if you said deductibles have to go up, because if people pay more they won't be as quick. And there's studies that show, if you move the college infirmary ten minutes further away, the number of people [who] go goes down 25%. You just can't argue that it's absolutely essential that they go. They don't think it's essential. But I think people are thinking total utility again. You know, safety, health: nothing more important. And if you're going to do something that hurts that, it's the damn guys with the green eyeshades. Economists, I'll bet. I'll bet you're talking to an economist, aren't you, when you want to make that reform?

Yeah, so I think it's an outrage how much we spend on that, and it's very hard to change it, because any serious change would have to mean somebody costs go up. And people don't want to go there. That's why I think you should think long and hard about any new benefit you give most people, because you're not probably not gonna able to get rid of it, if it doesn't work out or it does.

One thing economists do about incentives is they are great at saying, “You think this is helping the poor, but it's helping the rich.” Take something something like taxing unemployment insurance. When Reagan proposed that, they said, “You just want to stick it to the poor. You could care less about how they live.” And the economist tries to calmly say, “Look, taxes are payed on unemployment insurance. If you make more in your employment, you get more unemployment insurance. If we taxed unemployment insurance, the rich would be hurt more than the poor, because they don't have a high-paying job.” And they just try to get the facts out. And sometimes they're extremely useful, but not always effective, doing that, I think. That's something Alan Blinder pointed out at the time. He's a liberal Democrat, Reagan's a conservative Republicans. He said, “We would all agree it’s good to tax unemployment insurance.”