Responses from the Ivory Tower

Why do politicians speak so simplistically? Why are they focused on short-term goals? A consensus of Milton students studying economics raised these and other shared concerns. We asked two Milton graduates—economists, professors and researchers—to respond to their questions.

Austan Goolsbee ’87
Austan Goolsbee is professor ofeconomics at the University of Chicago Graduate School of Business. Named one of the 100 Global Leaders for Tomorrow in 2002 by the World Economic Forum, a Switzerland-based group that builds partnerships between business and society, Austan has focused on major public-policy issues of the new economy, including the economics of the Internet. His research and writings have covered diverse areas, including Internet commerce, technology adoption, stock options and executive compensation, and government policy.

In addition to teaching at the University of Chicago, Austan is an editor of the Journal of Law and Economics, a research fellow at the American Bar Foundation and at the National Bureau of Economic Research and recipient of an Alfred P. Sloan Research Fellowship. He has served as a special consultant to the Antitrust Division of the U.S. Department of Justice for Internet Policy, and has advised Congress on issues of Internet taxation. His work has been featured in the Wall Street Journal, Harvard Business Review, Business Week, the New York Times, the Financial Times, the Economist, and many others. Austan graduated summa cum laude with both a bachelor’s and master’s in economics from Yale University, and with a doctorate in economics from the Massachusetts Institute of Technology.

Reach Austan at goolsbee@gsb.uchicago.edu.

Helen F. “Sunny” Ladd ’63
Sunny Ladd is the Edgar Thompson Professor of Policy Studies and Professor of Economics at Duke University. Prior to joining the faculty at Duke, she taught at Dartmouth College, Wellesley College and Harvard University. An expert on state and local public finance and education policy, Sunny has written extensively on local tax policy, intergovernmental aid, the fiscal problems of U.S. cities, and education finance and policy. She recently chaired a three-year National Academy of Sciences committee on education finance.

Sunny’s most recent book, which she wrote with her husband, Edward B. Fiske, is Elusive Equity: Educational Reform in Post-Apartheid South Africa. She has also authored or co-authored books on school competition in New Zealand, school-based accountability, tax and land use policies, school finance and the fiscal problems of U.S. cities. In 2002, she received the Steven Gold award for work in state and local public finance and, in 2003, the Wildavsky award for lifetime achievement in budgeting and finance. She earned the Howard Johnson Teaching Award at Duke in 1994 and the Manuel
Carballo Excellence in Teaching Award at the John F. Kennedy School of Government in 1986.

Sunny earned a bachelor’s from Wellesley College in 1967, received a master’s degree from the London School of Economics in 1968, and earned a doctorate in economics from Harvard University in 1974.

Reach Sunny at hladd@pps.duke.edu.

What questions about economic issues should Americans be asking the presidential candidates?
Austan:
The most important economic issues tend to be things that are not pressing matters of the moment so they don’t get discussed. The U.S. budget is totally unsustainable on its current path. The baby boomers will retire soon, and just paying Social Security and Medicare will cost us more than $20 trillion. The gap between what we will need and what we will have is large, and how that gap is closed makes a huge difference in the quality of life for all Americans. We can reduce spending, raise the net age of retirement, cut benefits or institute means testing. If we wait until then, benefits will need to be cut in half or taxes will need to double. Thinking right now about putting something away would not hurt nearly as much as the drastic action we would have to take when the crisis occurs. Hopefully, someone will ask candidates what they will do to prevent it. But, I wouldn’t cross your fingers for a complete answer.

Sunny:
The most important question Americans should be asking of the presidential candidates this year is whose interests are being served by their policies and platforms. The need to balance many competing interests as we develop policy and spending priorities is crucial. Politics plays an important role in a democratic system because it is the process by which conflicting values are reconciled. Economic analysis is essential in that it provides the framework and tools to predict who gains and who loses from various policy options. Thus, economics helps voters determine whose interests are being served and, with that information, to make judgments as to whether the distributional outcomes of the proposed policies are consistent with one’s values.

How do economists think about environmental issues?
Austan:
A lot of economists are environmentalists but they tend to be the kind of environmentalists that “real” environmentalists find aggravating. Economists mainly think about costs and tradeoffs so they are inclined to say “we need to balance the value of saving the environment against the costs of closing down industry.” Usually neither side likes that.

Sunny:
As long as anyone cares about aspects of the environment such as clean air and water—and as long as these are in short supply—they are of concern to economists. The problem is that actions that contaminate the air or water are often not “priced.” Economists would call this lack of a price a “market failure,” and they would agree with environmentalists that there is probably a role for government action. Economists, however, would call for a cost-benefit analysis. Because maintaining the environment uses scarce resources, the benefits of maintaining the environment need to weighed against the costs. For environmentalists, costs are not an issue; for economists, attention to costs is important.

Are there overarching principles that should guide our country’s approach to international policy as the interdependencies among global economies increase?

Austan:
Competition is good. Every one of the countries that has escaped from abject poverty has done so with an open economy model—that is, low tariffs, low barriers to entry, openness to products that are produced cheaply elsewhere, and without excessive regulations preventing firms from investing or beginning companies there. In the U.S., our most productive industries are the ones that face competition. If your first thought is “What is best for consumers?” you are on the right track. Economists tend to make the argument that free entry for goods and compensation at a market rate for those goods is better than keeping things inefficient, which is what you have with our giant farm subsidies or protection of textiles. While competition is good, the majority of professionals believe that we should do much more to relieve the process of transition toward the openly competitive model.

Sunny:
Economists naturally emphasize the concept of comparative advantage, which leads them to support open economies and free trade. We cannot and should not fight against the view that free trade is advantageous to society as a whole—it has been in the past and will be in the future. Nonetheless, free trade policies inevitably hurt some people, and the pain to those groups is particularly severe during a period of economic recession or slow economic growth. In pursuing a free trade policy, we need to relieve the burden of adjustments across groups by, for example, reducing trade barriers gradually rather than precipitously and by providing opportunities for retraining. We need to give people time to adjust; it’s a mistake to ignore the pain of real people in real situations.

What general policies would you advise to help move developing countries toward stability and economic progress?

Austan:
They can’t get out of poverty by closing themselves off to the world. That’s first. They also need to establish some property rights and eliminate excessive restrictions on entry and reduce corruption. All of these problems are big taxes on productive activity. Entrepreneurs won’t bother to start companies if they have to face such obstacles.

With that as a starting point, though, it’s also clear that developed countries need to open their markets to the kinds of products these countries are selling. Too often they are telling the countries to do better while blockading their every move for the sake of some domestic company.

We now have several examples of poor countries that increased their wealth and improved the welfare of the people: Korea, Singapore, Taiwan, Chile, and in Africa, Botswana did well in comparison with its neighbor countries. Some countries are picking winners (i.e., specializing in industries); others are very decentralized. Every country that adopted a blockout strategy seems to do terribly; the economy remains at a subsistence level. While criticism of the IMF policy toward developing countries has an element of truth, the problems stem from dictators who line their pockets, saddle their country with debts, and then force the people to pay with major structural adjustments. The welfare of people goes down, but blaming the situation totally on the IMF is misleading. The debate about forgiving the debts is active, but would that encourage other dictators?

Sunny:
Applying the solutions of abstract economic models—which are typically tightly structured—to messy real-world issues is hard. Normative economic models, those that focus on what ought to be, often emphasize economic efficiency, which is only one of many important values. Policymakers need to rely on more than economic efficiency to build good policy; process and equity issues are also important. The problem is that economic efficiency is often easier to address within the context of an economic model than is equity or process.

What’s known as the “Washington consensus” view that favors austere budgets and no deficit spending has posed problems for developing countries with compelling equity agendas. Those countries are being told to address social welfare agendas without much money because they are not allowed to run deficits. Increasingly, however, policymakers are recognizing the importance for development not only of being open to the world, but also of having a strong legal and political infrastructure and adequate human capital through investments in education and training. An educated work force is central to an economic development strategy, either through providing the human capacity to develop new technology or by facilitating the transfer of existing technology from other countries. Capital moves around in a global marketplace; investors can move capital at will. Countries need to be nimble, and an educated population makes it possible for an economy to respond to the movement of capital.

What is your biggest concern within the focus of your specialized work?

Austan:
I focus on two things: taxes/government policy and competition within specific industries like the Internet and media. My major concern within the area I study is the issue I raised earlier: that unsustainable federal budget. Action now, although difficult, could help offset the huge implications of not dealing with it that will affect our country and our lives in 20 or 30 years. If you look at the budget numbers, the biggest contributors to the total are the entitlement programs, which are all growing, like Medicare. The joke in the profession is that in 25 years everyone is going to be a health economist, because that’s the only job there will be.

Sunny:
Two policy issues are of major concern in the field of education. The first, as exemplified by the federal legislation “No Child Left Behind,” is the tendency for policymakers to jump on just one part of a larger reform initiative, in this case, state-wide testing. Test-based accountability can be dangerous if not fully embedded in a larger standards-based reform strategy that includes attention to building the capacity needed to make sure no child is left behind.

The second issue is school choice. Good arguments can be made for providing more choice of schools for low-income families, but there remains an important role for policy in assuring that choice provides broad-based benefits. Low-income families currently have far less choice of school than higher-income families, but a voucher program for private schools is not a good solution to the educational challenges
facing such families. I would prefer to see more controlled choice within the public school system so that the interests of all groups can be balanced. My vision is for all children, regardless of their income, to have fair access to racially and socioeconomically balanced schools.

What about the study of economics do you particularly enjoy?

Austan:
I am a data guy. Day-to-day what I like best is getting the numbers and trying to figure out how things relate to each other—how sales tax rates affect people’s online buying behavior, say, or how the rise of satellite television affects cable television subscriptions: something practical. The other thing I like about the field, though, is that it is so broad. While a lot of our academic research is on very specific topics, we also get to spend time thinking about bigger issues, like how we will pay for the retirement of the baby boom and how emerging markets can become rich to outsiders. You can get deeply into things to which people want answers, answers for specific questions that are either policy relevant or industry relevant. Economics seems boring. Once you get into it, though, how do you think about anything else?

Sunny:
While Milton gave me a terrific background in math, I didn’t want to major in math in college. Economics intrigued me because of its usefulness for policy. I began by teaching economics at Dartmouth and Wellesley, but then moved to a more explicit policy orientation at Harvard, first in city and regional planning and then at the Kennedy School of Government. I am currently in a policy program at Duke. I thoroughly enjoy doing policy-relevant research. For the past decade, I have focused my research and writing on educational policy. We’ve carried out a broad-based longitudinal study of the outcomes for teaching and learning of state educational policy in North Carolina that has helped assess its effectiveness and will help design new policy. I enjoy the confluence of econometrics—sophisticated analysis aided by today’s advanced technology and ability to manipulate huge data sets—and policy evaluation. It’s fun to have the skills to do important work that may improve people’s lives.

Cathleen Everett

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