Friday, August 10, 2012

Subsidies for economists?

My colleagues Gary Becker and Jim Heckman have an interesting OpEd in the Wall Street Journal, arguing for Federal funding for economists. I respectfully disagree.

Yes, economic research is a public good. And, yes, they point to some good examples of good research that was supported by the Federal Government. That does not prove the research would not have been produced without Federal support.

We would demand a much higher standard of proof from, say, the Sugar Farmers of America, asking for continuation of their tariffs, on the grounds that saving the American Family-run sugar farm is a crucial public good that will vanish without support. Or any of the other supplicants from the federal government, all of whom make public interest arguments on behalf of their subsidies and tax brakes. 

We need a grand bargain. I give up mine, you give up yours. If economists pushing for the grand bargain are the first to say, "you give up yours, but we're an important public good," we're hardly credible.  At a minimum, we need a uniform standard of proof of just who is a public good that really would not be produced without Federal support.

The largest subsidy for economic research -- other than the tax exempt status of our employers -- is the National Science Foundation. They give grants to economists. But they don't pay for the one thing that would generate more research -- they won't buy out teaching. Instead, we operate under the fiction that the university pays us for 9 months, and the NSF can then pay "summer salary." (The NIH, which supports some of the research cited by the OpEd, will buy out teaching as they do for real scientists.) One might defend this as a prize for good past research, which is how it works out in practice. Might.

Is this producing important research that would not be done otherwise?  I've received a few NSF grants in the past. I can tell you the answer. I enjoyed the money. The institutions that took 60% "overhead" enjoyed the money. But I would have written exactly the same papers exactly as fast without it. (I don't apply for NSF grants any more. Given my views on others taking federal money, even though the institutions I work for would appreciate the overhead, it seems inconsistent to do so.)

Is there really not enough economic research being done? Research is not a good of which there is simply "more" or "less," like, say domestically-produced corn-based ethanol. It's "good" and "bad." There is a tremendous amount of it. And mostly "bad."

An economist, looking at the way economic research is funded, would say this is a system designed to produce lots and lots of not very innovative papers. 

Ask a few scientists, after a few beers, about how much faster human knowledge increased in the "war on cancer," the massive funding for HIV research, or now global warming. More federally directed research, is not necessarily better.

An economist looking at this system would also predict swift capture, and that the result of Federal support of research would be that lots of research comes to conclusions supportive of the Federal Government and its agencies. How many papers supported by the Federal Reserve are critical of the Fed? How many of the huge volume of health - policy studies even consider market-based approaches that don't have a huge role for federally sponsored health policy research? Is it just a coincidence that the kind of research that ends up being most critical of the Federal government is supported by private foundations, think tanks, and universities that don't take of federal money?

There are other mechanisms. Adam Smith did not have a Federal grant. Most of us support research by teaching, an activity that produces at least some externalties towards research. Private foundations support economic research, and would do so a great deal more if the Federal government did not. Yes, many private foundations have political goals. But they recognize that research is more credible if it's a-political, and as long as there is competition, all voices can get supported.  Having to convince a wider audience of the importance of our work might produce a lot better writing.  I want to see fewer papers and more second drafts!

And what's good for the goose is good for the gander. Many economists look down disdainfully at what our social science and humanities colleagues call research. They view it as jargon-ridden, highly politicized, intellectually shoddy waste of good trees  (or, now, bits). Well, nothing in Jim and Gary's column would not apply fairly to everything done in the academy.  Their panels of experts can write reports, hand out money, and plead public goods as well as we do.

I do agree heartily on support for data. For the moment, the Federal Government does have a unique role in creating and supplying economic data. We can't study what we can't measure. This really is a public good, reasonably well created managed, and starved for resources. But most of our data sources are decades old, and have not been adequately re-thought or expanded in that time.  Especially with the internet, there is more and more private collection and supply of data, but for the moment it cannot supplant the Federal government.

Here I think there is a middle ground where we agree. Economics is not, yet, "big science" requiring massive infrastructure to produce research. Economic data collection is "big," and best directed by researchers not government officials. Data can be sold, so it's not a pure public good. But I'm willing to go with the idea that not enough good data is produced. Much of the research Jim describes as success is really massive data collection. But much of the federal research subsidy to economists does not go to creating new, publicly useful data sets. So, I think we can agree on research support for researchers to produce new data, but we don't need support to analyze that data. Fortunately, for now, that just needs an office, a computer, and some free time


  1. That was awesome. Thank you. I am super happy

    1. Ok, it was a great piece, I understand that, but why on earth does it make you "super happy"?

    2. Moral economists are very rare. Our society does not reward virtue, because the main subsidy coming from our gov is for war. When you see someone advocating peace it just makes you feel a little more secure at home.

    3. "...the main subsidy coming from our gov is for war."


      "When you see someone advocating peace it just makes you feel a little more secure at home."

      Advocating for peace? He is talking about govt grants for economic research. Did you read the same piece I did?

      Did someone spike your granola this morning?

    4. Chris
      Need I say more.
      Whenever government gets involved in anything this is what we get.
      When Alexander the great was asked why he sent soldiers to capture and punish Aristotle (his teacher) he said. How dare he teach these secrets to common people, there will certainly be an insurrection. This cannot be allowed.

      Thank you for that. You made my day.
      Keep it coming.

  2. I'm not so sure about your "grand bargain" argument. I think it boils down to a false equivalence -- you're saying that even though subsidies for public goods are efficient but those for private goods are inefficient, in the name of political credibility we must get government out of the externalities business entirely. That may be good politics, but it is bad governance and economics: Are we to end all publicly-financed medical research on epidemics, perhaps the clearest case of public-interest R&D, because otherwise we doubt our capacity to make rational civic arguments against private rent-seeking interests? I would also ask if it is not a little naive to think that the private interests which secure the problematic subsidies -- agriculture, energy, etc. -- are waiting for the comparatively tiny public-interest research financing, as if it is a question of "fairness" to the rent-seekers and not merely about the rents.

    Also, I think your definition of a "public good" is off. My understanding is that public goods can be supplied by the market, but that they are undersupplied because marginal social benefits remain positive past the quantity at which marginal private benefit equals marginal private cost. Your point about the heterogenous nature of research as a good in a market is well taken.

  3. Seeing Mr. Becker's name on that op-ed made me very sad.

  4. I think a crucial issue here is _how_ the government funds economics. Paying "summer salary" to a tenured (and eminent) professor might not produce more or better papers. But what about funding grad students?

    From my brief experience as a PhD student, it seems like it's extremely hard to evaluate a PhD student by his/her application. They have to study and work full-time for a few years before the student's quality can even be glimpsed. And this requires funding. I'm pretty sure I'd be working for an insurance company rather than writing papers if I were not paid my meager stipend. Of course I'm biased in thinking my papers are a public good, but there certainly are _some_ actuaries out there whose talents might be better re-directed by the government.

    This reminds me of your post about Summers's stimulus/capital budgeting argument. There are, um, institutional frictions, which make giving up ours optimal.

  5. Excellent arguments in the post!

    Might I add that no one knows where the next step in progress will come, in any science or art? The public good argument only justifies an across-the-board subsidy scheme.

    Individual government agencies, in doing what they have to do, will happily buy whatever they need and whatever they want. Nothing much wrong with this in principle, it's just not a subsidy for research.

  6. Just a local martingaleAugust 12, 2012 at 7:28 PM

    Excellent thought-provoking post.

    As a high energy theorist turned operational research scientist, I have a few thoughts and a couple of questions.

    Like economics, in theoretical physics all we need is a computer, an office, and some free time, and like economics, it's the data collection that's the expensive part - high energy colliders don't come cheap! Unfortunately, your criticism about the plethora of "bad" research in economics applies equally to theoretical physics. Most theoretical physicists have some form of government grant (although there are some excellent private foundations and institutions), and some of those grants do explicitly buy out teaching. However, a significant number of annually produced papers are not particularly innovative, interesting, or useful. Honestly, many, many papers, and at times entire research fads, can be classified under wash, rinse, and, repeat. In fairness, truly innovative research is very hard and, of course, there are many excellent papers. Knowledge generation about the physical world does present an externality, but your comments on incentives seem well founded to me, even in theoretical physics. I am not sure how much less quickly theoretical physics would have advanced in the absence of direct government grants.

    How well do your observations apply to such disciplines as theoretical physics or even pure mathematics? Perhaps the signal-to-noise ratio is better in these fields than in economics, I don't know, (after all, there are not too many outside rent seekers or political groups who have a strong interest in top quark production rates) but it seems that your arguments hit home concerning incentives that lead to the overproduction of papers of limited use. How strongly does your argument on government supported research depend on the possibility of capture?

    BTW, your book, Asset Pricing, is wonderful. It's one of the best books I have read on any subject, a thoroughly enjoyble read.

  7. The "hive mind" of Modeled Behavior suggests that game theory is a prime example of economic research that does not need subsidy. It can be done very cheaply by researchers, unlike gathering data.

    Lawrence White has a paper on the Federal Reserve's influence on monetary research. He is an advocate of "free banking" who thinks that there should not be a central bank.

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  9. We need a new model for economics. The current state of research failed the country miserably in the run up to the financial collapse and we get allegedly leading economists signing off on the puff piece being touted as a "White Paper" on Romney's election platform.

    Maybe funding for economics research should be handed over to DARPA to seek out and fund useful research. DARPA seems to have had a good record of cost effective research.

  10. The fundamental error in your argument is that you implicitly assign or assume a very low value to the public good of having information widely available, at little or no cost. And, you give no thought to even attempting to estimate the missed opportunity cost.

    The paper not written or published or (more importantly, perhaps) read may just be the paper that tips the scale.

    To the contrary, wide dissemination of information at little or low cost has been our salvation, repeatedly. Consider just three examples.

    Harry Truman self taught himself by reading every book in his local free public library when he was growing up. How many tens of thousands of times did his leadership repay all the investment in all public libraries for all time.

    Remember, Truman was the architect of the policies that kept the United States in Europe after WWII and contained Soviet Russia (read Kissinger on how Truman policies differ from what FDR intended), keeping Europe both free and free from War for now 60 years. What was that worth?

    Andy Grove, who received a free colleged education in New York from City College of New York and a PhD from Cal. Berkeley. How much value has Intel alone, created, resting on his public good education.

    Steve Jobs, who audited classes, instead of paying tuition.

    The problem with you POV is that you think like an accountant. The error in your thinking is that you have no way to measure the missed opportunity costs. You can tell us how many loafs of bread are on the shelf Monday, after a weekend sale. But, if there are no loafs, you cannot tell us how many sales we missed.

    It is very interesting that those with the POV of greedy narsicists agree with you.

    1. Accountants are wonderful people. Each one of them takes his oath of honesty very seriously. Especially those who work between Wall Street and Washington av.

    2. What about the missed opportunity costs of not feeding all the people of the world with taxpayer money? What about the missed opportunity cost of not mandating that every citizen must adopt one third world child and raise them as their own?

      You throw the term greed around freely, but is there no greed among academics who are constantly advocating for a cushy public grant?

  11. I am confused by the announcement of Obama to purchase agricultural it implicit that this will be at an above market price?

    If not I don't see how it will help, but I just didn't see that detail mentioned anywhere so could someone help me out with a link or an explanation how it will help without that feature?

  12. To the Anonymous poster,

    Information in general may be valuable, but even now access to academic papers is only free if the professor posts it on his personal website. Then of course there is the very high cost of actually understanding what is in a very technical paper...usually it requires graduate level training in the discipline.

    So this information is not free even if funded and when you spend some time reading a lot of these papers ... on the margin I think plenty of subjects in economics are well past the diminishing returns mark for society. Tenure and other institutional factors (like a lack of originality among graduate students and young professors) exacerbate this.

    I do not feel that any of your examples focus enough on the Academic Economics papers. In reality much of the funding given out in such grants is for papers already written (because why fund a shot in the dark versus a result that they already know they will get) and widely distributed through conferences and manuscripts.

    In sum, the information is already distributed amongst its capable readership, is not necessarily value added, and funding "research" does little to foster economic understanding among more people.


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