Scary campfire tales for economic policy analysts

Joseph Francois, The Random Economist and a trade expert, has spent a lot of time in government and academics. 

He may be the coauthor of "the only economic model that has been banned in proposed legislation...": Illegal models (The Random Economist, Dec 16, 2006):

I have been been banned by the US Congress! Well, not quite, but one can always hope. I am coauthor of what I believe is the only economic model that has been banned in proposed legislation -- COMPAS. Many professional incarnations ago, I coauthored a set of rather simple calibrated trade models meant to help in the assessment of economic factors relevant in fair trade litigation and safeguard cases. The goal, naively, was to make the process more transparent vis-à-vis the winners and losers. Economic guidelines and indicators have been used for decades in antitrust litigation, and our intention was to introduce the same dose of scientific reason to trade litigation. Of course, this was before the surge in research on politics of trade policy, and before I had read Michael Finger's delightful JPE piece "Policy Research." Since trade litigation has less to do with scientific rationality and national interest than it does with lobbying by competing special interests (including efforts to obfuscate the impact on losers), the effort was not appreciated. Recently, it keeps surfacing in legislation. One example of the draft legislation is linked here (the proposed law) -- see pages 71 & 72. The current tone of proposed legislation is not really targeted at our simple models. Rather is it prohibit the Executive Branch from using economic analysis when formualting economic policy. Does this make sense? Of course it does. Just read Finger's article.

Here's a piece of the text from the draft legislation:

The following factors may not be used as the basis of a recommendation by the Trade Representative to recommend denying relief under this section... Any results of the econometric model known as the Commercial Policy Analysis System (COMPAS) or equivalent model.

The COMPAS model is a widely used partial equilibrium model originating in the U.S. International Trade Commission.  Here's an Excel version: COMPAS.  Here's a recent article about a modifed Canadian version: Adapting the COMPAS model for Foreign Affairs and International Trade Canada

The Finger piece is worthwhile and won't take you long.

Brad DeLong (Grasping Reality With Both Hands: Brad DeLong's Semi-Daily Journal) was DeputyAssistant Secretary for Economic Policy in the Treasury in the early years of the Clinton Administration.  He left in 1995, and a year later he was finishing up an introductory macro class at Berkeley.  He spent the last substantive lecture relating the semester's macro topics to policy making: Lecture Thirty Four.

DeLong makes the point that, even if you, the analyst or advisor, have...

...correctly spotted the proper policy and analyzed the proper consequences, you have to convince lots of people who are not economists that it is in fact correct. This is hard:

• Some people dislike economists and economic reasoning on principle.
• Some people dislike economic reasoning because they generalize incorrectly from their own experience.
• Some people cannot afford to listen to economists.

He drives the point home with this neat anecdote about Ira Magaziner.  Ira Magaziner directed the operations of the Clinton Administration's Health Care Task Force in 1992-1993.  This reform effort was a political disaster for the administration.

Let me give you an example of the second and third. I got to my Treasury office one morning to find a memo in my inbox, stating that:

The NEC and the NSC are convening a team to produce an analysis for the President of the nation's structural current account deficit. The project will analyze the underlying causes and composition of our deficit and the economic problems it may cause for current and future living standards. The study will be global in scope, with particular emphasis on our economic relations with Asian nations.

...The effort will be coordinated by Ira C. Magaziner...

Translation: Ira Magaziner needs something to do after making a catastrophic mess of health care reform. Ira thinks that he can make a contribution by identifying barriers to America's exports that cause a "structural" trade deficit. And some Japan-bashing thown in.

The problem is that we know that the U.S. trade deficit grew from zero in 1992 to $150 billion this year because of the balance of national savings and investment--memos written in early 1993 predicting it.

Yet if Ira acknowledges this, he is out of a job--and few people ever leave the OEOB [Old Executive Office Building - Ben] until their hands are ripped by force from the ornamental stone geegaws of the building.

And Ira generalizes from his experience as a consultant, in which a firm that fails to export (or that sees its markets stolen by imports) is probably failing to be "competitive"--and he cannot make the conceptual jump necessary to notice that what is true about an individual firm is not true for the economy as a whole. Potential foreign customers of a business can always decide that its products are not worth buying, and go buy the products of some other firm.

But once you have sold your imports in America and gotten paid in dollars, you must buy something American (or trade your dollars to someone who wants them to buy something American)--either an export or make an investment. There is no "alternative" place to spend your dollars. Thus whether America's businesses are competitive or uncompetitive, the international accounts balance--with the trade deficit equal to net investment by foreigners in the U.S.

Ira's response: I have a friend trapped in the OEOB who has to deal with him occasionally: "I don't think economists have much to say that is useful about modern international trade."

• He doesn't like economists (because they make claims to expertise that he can't evaluate or debate)
• He incorrectly thinks his own experience generalizes to the world
• And he loses his job if he understands the determinants of the trade balance

All in all, a pretty powerful set of reasons insulating one against any kind of rational argument.

Revised to add link to COMPAS model Sept 16, 2007.

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