Friday, January 8, 2016

Simplification isn't Helpful in Econ Discussions

Economics is not a simple discipline to understand. Yet, all around us are people claiming that complex economic matters can be as clear as "Econ 101" when debating public policy. Sorry, but Econ 101 doesn't answer anything and the rhetorical shorthand does the discipline (and policy debates) a disservice.

When you take an introductory class in any topic, from physics to programming, the concepts are necessarily simplified. It is like teaching a child to read. You start with phonics in English and tell the child that letters make sounds. Oops. But it isn't really that simple, is it? Phonetic rules change and words in English have complex etymologies. Rules you learn as a new reader quickly vanish or have to be understood as a small part of a complex flowchart.

Economic principles like "supply and demand" or "externalities" seem simple enough in the language and models of Econ 101. And then you head into the bushes and discover there are more "ifs" and "howevers" involved than you originally understood. Yes, higher taxes can dissuade consumption and production, but not always. Situations are contextual to cultures and times and models have to be adjusted. What seems like a high tax rate in one situation (recession, high unemployment) might be a low tax rate in another (peace, strong growth, tight labor market).

Tim Worstall wrote about this in November 2015. Critiquing "Econ 101" without understanding Econ 101 is a strawman argument, and probably several other fallacies all rolled together.
NOV 25, 2015 @ 06:59 AM
To Prove Econ 101 Is Wrong You Do Need To Understand Econ 101
Tim Worstall
It's entirely true that Econ 101 is not the end of the subject. That there's an awful lot of caveats that we would want to apply to the rather simplistic conclusions of the average introductory economics class. But then that's what Terry Pratchett pointed out education was: lies to children to help them make some sense of the world. When they become older, more capable of nuance, then we point this out to them: those previous stories were gross simplifications and now you need to know the caveats.
As we prepare to elect a president in the United States, complex economics will be presented as simple Facebook memes. Examples out of context will be used to generalize about the nation.

"Minnesota raised taxes and it's growing!" "Texas has reduced regulation and costs to businesses, and it's growing!" Both can be true, and both ignore the contexts of those states. Minnesota is ranked as one of the best places to live (overall) and one of the worst places to be a low-income person of color. Generalizations ignore ugly outliers. Economists and sociologists have found that in developed economies ("Western" nations) the lower the diversity in a place, the higher the "quality of life" for some reason. Utah and Minnesota feature statistical paradises with above average schools in homogenous neighborhoods. So what? What does that tell us about taxes and spending? Maybe that we're willing to live with higher costs the more alike we are. But that doesn't really answer the taxes vs. quality of life question overall.

Coming out of the recession, energy states boomed with high wages and new construction. As energy prices fall, those same states might suffer. State-level policies might have had little to do with the energy boom (and bust). Texas and North Dakota might have boomed, but did their elected officials control OPEC and North Sea oil production? No. They benefited from global events by sheer luck.

Econ 101 offers generalizations before taking more advanced courses and learning that models are complex. The GDP model for the United States is contained in 98 pages of documentation. That's not Econ 101. The models the Federal Reserve uses to debate interest rates are not Econ 101, either.

Expect "Econ 101" arguments about taxes, wages, regulation, immigration, and dozens of other topics. Expect this arguments to be misleading oversimplifications, too. Econ 101 isn't about reality. It is about teaching basic concepts that are later challenged and expanded in other courses.

The political winds in the U.S. are shifting, and we are possibly entering another "progressive" era for a decade or more (on domestic social issues). Then, when things happen and models break, national politics will swing back to the center-right (not that we ever go to the far left). "Econ 101" will be quoted in both directions, as we oscillate about the center. When a new war on poverty, war on crime, war on whatever doesn't work, Econ 101 will be cited, incorrectly.

Reality isn't a simple model. A colleague once told me that teaching Econ 101 is like telling physics students that e=mc^2 is more complex than it seems. Everybody in the lecture hall nods, but they still leave the class thinking e=mc^2 is simple, elegant, and captures everything you need to know about energy and mass.

I'm not a physicist, but I can appreciate how hard it must be to say that all those models in Newtonian physics are misleading. And Einstein's simple equation describing the relationship between energy and mass isn't that simple, either.

Politics (and journalism) don't lend themselves to twenty-page explorations of economics. That's a shame. Bumper stickers, memes, and misleading graphs will shape this election as similar simplifications have shaped past elections.

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