The Rise of Advocacy Economics

By Tomas J. Philipson

Monday, November 18, 2024

 

Economic science is turning into advocacy economics. This was on full display during the election and will be going forward as the economic agenda of President-elect Trump is debated. Many economists have already warned us about the dire consequences of Trump’s platform. However, their advocacy often reveals double standards and internal contradictions which may well explain how poor they have proved to be in predicting a policy’s actual outcome.

 

A good example of the rise in advocacy economics is the debate about Trump’s proposed tax policy. One of the first economic lessons of taxes is that the people sending checks to the tax collectors may differ from the people truly made poorer by the tax. For example, sales taxes are submitted by retailers but may be borne by consumers. The corporate tax is paid by businesses, but the burden is partially borne by workers through lower wages and consumers through higher prices.

 

Harris-supporting economists often stressed that tariffs levied on foreign companies will act as sales taxes, not borne by foreign companies but pushed onto U.S. consumers. However, in the same breath they claim that Trump’s promised corporate tax cuts are a tax break for billionaires. Advocacy economics runs into credibility problems when arguing that taxes levied on foreign firms are not borne by the rich people who run the companies but that taxes on domestic firms are. Taxes on domestic firms are pushed onto consumers just as taxes on foreign firms are. The beneficiaries of corporate tax cuts include American workers, consumers, and shareholders.

 

All taxes have harms, so while imposing taxes on foreign firms may potentially hurt Americans, imposing taxes on American firms also hurts us, if not more. Tariffs on the small share of our spending that is on imports may raise prices, but tax cuts on firms contributing to the much larger share of our spending that is not on imports may lower prices. It seems prudent to consider whether replacing taxes on domestic firms with taxes on foreign firms while keeping tax revenue neutral, a part of the RNC platform, may benefit Americans. But of course, we cannot raise all revenue that way. The Laffer curve is real: Uncle Sam won’t raise enough from tariffs to wipe out the income tax.

 

For labor markets, advocacy economics again runs into problems with logic. Much economic research by left-leaning economists has for decades argued that legal immigration has a limited impact on natives’ wages. But we now hear the same economists warning us that deportation of illegal immigrants will be highly “inflationary” by cutting the number of available workers. Advocacy loses credibility if claiming a rise in supply does not affect price, but a cut in supply does.

 

On a broader level, the Keynesian framework accepted as conventional by many economists and policy-makers is based on the underlying belief that government officials can time fiscal and monetary policy to dampen the business cycle while controlling price growth. But its advocates repeatedly disagree with the timing of policies implemented by government officials. To illustrate, take the case of Larry Summers, who correctly argued that Biden’s fiscal policies would be inflationary and that the Fed was too slow in responding. But either the Keynesian framework he adheres to is useful because government officials are good at timing policy, or it isn’t useful because it is too difficult for them, or anyone, to do. Which is it?

 

A large part of this headache-inducing advocacy occurs because of the virtue-signaling of economists who work in academia, one of the most left-leaning sectors in the American economy and one where, just like Hollywood, being on the wrong team dampens your career.

 

The loudest advocacy comes from Nobel economists who insist on signing letters predicting the opposite of what actually happens. Having served decades at the University of Chicago, the global leader in the Nobel count, I know firsthand that their research focuses on more general issues distant from specific election platforms, and few even read the platforms. In addition, many Nobel winners sign letters outside their area of expertise, which is like asking a psychiatrist to comment on a surgical procedure.

 

This may explain letters predicting an economic Armageddon in the event of a Trump win in 2016, that the nationalization of student lending would help fund the Affordable Care Act, and that massive redistribution would generate higher long-run growth, through Biden’s Build Back Better.

 

The Nobel winners’ most recent letter warning of Trump was challenged by market indices rising 4–5 percent immediately after the election — a large gain given that the victory was already somewhat baked into prices since the election was a toss-up according to polls and Trump was favored in prediction markets. This advocacy problem mimics 2016 when the index of small-business optimism went through the roof directly after the election. The faulty academic predictions are not surprising: Asking the academy to evaluate Trump is like asking Pepsi to evaluate Coke.

 

Let’s hope more rational assessments can help America evaluate Trump’s economic agenda. Americans deserve to be informed by economic assessments that are built on logic and evidence, not on advocacy.