Dementia Care: A Shift to Paid Support?

The economic burden of dementia care is already enormous, and will only rise further as the population ages. In \”Improving Long-Term Care Dementia: A Policy Blueprint,\” a report for the Rand Corporation, Regina A. Shih, Thomas W. Concannon, Jodi L. Liu, and Esther M. Friedman consider what might be done to improve care. Let\’s start with a bit of background (footnotes omitted):

Dementia is a debilitating and progressive condition that affects memory and cognitive functioning, results in behavioral and psychiatric disorders, and leads to decline in the ability to engage in activities of daily living and self-care. In 2010, 14.7 percent of persons older than age 70 in the United States had dementia. With the expected doubling of the number of Americans age 65 or older from 40 million in 2010 to more than 88 million in 2050, the annual number of new dementia cases is also expected to double by 2050, barring any significant medical breakthroughs. Alzheimer’s disease, which accounts for 60 to 80 percent of dementia cases, is the sixth leading cause of death in the United States overall and the fifth leading cause of death for those age 65 and older. Additionally, recent research suggests that deaths attributable to Alzheimer’s disease might be underreported such that it could be the third leading cause of death overall. It is the only cause of death among the top ten in the United States without a way to prevent it, cure it, or even slow its progression.

Dementia is already the medical condition that imposes the highest annual cost in terms of market cost of services provided, ahead of cancer and heart disease. These market costs don\’t include the costs of care provided by family and friends, which in the case of dementia could double the total costs.

The data in the report suggests that there is going to be a substantial shift in dementia care over the next few decades. The number of people with dementia is going to rise more than the number of potential family caregivers. Thus, it seems likely to me that as a society we are going to shift toward paid caregivers for dementia.

Most of the burden of caring for people with dementia is shouldered by family and friends. More than 15 million Americans currently provide family care to relatives or friends with dementia. These family caregivers typically shoulder a heavy burden: Nearly 40 percent reported quitting jobs or reducing work hours to care for a family member with dementia. Many of these caregivers also experience negative physical and mental health effects. …

With respect to formal care, about 70–80 percent of those who provide LTSS [long-term services and supports] are direct care workers, including nursing aides, home health aides, and home- or personal-care aides. This workforce benefits substantially from training in how to manage behavioral symptoms related to dementia. Inadequate training for dementia in the direct care workforce has been identified as a main contributor to poor quality of care, abuse, and neglect in nursing homes. Another significant gap in the LTSS workforce stems from the growing imbalance between the demand for—and supply of—qualified paid workers. This shortage results from high turnover and difficulty attracting qualified workers. Shortfalls in this workforce are often filled via the “gray market,” meaning that untrained, low-cost caregivers are hired, leaving older adults vulnerable to poor or unregulated quality of care. … As one indicator of the greater need for formal care among persons with dementia, 48.5 percent of nursing home residents and 30.1 percent of home health patients in 2012 had dementia. … The Alzheimer’s Association has estimated that the average per-person Medicaid spending for Medicare beneficiaries age 65 and older with dementia is 19 times higher than the average per-person Medicaid spending for comparable Medicare beneficiaries without dementia. …

Demographic trends suggest that the current heavy reliance on family caregiving is unsustainable. As the median age of the U.S. population, including baby boomers, trends upward, there will be a growing imbalance between the number of people needing care and family caregivers available to deliver it. To illustrate, the AARP Public Policy Institute estimates that the ratio of caregivers aged 45–64 to each person aged 80 and older who needs LTSS will decline from 7:1 in 2010 to less than 3:1 in 2050. … In addition, life expectancies have increased so that it is possible for two generations within one family to be living with dementia at the same time.

The report has lots of worthy and sensible recommendations focused on improving the quality of care for dementia: more outreach and education for the public and caregivers on recognizing symptoms of dementia; access to training and perhaps also some financial support for informal caregivers; better training, pay and coordination for formal caregivers; expanding home and community-based services where possible, and coordinating these with each other and with institutional care as needed; and more research into possibilities for prevention and treatment.

But this report ducks the hard question of costs. The report has some short comments about encouraging more long-term care insurance, whether through linkages to current health insurance, or through public/private partnerships of some kind, or through a national single-payer system. But the hard fact here is that the costs of dementia care–again, which is already the single most expensive medical condition–are going to grow very rapidly in the next few decades. Many elderly persons and going to face crushing financial costs, and their families are going to face costs of both money and time. I suspect that the demands for government financial and regulatory interventions in the area of long-term care for those with dementia are going to become very powerful. It\’s high time to start thinking about what policy options make more sense that others.

Snapshots of Foreign Direct Investment Flows

The canonical source for data on flows of foreign direct investment are the reports from the United Nations Conference on Trade and Development, more commonly known as UNCTAD. It\’s World Investment Report 2015 provides a discussion of trends up through last year.

To interpret these patterns, it\’s important to remember how foreign direct investment, or FDI, differs from \”portfolio investment.\” Portfolio investment involves foreign investment that do not involve any kind of management voice. Thus, buying debt issued in another country is counted as portfolio investment, as is buying a mutual fund of stocks of firms from another country. By contrast, UNCTAD defines foreign direct investment in this way:

FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise. … Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; the BPM5 [Balance of Payments Manual: Fifth Edition] suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor.

Thus, FDI matters not just because of the financial size of the flows, but also because it often involves a transfers of managerial or technological expertise, or a commercial buying-or-selling connection. FDI can often be part of global value chain connections across the world economy.

FDI inflows to developed economies have been quite volatile over the past two decades. In contrast, inflows to developing economies have risen much more steadily–and indeed, inflows of FDI to developing countries were more than half of global FDI inflows in 2014.

What are the economies receiving the lion\’s share of these FDI inflows? For those who think of China\’s economy as largely closed to outside investment, it\’s interesting that China and Hong Kong are at the top for size of FDI inflows in 2014. The US, the UK, and Canada also rank highly, in part because of how these economies often see FDI investments back and forth among their borders.

What about outflows of FDI? Here, the story is that the share of FDI outflows from developing economies has been rising, both as an overall amount and as a proportion of the total, and now constitutes about one-third of all FDI outflows.

What countries mainly account for FDI outflows? It\’s perhaps no surprise to see the US, China, and Hong Kong near the top of the list. However, developed economies like Japan, Germany, Canada, and France play a substantial role in outflows of FDI, too.

Origins of Labor Day

It\’s clear that the first Labor Day celebration was held on Tuesday, September 5, 1882, and organized by the Central Labor Union, an early trade union organization operating in the greater New York City area in the 1880s. By the early 1890s, more than 20 states had adopted the holiday. On June 28, 1894, President Grover Cleveland signed into law: \’\’The first Monday of September in each year, being the day celebrated and known as Labor\’s Holiday, is hereby made a legal public holiday, to all intents and purposes, in the same manner as Christmas, the first day of January, the twenty-second day of February, the thirtieth day of May, and the fourth day of July are now made by law public holidays.\” (Note: This post has been reprinted on this blog on Labor Day since 2011.)

What is less well-known, at least to me, is that the very first Labor Day parade almost didn\’t happen, and that historians now dispute which person is most responsible for that first Labor Day. The U.S. Department of Labor tells how first Labor Day almost didn\’t happen, for lack of a band:

\”On the morning of September 5, 1882, a crowd of spectators filled the sidewalks of lower Manhattan near city hall and along Broadway. They had come early, well before the Labor Day Parade marchers, to claim the best vantage points from which to view the first Labor Day Parade. A newspaper account of the day described \”…men on horseback, men wearing regalia, men with society aprons, and men with flags, musical instruments, badges, and all the other paraphernalia of a procession.

The police, wary that a riot would break out, were out in force that morning as well. By 9 a.m., columns of police and club-wielding officers on horseback surrounded city hall. By 10 a.m., the Grand Marshall of the parade, William McCabe, his aides and their police escort were all in place for the start of the parade. There was only one problem: none of the men had moved. The few marchers that had shown up had no music.

According to McCabe, the spectators began to suggest that he give up the idea of parading, but he was determined to start on time with the few marchers that had shown up. Suddenly, Mathew Maguire of the Central Labor Union of New York (and probably the father of Labor Day) ran across the lawn and told McCabe that two hundred marchers from the Jewelers Union of Newark Two had just crossed the ferry — and they had a band!

Just after 10 a.m., the marching jewelers turned onto lower Broadway — they were playing \”When I First Put This Uniform On,\” from Patience, an opera by Gilbert and Sullivan. The police escort then took its place in the street. When the jewelers marched past McCabe and his aides, they followed in behind. Then, spectators began to join the march. Eventually there were 700 men in line in the first of three divisions of Labor Day marchers.

With all of the pieces in place, the parade marched through lower Manhattan. The New York Tribune reported that, \”The windows and roofs and even the lamp posts and awning frames were occupied by persons anxious to get a good view of the first parade in New York of workingmen of all trades united in one organization.

At noon, the marchers arrived at Reservoir Park, the termination point of the parade. While some returned to work, most continued on to the post-parade party at Wendel\’s Elm Park at 92nd Street and Ninth Avenue; even some unions that had not participated in the parade showed up to join in the post-parade festivities that included speeches, a picnic, an abundance of cigars and, \”Lager beer kegs… mounted in every conceivable place.

From 1 p.m. until 9 p.m. that night, nearly 25,000 union members and their families filled the park and celebrated the very first, and almost entirely disastrous, Labor Day.\”

As to the originator of Labor Day, the traditional story I learned back in the day gave credit to Peter McGuire, the founder of the Carpenters Union and a co-founder of the American Federation of Labor. At a meeting of the Central Labor Union of New York on May 8, 1882, the story went, he recommended that Labor Day be designated to honor \”those who from rude nature have delved and carved all the grandeur we behold.\” McGuire also typically received credit for suggesting the first Monday in September for the holiday,\” as it would come at the most pleasant season of the year, nearly midway between the Fourth of July and Thanksgiving, and would fill a wide gap in the chronology of legal holidays.\” He envisioned that the day would begin with a parade, \”which would publicly show the strength and esprit de corps of the trade and labor organizations,\” and then continue with \”a picnic or festival in some grove.\”

But in recent years, the International Association of Machinists have also staked their claim, because one of their members named Matthew Maguire, a machinist, was serving as secretary of the Central Labor Union in New York in 1882 and clearly played a major role in organizing the day. The U.S. Department of Labor has a quick summary of the controversy.

\”According to the New Jersey Historical Society, after President Cleveland signed into law the creation of a national Labor Day, The Paterson (N.J.) Morning Call published an opinion piece entitled, \”Honor to Whom Honor is Due,\” which stated that \”the souvenir pen should go to Alderman Matthew Maguire of this city, who is the undisputed author of Labor Day as a holiday.\” This editorial also referred to Maguire as the \”Father of the Labor Day holiday.

So why has Matthew Maguire been overlooked as the \”Father of Labor Day\”? According to The First Labor Day Parade, by Ted Watts, Maguire held some political beliefs that were considered fairly radical for the day and also for Samuel Gompers and his American Federation of Labor. Allegedly, Gompers did not want Labor Day to become associated with the sort of \”radical\” politics of Matthew Maguire, so in a 1897 interview, Gompers\’ close friend Peter J. McGuire was assigned the credit for the origination of Labor Day.\”

The Economies of Latin America: Fade or Pause?

Five years ago in September 2010, the Economist magazine ran a lengthy article titled: \”A Latin American decade? The reformers have won, but they have yet to consolidate their success.\” Now, the September 2015 issue of Finance & Development (published by the IMF) has a seven-paper symposium titled \”Latin America: Finding its Footing. The tone of the discussion is about \”the many challenges facing the region today\” and how to go about \”avoiding a prolonged slowdown.\”  What\’s happening in that region?

The lead essay by José Antonio Ocampo sets the stage: \”But this positive picture has changed dramatically. Growth per capita ground to a halt in 2014 and much of the region is again viewed with a sense of forgone promise. … In contrast to the halcyon decade that ended in 2013, the recent economic performance of Latin America has been poor. Growth fell sharply in 2014 to just 1.1 percent—barely above the region’s current low population growth of 1.0 percent—and will continue at a similar or even lower rate in 2015 … Investment also declined in 2014, and will continue to do
so in 2015. Poverty ratios have stagnated at 2012 levels … and, although no hard data are yet available, this seems also true of income distribution.\”

Here\’s a figure showing annual growth rates of GDP for the region. Notice that from the 1950s through 1970s, annual growth of GDP tended to be in the range of 4-7% per year, with some exceptions. During what\’s called in Latin America the \”lost decade\” of the 1980, annual growth rates were more likely to be in the range of 0-2%. and sometimes negative for the region as a whole. Growth rates of GDP rebounded around 2004, but now seem to be sagging again.

Ocampo explains the underlying factors:

\”The change in Latin America’s fortunes results in large part from a reversal of the benevolent external conditions that fostered the boom. The excellent performance from 2004 until the middle of 2008 reflected the extraordinary coincidence of four positive external factors: rapid growth of international trade, booming commodity prices, ample access to external financing, and migration opportunities and the burgeoning remittances that migrants sent home.Two of these positive factors—migration opportunities and rapid world trade expansion—have disappeared, probably permanently, as a result of the financial crisis in advanced economies. Migration opportunities to the United States are more limited than before the crisis, and high unemployment in Spain has prompted many South American migrants to return home. Remittances, which help prop up demand in recipient countries, have recovered but are still below the 2008 peak. Likewise, world trade experienced the worst peacetime contraction in history after the September 2008 collapse of the Wall Street investment firm Lehman Brothers. Although trade swiftly recovered, since 2011 it has settled in at a slow rate of growth. … [R]eal commodity prices have followed long-term cycles since the late 19th century. If this continues to be the pattern, the world is at the beginning of a long period of weakening commodity prices.

\”Therefore, of the four conditions that fed the 2004 to mid-2008 boom, only one remains in place: good access to external financing.  …  Annual bond issues by Latin America have almost tripled— to $9.6 billion a month in 2010–14 compared with $3.5 billion in 2004–07—and the costs of financing have remained low for countries that issued bonds in international private capital markets. …  Global financial conditions may, of course, change given new uncertainties surrounding the euro area in the face of the Greek crisis or if a reversal of U.S. monetary policy draws away investment funds from the region. But at the time of writing, Latin America’s access to global capital markets remained favorable.\” 

This explanation seems sensible to me, but it contains a disagreeable underlying message: both Latin America\’s growth after about 2004 and its slowdown in the last few years were mostly about external factors. What steps should Latin America itself be taking so that at least over the long-run (setting aside inevitable short-run fluctuations)  it can do more to shape its own economic future and raise the standard of living? Here, the policy agenda seems less clear-cut to me, in the sense that there are lots of goals, but it\’s less clear what the practical steps and top priorities should be. For example, Ocampo says in the course of a few paragraphs that all Latin America needs is new methods of production, new technology, new trade patterns, lower and less volatile exchange rates, and better education and infrastructure.

\”It is essential, then, that the region invest in diversifying its production structure and place technological change at the center of long-term development strategies. This should include not only reindustrialization but, equally important, the upgrading of natural-resource-production technology and the development of modern services. Diversifying trade with China away from commodities is another essential element of this policy. … The best way to exploit richer domestic markets is through regional integration. But this requires, in turn, overcoming the significant political divisions that have blocked the advance of regional integration over the past decade. … In macroeconomic terms, the most important condition for more dynamic production diversification is more competitive and less volatile real exchange rates. … The region also needs to make major advances in two other areas: the quality of education and infrastructure investment.\”

Other papers in the symposium focus in on specific elements.  For example, Daniel Kaufmann writes on \”Corruption Matters.\” His research looks at difference measures of governance across countries. For Latin America as a whole he writes \”that on average, government effectiveness, control of corruption, and voice and accountability stagnated in the region, and overall regulatory quality and rule of law deteriorated. At the end of 2013, Latin America’s governance quality trailed that of other predominantly middle-income regions, such as central and eastern Europe …Similarly, except in voice and accountability (a relative strength of Latin America), east Asia, with its focus on a long-term strategy and independent merit-based bureaucracies, surpassed Latin America on many governance dimensions, including government effectiveness, rule of law, and corruption control. …
Latin America’s average score is below the world median in all governance indicators except voice and accountability, which barely tops the median. It rates particularly poorly on (implementation of) rule of law. And on personal security and common crime, the region is at the very bottom.\”

As another example, Augusto de la Torre, Daniel Lederman, and Samuel Pienknagura offer a more detailed trade agenda for Latin America in \”Doing It Right,\” suggesting that the goal for Latin America shouldn\’t just be more trade within the region, but greater connection with the global value chains of production:

We found that once endemic structural factors-such as geography, economic size, and natural resource abundance-are taken into account, Latin America fares relatively well compared with east Asia merely in terms of intraregional trade volume and connectivity among regional trade partners. Where Latin America differs markedly from east Asia is in those key features of trade-intra-industry trade and participation in global value chains. This suggests that policies aimed at simply boosting intraregional trade connections and volumes in Latin America are unlikely to do much to boost growth. Latin American authorities should design policies that favor a more vigorous participation in intra-industry trade and in global value chains.

Nora Lustig points out in \”Most Unequal on Earth\” that the distribution of income in Latin America remains more unequal than in other regions, despite some modest progress in the last few years. Lustig offers two main causes for the decline in inequality. One is a rise in \”conditional cash transfers,\” but by her calculations this accounts for only about 20% of the reduction in inequality. The bigger changes, she argues, is that improvements in education have tended to lead to reduction in the supply of workers with less education–and thus boosted the wages of this group.

More equal distribution of labor earnings among wage earners and the self-employed is the most important factor, accounting for 60 percent of the region’s decline in inequality. This is because wages of workers with very little education rose faster than those of more educated workers, especially those with tertiary—college or other postsecondary—education. …Government transfers have increased in size and are better targeted to the poor. Almost every country in the region runs a flagship cash transfer program that requires families to keep their children in school and receive regular health checkups as a condition for benefits. … Since they were first implemented in Brazil and Mexico in the second half of the 1990s, conditional cash transfers have constituted one of the most important innovations in social policy to benefit the poor. Today, about 27 million households in the region—most of them poor—are beneficiaries of so-called conditional cash transfers. In addition to improving the living standards of the poor, cash transfers have helped improve the health, education, and nutrition of children living in poverty and therefore carry the promise of better employment opportunities in the future. … 

There is a lot of useful information about recent developments in the economies of Latin America in this issue of F&D, but less about long-run perspective.  Ernesto Talvi offers some perspective in an essay on \”Latin America\’s Decade of Development-less Growth\” that appeared as a chapter of a report written for a meeting of the G-20 (a group of leaders from the largest world economies) in November 2014. Talvi points out that over time, per capita GDP in Latin America relative to the US level rose a bit from the 1950s to the 1970s, fell in the 1980s and 1990s, and how has rebounded a bit. Thus, there is a lack of catch-up convergence over the last six decades

Talvi\’s view (similar to Ocampo) is that Latin America\’s growth after about 2004 was mainly from external forces, but he draws a more discouraging lesson: that Latin America has largely not made progress in the internal factors that should be the basis for its own organic economic development. Here\’s Talvi: 

\”Latin America had a decade of uninterrupted high growth rates—with the sole exception of 2009 in the aftermath of the Lehman crisis—that put an end to a quarter of a century of relative decline in income per capita levels vis-à-vis advanced economies. However, high growth and income convergence were largely the result of an unusually favorable external environment, rather than the result of convergence to advanced country levels in the key drivers of growth. Moreover, income convergence was not associated either with a comparable convergence in key indicators of development. Fundamentally, the last was a decade of “development- less growth” in Latin America.\”

For illustration, Talvi offers some graphs. In these two figures, the blue lines are all set to 100, showing the level in 2004. The green bars then show a comparable level in 2013. In each figure, the first two bars sh ow the rise in income levels from 2004 to 2013,. The point is that on many other important measures for long run economic health, Latin America has not seen similar growth: that is, not on  measures of human capital, infrastructure, public services, trade integration, innovation, equality of opportunity by income, environmental protection, gender equity, or personal security.

My own experience is that in discussions of economic reform in Latin America, there often seems to be a reflexive need for speakers to dissociate themselves from any suggestion that they favor market-oriented reform or capitalism. Of course, the history of Latin America in the last century is  full of populist political leaders who argued that the the problems and inequalities of society and the economy were due to big business and capitalists. The actual policies of most of these populist leaders, once in office, mostly tended to reinforce the pre-existing inequalities. However, the political strategy of  perpetually blaming free markets and capitalism often seems to keep working in Latin American politics and society, even while the actual governments operate in a way that is quite far from what a US-based economist would think of as a freer-market agenda. From my outsider perspective, many governments in Latin America practice policies of government planning and interventionism, along with favoritism for politically well-connected large corporations, and then blame free markets for the result.

These arguments took on a new edge a few decades ago. Those who tend to downplay market reforms look back at the long-run history of the Latin American region and argue that there approach was going pretty well from the 1950s through the 1970s–as shown by the convergence at that time–and that a wave of market-oriented reforms are mostly to blame for the relative decline in Latin America\’s economies in the 1980s and 1990s. The other side points out that the convergence in per capita incomes from the the 1950s to the 1970s wasn\’t all that large, and argue that it was  driven by a series of unsustainable government policies that crashed and burned in the 1980s, leading to a need for market-oriented reforms in the 1990s. They argue that in Latin America, market-oriented reforms have worked pretty well in the countries that gave them a try, even though they have had to fight the tide of economic populism.

About 10 years ago,we offered a pro-and-con example of this dispute in the Spring 2004 issue of Journal of Economic Perspectives (where I work as Managing Editor).  José Antonio Ocampo made the case that market-oriented reforms had not much helped in Latin America in \”Latin America\’s Growth and Equity Frustrations During Structural Reforms.\” On the other side, Arminio Fraga argued that the market-oriented reforms had started working and needed to be strengthened in \”Latin America since the 1990s: Rising from the Sickbed?\” 

Campbell Harvey: Interview on Topics in Finance

An interview of Campbell Harvey by David A. Price appears in Econ Focus, published by the Federal Reserve Bank of Richmond (2015 First Quarter, pp. 26-30). Here are some comments that especially caught my eye, but the rest of the interview contains many additional nuggets like Harvey\’s comments on Bitcoin, a countercyclical risk premium, CEO overconfidence, and why people keep buying actively managed investment funds although they don\’t seem to beat the market on average.

Concerning the differences between doing work in practical finance inside a company and doing academic finance

To be published in academic finance or economics, the idea must be unique; it\’s the same in the practice of finance — you\’re looking to do something that your competitors haven\’t thought of.

There are differences, though. The actual problems that are worked on by practitioners are more applied than the general problems we work on in financial economics.

The second difference is that in academic financial economics, you have the luxury of presenting your paper to colleagues from all over the world. You get feedback, which is really useful. And then you send it in for review and you get even more feedback. In business, it\’s different; you cannot share trade secrets. You really have to lean on your company colleagues for feedback.

The third thing that\’s different is access to data for empirical finance. When I was a doctoral student, academia had the best data. For years after that, the pioneering academic research in empirical finance relied on having this leading-edge data. That is no longer the case. The best data available today is unaffordable for any academic institution. It is incredibly expensive and that\’s a serious limitation in terms of what we can do in our research. Sometimes you see collaborations with companies that allow the academic researchers to access to data that they can\’t afford to buy. Of course, this induces other issues such as conflicts of interest. … 

The fourth difference is the assistance that\’s available. Somebody in academia might work on a paper for months with a research assistant who might be able to offer five to 10 hours per week. In the practice of management, you give the task to a junior researcher and he or she will work around the clock until the task is completed. What takes months in academic research could be just a few days.

The fifth difference is computing power. Academics once had the best computing power. We have access to supercomputing arrays, but those resources are difficult to access. In the practice of management, companies have massive computer power available at their fingertips. For certain types of studies, those using higher frequency data, companies have a considerable advantage.

Concerning some major open questions in finance

One is how you measure the cost of capital. We had the capital asset pricing model in 1964, but the research showed very weak support for it. We have many new models, but we are still not sure. That\’s on the investment side. On the corporate finance side, it would certainly be nice to know what the optimal leverage for a firm should be. We still do not know that. In banking, is it appropriate that banks have vastly more leverage than regular corporations? Again, we need a model for that. Hopefully these research advances are forthcoming. Some people have made progress, but we just don\’t know.

Concerning the importance of looking for big research ideas

One thing that was pretty important for me in my development was an office visit with Eugene Fama, my dissertation adviser, where I had a couple of ideas to pitch for a dissertation. I pitched the first idea, and he barely looked up from whatever paper he was reading and shook his head, saying, \”That\’s a small idea. I wouldn\’t pursue it.\” Then I hit him with the second idea, which I thought was way better than the first one. And he kind of looked up and said, \”Ehh, it\’s OK. It\’s an OK idea.\” He added, \”Maybe you can get a publication out of it, but not in a top journal.\” He indicated I should come back when I had another. Even though he had shot down both of my ideas, I left feeling energized. The message from him was that I had a chance of hitting a big idea. That interaction, which I am sure he doesn\’t remember, was very influential — it pushed me to search for big ideas and not settle on the small ones.

Crossing the Ravine from Economic Theory to Policy Advice

When describing the benefits of learning economics to often-skeptical listeners, I often quote Joan Robinson (in the 1978 book Contributions to Modern Economics, p. 75): \”The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.\”

After all, if you don\’t know any economics, you are likely at some point to find yourself in a discussion of policy or social issues where at some point the other person says: \”Well, even a basic knowledge of economics will tell you that my view is correct.\” That person may be totally wrong; in my experience, that person is often totally wrong. But if you don\’t know any economics, you have no easy way to refute this claim about what \”economics\” implies.

David Colander makes a similar point more thoroughly in his \”Economics with Attitude\” column in the Fall 2015 issue of the Eastern Economic Journal, \”Economic Theory Has Nothing to Say about Policy(and Principles Textbooks Should Tell Students That)\” (41: pp. 461-465). He begins his way:

Let me start with a quiz: 

● Question 1: According to economic theory, whenever possible government should avoid tariffs.
● Question 2: According to economic theory, the minimum wage lowers the welfare of society.
● Question 3: According to economic theory, if there are no externalities, the market is the preferable way of allocating resources. 

The correct answer to each of these questions is false; economic theory, on its own, has nothing to say about policy.

Colander distinguishes between theorems and precepts, and discuses how the pedagogical emphasis has shifted between these over time. Theorems are results derived from models and assumptions. \”Precepts are based on the insights coming from models, combined with educated judgments about all relevant aspects of the decisions that the model assumes away for tractability reasons. These include moral judgments, historical knowledge, and institutional understanding. Precepts are the realm of economic statesmen, not economic scientists.\” With this distinction in mind, Colander writes:

 All students coming out of a principles course should know that before one can make a meaningful judgment about policy, there is a lot of history, moral philosophy, and additional peripheral knowledge that is needed to move from theory to policy. Even if we don’t teach the nuance, we can teach the need for nuance in policy discussion. Every beginning economics student should know that economic theorems are not enough to arrive at policy conclusion.

Colander has been contributing short, lively essays at the start of each issue for the EEJ, and the essays are freely available at least for a time. Earlier essays in 2015 include his remembrances of Gordon Tullock. an argument that there is too much intellectual in-breeding (that is, cross-hiring) at Harvard and MIT, and a critique of the overly enthusiastic reaction to Thomas Piketty\’s Capital in the 21st Century.