The collective wisdom of economists is valuable. With it and $3.75 you can buy a gallon of unleaded gas nearly anywhere. Yes, that is a sour-grapes reaction to John McCain and Hilary Clinton’s scorn for a warning from economists that a gas-tax holiday would be not only futile but counterproductive.
Hurt feelings may be premature. Based on Tuesday’s vote, it isn’t clear Clinton gained much from her stand. But her position raises the question of why economists have little influence whenever some issue prompts them to speak with one voice.
The track record for open letters signed by notables in the discipline of economics is not great. In May 1930, 1,028 members of the American Economics Association signed a letter to President Herbert Hoover asking him to veto the Smoot-Hawley tariff bill, which raised import tariffs to the highest level ever. The U.S. was running a considerable trade surplus at the time, and some of the greatest tariff increases were on items that had no domestic producers. The signatories included prominent economists associated with each of the political parties. Hoover signed the bill anyway.
In 2001, more than 600 economists signed a similar letter asking President Bush not to impose “emergency” tariffs on steel imports. Again, the signatories included prominent supporters of each of the political parties and several Nobel laureates. Again, their collective advice was ignored.
A week ago, nearly 300 economists signed a letter arguing that “suspending the federal tax on gasoline this summer is a bad idea and we oppose it.” Once again, the signers included Nobelists and a broad range of Republicans, Democrats and independents.
Candidates McCain and Clinton dismissed the economists’ warning, with Clinton pointedly stating, “I’m not going to put my lot in with economists.”
In the first two cases, history proved the economists right. Supply-side economists who identify Smoot-Hawley as the root cause of the Great Depression are a small minority, but most historians agree the act made the Depression much worse than it might have been and spread its effects more widely around the globe.
Indeed, the letter’s closing warning, “A tariff war does not furnish good soil for the growth of world peace” embodied tragic prescience. The Smoot-Hawley Act touched off a tit-for-tat trade war that made international trade collapse. The economic chaos to which Smoot-Hawley contributed aided both Adolf Hitler and Japanese militarists in their grabs for power.
In the case of the 2001 steel tariffs, it rapidly became evident that the tariffs were destroying more jobs in industries that used steel than they protected in steel production. In 2003 the tariffs were dropped.
One can take several lessons from this. First, political considerations trump academic wisdom every time. Hoover himself thought the tariff was a bad idea, but it was highly popular among his fellow Republicans. As the economy cooled in 1930, following stock market drops in late 1929, Republicans thought high tariffs would help them win the fall elections.
The steel tariffs were much less important than Smoot-Hawley, and any gas-tax holiday is even more trivial. Neither McCain nor Clinton will have any particular political power until after the summer is over. There is no groundswell of support for a gas-tax holiday in either house of Congress. So it is a safely irrelevant way to pander to voters.
Economists need to examine their own house. We don’t do a very good job of educating the public about which ideas we generally agree on and which are controversial. There is wide diversity of opinion within the discipline on issues such as what the Federal Reserve should do right now, how important budget deficits are or whether capital gains should get preferential tax treatment.
Conversely, there is near unanimity among economists that the benefits of trade between nations usually outweigh the costs and that emissions taxes would be much better at improving the environment than current policies. But none of this is evident to the average citizen.
Moreover, economists always are vulnerable to charges that they are disconnected from the real world or that they live lives of privilege compared to working folk.
Write that construction subsidies to the Mall of America don’t, on balance, create any new jobs and you get deluged with letters decrying your lack of sympathy with working people. Point out that a gas-tax holiday will lower pump prices little, if at all, and you hear the same.
Economists can take comfort in the idea that they will be right in the long run. In the last paragraph of his most important book, John Maynard Keynes assured us that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.” Take that, you demagogues.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.