The Economist As Policy Adviser

Often, economists are asked to explain the causes of economic events. Why, for example, is unemployment higher for teenagers than for older workers? Sometimes, economists are asked to recommend policies to improve economic outcomes. What, for instance, should the government do to improve the economic well-being of teenagers? When economists are trying to explain the world, they are scientists. When they are trying to help improve it, they are policy advisers.

positive statomonts claim- that attempt to describe the world as it IS

normative statements claims that attempt to pnwcrtb* how the world should be

Positive versus Normative Analysis

To help clarify the two roles that economists play, let's examine the use of language. Because scientists and policy advisers have different goals, they use language in different ways.

For example, suppose that two people are discussing uiinimum-wage laws. Here are two statements you might hear:

Pou.v: Minimum-wage laws cause unemployment.

Norm: The government should raise tl>e minimum wage

Ignoring for now whether you agree with these statements, notice that Polly and Norm differ in what they are trying to do. Polly is speaking like a scientist: She is making a claim about how the world works. Norm is speaking like a policy adviser: He is making a claim about how he would like to change the world.

In general, statements about the world are of two types. One type, such as Polly's, is positive. Positive statements are descriptive They make a claim about how the world is. A second type of statement, such as Norm's, is normative. Normative statements are prescriptive. They make a claim about how the work! ought to be.

A key difference between positive and normative statements is how we judge their validity. We can, in principle, confirm or refute positive statements by examining evidence. An economist might evaluate Polly's statement by analyzing data on changes in minimum wages and changes in unemployment over time. By contrast, evaluating normative statements involves values as well as facts. Norm's statement cannot be judged using data alone. Deciding what is good or bad policy is not just a matter of science. It also involves our views on ethics, religion, and political philosophy.

Positive and normative statements are fundamentally different, but they arc-often intertwined in a person's Set of beliefs. In particular, positive views about how the workl works affect normative views about what policies are desirable-Polly's claim that the minimum wage causes unemployment, if true, might lead her to reject Norm's conclusion that the government should raise the minimum wage. Yet normative conclusions cannot come from positive analysis alone; they involve value judgments as well.

As you study economies, keep in mind the distinction between positive and normative statements because it will help you stay focused on the task at hand. Much of economics is positive: It just Iries to explain how the economy works. Yet those who use economics often have normative goals: They want to learn how to improve the economy- When you hear economists making normative statements, you know they are speaking not as scientists but as policy advisers.

Economists in Washington

President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economists for advice, they always answered, "On the one hand,... On the other hand,..."

Truman was right in realizing that economists' advice is not always straightforward. This tendency is rooted in one of the Ten Prlnapfes o/Econmics. People face trade-offs. Economists are aware that trade-off» are involved in most policy decisions- A policy might increase efficiency at the cost of equality. It might help future generations but hurt current generations. An economist who says that all policy decisions are easy is an economist not to be trusted.

Truman wa» also not alone among presidents in reiving on the advice of economists. Since 1946, the president of the United States has received guidance from the Council of Economic Advisers, which consists of three members and a staff of several dozen economists. The council, whose offices are just a few steps from the White House, has no duty other than to advise the president and to write the annual Economic Report of fhe President, which discusses recent developments in the economy and presents the council's analysis of current policy issues.

The president also receives input from economists in many administrative departments. Economists at the Department of the Treasury help design tax policy. Economists at the Department of Labor analyze data on workers and those looking for work to help formulate labor-market policies. Economists at the Department of |ustice help enforce the nation's antitrust laws.

Economists are also found outside the administrative branch of government. To obtain independent evaluations of policy proposals. Congress relies on the advice of the Congressional Budget Office, which is staffed by economists. The Federal Reserve, the institution that sets the nation's monetary policy, employs hundreds of economists to analyze economic developments in the United States and throughout the world.

The influence of economists on policy goes beyond their role as advisers: Their research and writing» often affect policy indirectly. Economist John Maynard Keynes offered this observation:

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. Practical men, who believe themselves to be quite exempt from intellectual influencvs, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzv from some academic scribbler of a few vears back, „, ,

Although these words were written in 1935, they remain true. Indeed, the "aca- fcocv. voy mtuuevr it, demic scribbler" now influencing public policy is often Keynes himself. Hf,u- n "

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