Nobel Prizes in Economics are awarded for long-term research, not for the role of economists in current debates, so they don’t necessarily have much bearing on the political moment. You might expect the disconnect to be particularly strong when the prize is awarded primarily for the development of new research methods.
And so is the latest prize, awarded on Monday to David Card, Joshua D. Angrist and Guido W. Imbens, leaders of the “credibility revolution” – a shift in the way economists use data to assess theories – which swept away the economy. the past generation.
It turns out, however, that the credibility revolution is extremely relevant in current debates. Indeed, studies using the new approach have, in many cases, but not all, reinforced the argument for a more active role of government in tackling inequalities.
As I will explain, this is no accident. But first, what is this revolution?
Economists generally cannot do controlled experiments – all we can do is observe. And the problem with trying to draw conclusions from economic observations is that anytime, anywhere, there is a lot going on. For example, the economy exploded after Bill Clinton raised taxes on top earners and reduced the budget deficit. But did these tax policies cause prosperity, or was Clinton just lucky to preside over a tech boom?
Before the Credibility Revolution, economists essentially tried to isolate the effects of particular policies or other changes by using sophisticated statistical methods to control for other factors. In many cases, that’s still all we can do. But such an attempt is only as good as the checks, and there is usually endless room for controversy over the results.
In the 1990s, however, some economists realized that there was an alternative approach, that of exploiting “natural experiments” – situations in which the vagaries of history offer something akin to the type of controlled trial that researchers might want to conduct but cannot.
The most famous example is Card’s research with the late Alan Krueger on the effects of minimum wages. Most economists believed that increasing the minimum wage reduced employment. But is it true? In 1992, the state of New Jersey increased its minimum wage, unlike neighboring Pennsylvania. Card and Krueger realized they could gauge the effect of this policy change by comparing job growth in the two states after the wage hike, essentially using Pennsylvania as a control for the New Jersey experience. .
What they found was that the increase in the minimum wage had very little or no negative effect on the number of jobs, a result confirmed since by examining many other cases. These results argue for not only a higher minimum wage, but also more aggressive attempts to reduce inequalities in general.
Another example: how do you assess the effects of safety net programs that help children? Researchers took advantage of natural experiments created, among other examples, by the gradual roll-out of food stamps in the 1960s and 1970s and several discrete jumps in Medicaid availability in the 1980s. These studies show that children who have recipients of assistance grew into much healthier and more productive adults than non-recipients.
And studies like this argue for the Biden administration’s Build Back Better initiative, which emphasizes investing in children as well as conventional infrastructure.
Finally, big changes in UI during the pandemic – a huge increase in generosity, then a sudden cut, then a partial restore, then another cut, with some states cutting benefits earlier than others – provide several natural experiments allowing us to test whether, as the Conservatives still insist, unemployment insurance dissuades the unemployed from looking for a new job.
Well, the data provides a clear The Answers6: While there may be disincentives for unemployment benefits, they are weak.
Overall, then, the modern data-driven economy tends to support more militant economic policies: raising wages, helping children, and helping the unemployed are better ideas than many politicians seem to believe. But why do the facts seem to support a progressive agenda?
The main answer, I would say, is that in the past many influential people have grasped economic arguments that could be used to justify high inequalities. We cannot increase the minimum wage because that would kill jobs; we cannot help the unemployed because it would hurt their incentives to work; etc. In other words, the political use of economic theory has tended to have a right-wing bias.
But now we have some evidence that can be used to verify these arguments, and some don’t. Thus, the empirical revolution in economics undermines the conventional right-wing wisdom that had dominated discourse. In this sense, the evidence turns out to have a liberal bias.
Again, the research honored by this Nobel is not political, but it has important political implications. And most of these implications favor a political movement to the left.