Must-Read: Noah Smith: Economics Has a Major Blind Spot

Must-Read: Noah Smith: Economics Has a Major Blind Spot:

Economists often don’t take politics into account. As a result, econ models leave out important pieces, and the advice of economists often falls on deaf ears or is seen as impractical…

Most economists would probably agree that fiscal and monetary policy both have an effect on aggregate demand and economic growth. But models of monetary policy often don’t consider the way that Congress’ tax and spending decisions react to changes in interest rates. And models of fiscal policy often assume that the central bank will follow some fixed rule no matter what happens to taxes and spending…. This interaction is so important that with certain assumptions about fiscal policy, it’s possible to completely reverse a model’s predictions about the effects of monetary policy.

Incomplete models aren’t the only way that econ fails…. Economists rarely think about the political feasibility of their proposals… intricate, complex models of optimal tax policy…. If academics spend their time on complex models that might only be used by some hyperadvanced future civilization, that’s not really a problem. The danger is that any attempt to change tax policy in the direction of an optimal solution might actually make things worse….

Not all economists need to take politics into account, but the ones who give policy advice definitely do…. Economists and their models are now in the thick of the political arena. If only more were aware of it.