February 19, 2015—Do you like to shop online and buy cheap gasoline? If so, you might want to save some of your gratitude for economists.
That’s the message from Robert E. Litan, arguing that his profession has contributed to business and technological innovations in recent decades. Litan made his case to economists and analysts at Nathan Associates as part of the firm’s “Economists Present” series.
Yes, economists failed for the most part to warn of the financial crisis and Great Recession of 2007–2009. This failure by the relative handful of economists who engage in forecasting has severely damaged the profession’s reputation.
But economists can also be thanked, at least in part, for the policy changes that enabled the Internet to thrive and U.S. oil and gas production to boom, said Litan, author of Trillion Dollar Economists (Wiley Press 2014)—the title representing an attempt to quantify their contribution.
Economic thinking and statistical techniques also underlie auction-based selling of ads at Google, conditional pricing for travel booked at Priceline, inexpensive index-based mutual funds, the “Big Data” revolution, and predicting how professional athletes will perform, Litan said. Even successful matchmaking—of men and women, organs and donors—has an economic underpinning.
“We’ve had a huge impact and nobody realizes it,” said Litan, who has four decades’ experience as a lawyer and economist in government, think tanks, private practice, and business. Litan addressed his book to a business audience among other groups of readers, including economists themselves, “who short sell themselves, don’t understand how influential and important they really are.”
Deregulation of air transportation and trucking in the late 1970s and early 1980s, combined with the breakup of AT&T’s telecommunications monopoly in the 1980s, cleared the way for the Internet’s explosive growth. Internet retailers would not have been able to ship rapidly under regulations that existed before 1980, and AT&T’s breakup sped the replacement of copper telephone wires with fiber optic technology—the “backbone of the Internet.”
“It is not at all clear that Sergey Brin and Larry Page, founders of Google, or Jeff Bezos, the founder of Amazon, would have been interested or able to launch their now iconic companies had not the Internet been ready for them when they had hatched their ideas and were ready to implement them,” Litan said. “The breakup of AT&T, an idea promoted by economists, helped make the timing right.”
Transportation would not have been deregulated “without many years of prior economic research, and most likely without articulate economists” like Alfred Kahn, Elizabeth Bailey, and Darius Gaskins in government positions, “and their economist appointees in key regulatory positions,” said Litan, who previously served in the White House Budget Office and as an attorney in the Justice Department’s Antitrust Division.
Economists played an “unsung role” in the surge of U.S. oil and gas production, starting with the Ford and Carter administrations. Economists “were instrumental in decisions dismantling energy price controls” after controls under Nixon and Ford caused gasoline and natural gas shortages.
When energy prices again rose in the 2000s, politicians refrained from attempting controls, and “higher prices did what economists predicted they would do”—created an incentive to exploit new sources through twin horizontal drilling and fracking.
“So score several points for the technologists and risk-taking oil and gas production companies, but score at least one point (maybe two) for the economists in the background,” he said.
More economic ideas are on the shelf awaiting implementation by businesses and policymakers—most likely in response to crisis.
Congestion (or value) pricing for roads—such as charging more to drive in high-traffic areas—will become easier to impose when political gridlock paralyzes public highway spending, leading governments to authorize more private roads. Premium support—vouchers—for the Medicare eligible population will eventually be adopted as more people age and medical costs rise. A carbon tax to mitigate climate change has a chance, especially if combined with a reduction in the social security tax to preserve revenue neutrality. Don’t be surprised if Congress adopts a consumption or value-added tax to narrow deficits.
Some other innovations: “pharma bonds” to raise money for clinical trials, and financial instruments based on housing prices to prevent another financial crisis.
Litan, who has also written about entrepreneurship and capitalism, will tackle international development in his next book. Like his friend the Peruvian economist Hernando de Soto Polar, Litan is interested in the role of property rights and the informal economy in global development.
Litan was shocked that enhancing property and contractual rights was omitted from the Copenhagen Consensus Center’s list of top policy interventions to promote growth and advance living standards. “It’s not sexy enough,” he said.
Vast numbers of “visible yet invisible” people exist without an identity on record, depriving them of access to benefits, property, or finance, unknown even to the states where they live.
“Getting plugged into the rest of the world is the development challenge of our time,” he said.