Wednesday, March 31, 2010
Supreme Court Trading Cards
Now, I claim to be a law school nerd, through and through. But even I think this has a failed, doomed market. Check it out: it's a John Roberts trading card. I understand that it's tongue-in-cheek, but who, honestly, has this much time on their hands?
Aside from the Constitution . . .
Yesterday I set forth a series of educated guesses about what would happen to the two health care law suits. They are educated only to the tune of a law school career about 60% over, so take them with somewhere between a grain and the shaker of salt.
Today, however, I would ask whether the health care reform that passed is a good idea or not. I think that most have seen Atul Gawande's article in The New Yorker back in June of '09, which profiled the South Texas town of McAllen, which has the second-highest per-capita expenditures on health care in the country. That article really got me thinking about the entire system, which is hard to do. I have not been to the hospital in a long, long time. I have not bought a prescription drug since -- I can't even remember. Gawande's article did a good job giving me an introduction to the problem. But information out there is hard to find; there is no "health care systems for dummies" book that I have found.
Unbelievably, it is exceedingly hard to find a well-reasoned, thorough critique of the bill. The New York Times, naturally, gives policy a conclusory pat-on-the-back or kick-in-the-rump, with about as much thought-provocation as an episode of Family Guy. Redstate.com, of course, does the same thing -- just with a different conclusion and almost no coherence (although I must confess I enjoy that site for other reasons). But I finally did find a very thoughtful critique of the bill. The Becker-Posner blog has a tremendous post today on the merits of the new bill. Of course, both of the contributors have conservative leanings economically and legally. But while one may disagree with whatever their philosophical presuppositions might be, their conclusions come only after deliberation and reason.
Becker contends that really good, cost-cutting reform would seek to scale back the tax deductions that employers enjoy for providing plans, which would have the putative effect of forcing consumers to pay a higher deductible for medical care. Becker compares Americans' out-of-pocket expenses (12%) with Swiss citizens' out-of-pocket expenses (30%). Switzerland, he continues, spends a much lower percentage of their GDP on health care.
I would make two observations of this argument: (1) Raising the cost of procedures would surely deter a substantially greater portion of the population from undergoing that procedure; and (2) raising the cost of a good/service does not lower the cost of that good/service. In my mind, productive legislation would seek to spend less on health care. I supposed that, in the aggregate, a lower percentage of GDP would mean less per-capita spending on health care. I do not know, though, that it would make a particular health product any cheaper. Put another way -- is the goal of health care reform to keep the same level of service (roughly the same number of tests performed, same number of checkups, roughly the same prescription drugs, the same general sphere of coverage, etc.) and to make it cheaper? Or, is it simply to spend a smaller percentage of GDP on health care? Becker does not really answer that.
The Gawande article I mentioned above contends that over-prescription (of tests, drugs, specialists, etc.) has driven up costs. That makes sense: if the medical culture subscribes to needless over-testing, then it will of course incur costs. And because co-payments are so low, someone else foots about 85% of the bill. But who foots that bill? Obviously, those who pay the premiums -- peoples' employers, i.e. - corporate America. It would seem that premiums would go up year by year in response to a rampant exercise of the plan's options by its subscribers. And in America, corporations would eventually buck the increased cost of the health care they must provide. So what steps into stop that market equilibrium? Are we at the market equilibrium right now? Or are health care costs expected to rise?
This analysis, of course, raises the question why this bill was enacted, why this reform was pushed now. I can think of two reasons why Obama and the Democrats made this a priority. First, they thought that, for the services Americans were receiving, they should be paying less (in other words, health services was being inefficiently delivered). Second, too many people in this country did not have health insurance, and this was an unacceptable state of affairs from a policy/philosophy standpoint. Both of these reasons make sense as a causa actionis.
And the has definitely addressed the second reason: it has vastly expanded coverage. But in regard to the first reason, what has the bill done? As far as I can see, it has set up state health insurance exchanges. This idea, by the way, was put forward by the Heritage Foundation three years ago in several articles. This will enable consumers to see what other plans offer, and it should lead to a more efficient market. But if the market is at equilibrium now (no idea if it is), then consumers will not likely see much change in the value of the dollar that they spend on health care. Why? Think about the range of health care plans we have now. They range from covering little to covering everything and the kitchen sink (these are the infamous "Cadillac plans," upon which many heap plenty of blame for today's health care "crisis"). With disclosure, the market will find a happy median -- somewhere between the awful plans and the extravagant plans. Employers will converge on that. But if we are at market equilibrium, then plans will converge in terms of cost and coverage somewhere halfway between a mediocre plan and a cadillac plan. Qualitatively, I do not know how big a gap exists between two such plans -- but I would wager that the market will converge on the "average" health plan now. So is that what disclosure will ultimately do? Provide everyone with the average?
Now, perhaps in doing so, the market in the long term will force plans to raise deductibles and offer abridged coverage (not necessarily in a miserly way, just fewer options than a cadillac plan). Disclosure and information sharing worked the same way when the internet started selling goods and services: prices were cheaper online, but brick and mortar stores and the internet started to converge around the same market price for the same good. Thus, the exchanges may very well see modest reductions in price, but not an immediate cost-cutting that many Americans may well expect to see. It certainly will not warrant the fanfare of the twenty-two pens needed to sign the legislation. But it very well may help in the long run. Just don't expect too much.
Posner's critique, on the other hand, provides an outstanding analysis of the legislation. First, he contends that it will at least provide us data on how to run a health care system and what the cause of the problem is (not what its attendant circumstances are; much of the analysis and data I've seen merely give a post hoc, propter hoc type of analysis). Second, Posner contends that the bill will be expensive and that it will not save money. Judge Posner towers above the masses (in which I include myself) intellectually, but this prediction does not seem to come from Sinai, so to speak. There will be an increased demand for services, but no corresponding increase in funding? Oh -- looks like a financial shortfall. You do not have to be an economist at . . . well, the University of Chicago . . . to predict that.
So what will the bill do? If it subjects the nation to poor policy outcomes, it will sharpen our policy-making ability in the future. If it produces mediocre, modest results, it will have the same effect. Remember -- Americans like incremental policy change. We will have to wait to see whether the bill provides such an approach, but I think it does. Does it expand entitlements? Yes, of course it does -- but it does not engender a new way of thinking the way that the New Deal did. Now, business are expecting their costs to rise. While I hate to let corporate America dictate policy, they churn the economic engine, and their collective prospectus bears on us all. So, unfortunately, we must wait. But the plan is not catastrophic. The New Deal did not bankrupt us (though it more or less invented deficit spending), and this exceedingly more modest effort will not do the nation in, either -- at least in the short run.
Today, however, I would ask whether the health care reform that passed is a good idea or not. I think that most have seen Atul Gawande's article in The New Yorker back in June of '09, which profiled the South Texas town of McAllen, which has the second-highest per-capita expenditures on health care in the country. That article really got me thinking about the entire system, which is hard to do. I have not been to the hospital in a long, long time. I have not bought a prescription drug since -- I can't even remember. Gawande's article did a good job giving me an introduction to the problem. But information out there is hard to find; there is no "health care systems for dummies" book that I have found.
Unbelievably, it is exceedingly hard to find a well-reasoned, thorough critique of the bill. The New York Times, naturally, gives policy a conclusory pat-on-the-back or kick-in-the-rump, with about as much thought-provocation as an episode of Family Guy. Redstate.com, of course, does the same thing -- just with a different conclusion and almost no coherence (although I must confess I enjoy that site for other reasons). But I finally did find a very thoughtful critique of the bill. The Becker-Posner blog has a tremendous post today on the merits of the new bill. Of course, both of the contributors have conservative leanings economically and legally. But while one may disagree with whatever their philosophical presuppositions might be, their conclusions come only after deliberation and reason.
Becker contends that really good, cost-cutting reform would seek to scale back the tax deductions that employers enjoy for providing plans, which would have the putative effect of forcing consumers to pay a higher deductible for medical care. Becker compares Americans' out-of-pocket expenses (12%) with Swiss citizens' out-of-pocket expenses (30%). Switzerland, he continues, spends a much lower percentage of their GDP on health care.
I would make two observations of this argument: (1) Raising the cost of procedures would surely deter a substantially greater portion of the population from undergoing that procedure; and (2) raising the cost of a good/service does not lower the cost of that good/service. In my mind, productive legislation would seek to spend less on health care. I supposed that, in the aggregate, a lower percentage of GDP would mean less per-capita spending on health care. I do not know, though, that it would make a particular health product any cheaper. Put another way -- is the goal of health care reform to keep the same level of service (roughly the same number of tests performed, same number of checkups, roughly the same prescription drugs, the same general sphere of coverage, etc.) and to make it cheaper? Or, is it simply to spend a smaller percentage of GDP on health care? Becker does not really answer that.
The Gawande article I mentioned above contends that over-prescription (of tests, drugs, specialists, etc.) has driven up costs. That makes sense: if the medical culture subscribes to needless over-testing, then it will of course incur costs. And because co-payments are so low, someone else foots about 85% of the bill. But who foots that bill? Obviously, those who pay the premiums -- peoples' employers, i.e. - corporate America. It would seem that premiums would go up year by year in response to a rampant exercise of the plan's options by its subscribers. And in America, corporations would eventually buck the increased cost of the health care they must provide. So what steps into stop that market equilibrium? Are we at the market equilibrium right now? Or are health care costs expected to rise?
This analysis, of course, raises the question why this bill was enacted, why this reform was pushed now. I can think of two reasons why Obama and the Democrats made this a priority. First, they thought that, for the services Americans were receiving, they should be paying less (in other words, health services was being inefficiently delivered). Second, too many people in this country did not have health insurance, and this was an unacceptable state of affairs from a policy/philosophy standpoint. Both of these reasons make sense as a causa actionis.
And the has definitely addressed the second reason: it has vastly expanded coverage. But in regard to the first reason, what has the bill done? As far as I can see, it has set up state health insurance exchanges. This idea, by the way, was put forward by the Heritage Foundation three years ago in several articles. This will enable consumers to see what other plans offer, and it should lead to a more efficient market. But if the market is at equilibrium now (no idea if it is), then consumers will not likely see much change in the value of the dollar that they spend on health care. Why? Think about the range of health care plans we have now. They range from covering little to covering everything and the kitchen sink (these are the infamous "Cadillac plans," upon which many heap plenty of blame for today's health care "crisis"). With disclosure, the market will find a happy median -- somewhere between the awful plans and the extravagant plans. Employers will converge on that. But if we are at market equilibrium, then plans will converge in terms of cost and coverage somewhere halfway between a mediocre plan and a cadillac plan. Qualitatively, I do not know how big a gap exists between two such plans -- but I would wager that the market will converge on the "average" health plan now. So is that what disclosure will ultimately do? Provide everyone with the average?
Now, perhaps in doing so, the market in the long term will force plans to raise deductibles and offer abridged coverage (not necessarily in a miserly way, just fewer options than a cadillac plan). Disclosure and information sharing worked the same way when the internet started selling goods and services: prices were cheaper online, but brick and mortar stores and the internet started to converge around the same market price for the same good. Thus, the exchanges may very well see modest reductions in price, but not an immediate cost-cutting that many Americans may well expect to see. It certainly will not warrant the fanfare of the twenty-two pens needed to sign the legislation. But it very well may help in the long run. Just don't expect too much.
Posner's critique, on the other hand, provides an outstanding analysis of the legislation. First, he contends that it will at least provide us data on how to run a health care system and what the cause of the problem is (not what its attendant circumstances are; much of the analysis and data I've seen merely give a post hoc, propter hoc type of analysis). Second, Posner contends that the bill will be expensive and that it will not save money. Judge Posner towers above the masses (in which I include myself) intellectually, but this prediction does not seem to come from Sinai, so to speak. There will be an increased demand for services, but no corresponding increase in funding? Oh -- looks like a financial shortfall. You do not have to be an economist at . . . well, the University of Chicago . . . to predict that.
So what will the bill do? If it subjects the nation to poor policy outcomes, it will sharpen our policy-making ability in the future. If it produces mediocre, modest results, it will have the same effect. Remember -- Americans like incremental policy change. We will have to wait to see whether the bill provides such an approach, but I think it does. Does it expand entitlements? Yes, of course it does -- but it does not engender a new way of thinking the way that the New Deal did. Now, business are expecting their costs to rise. While I hate to let corporate America dictate policy, they churn the economic engine, and their collective prospectus bears on us all. So, unfortunately, we must wait. But the plan is not catastrophic. The New Deal did not bankrupt us (though it more or less invented deficit spending), and this exceedingly more modest effort will not do the nation in, either -- at least in the short run.
Monday, March 29, 2010
The Legal Challenge to Health Care
The New York Times editorial page featured a great piece today on the lawsuits filed last Tuesday to challenge the constitutionality of the recent health care reforms. I have never been one to cotton to the views espoused on this page. Simply put, the views of this page frequently conflict with mine. They are liberal; I am conservative. Yet I like to think that I disagree with them based on more than reaction (liberals' oft-applied label to conservative critiques of their policy; a lot of ink may be spilled on this subject, but that will be saved for a later post).
And my reaction, this time, to the editorial page is this: the New York Times is best at reporting news, and worse when commenting on that news, but worst when analyzing legal claims.
First, I wrote off the editorial page's jurisprudential views when it recently came close to endorsing an argument based on the privileges and immunities clause of the Fourteenth Amendment. That clause, famously (if tragically) gutted in 1873 by the Slaughterhouse Cases carried NO weight in the oral arguments in McDonald v. Chicago. Justice Scalia, perhaps the closest proponent on the Court of adherence to original meaning (his recent writings would characterize his position as adherence to "meaning," not "intent," as the Times would characterize it), might as well have laughed in advocate Alan Gura's face (on whose side may very well rule) when he observed, "Well, I mean, what you argue is the darling of the professoriate, for sure, but it's also contrary to 140 years of our jurisprudence." The Times did not outright endorse such a view, but it did seem to import some enthusiasm to Gura's argument. Such hopefulness betrays, I think, a shallow understanding of constitutional law.
So, aside from my nigh diametrical opposition to the positions that the Times advocates, I take serious issue with their theories of advocacy. Thus, when I see them submit a constitutional argument to their own critique, I give very little deference to their conclusions. But I would seek to discuss the merits of their claims.
1) Virginia's claim to nullify will fail. A lengthy piece of a lengthy article I submitted to the N.C. Law Review detailed the thorough discreditation that the oudated, hoary doctrine of nullification has received. Despite the Virginia and Kentucky Resolutions, almost no Founders would endorse nullification, or "interposition," as John C. Calhoun termed it.
2) The challenge to the exchanges will fail. The bill is deftly drafted so as not to require the states to implement Federal law (a commandment firmly laid down by Printz v. United States). The federal government will step into to provide the framework for the exchanges if the state governments fail to do so (and thus forgo Federal dollars). Conceivably, the requirement that exchanges host all policies sold in the state may very well be a violation of the Commerce Clause, but it is not.
3) The Commerce Clause challenge will fail. First, the Supreme Court has declared the sale of insurance "commerce." Furthermore, the bill is drafted to ensure that no Federal regulations impinge on the states' ability to regulate insurance. The McCarran-Ferguson Act later provided that insurance regulation remains within the purview of the states, but that still does not repudiate the 1944 decision in Southeastern Underwriters, in which the Supreme Court declared insurance a form of interstate commerce.
4) The individual mandate claim may very well prevail. Now, as a second-year law student my knowledge of the constitution is hardly exhaustive, but I cannot think of any Supreme Court opinion, or any significant doctrine of the Court, that sanctions a mandate to buy something. Indeed, the prevailing view of the guarantees of the Bill of Rights would hold that the Constitution guarantees only "negative" rights. In other words -- you are not guaranteed a right to speak (i.e. -- you may not be physically, financially able to do so), but you are guaranteed that the government may not restrain that right (at least unreasonably; this is a gross oversimplification of constitutional rights across the board, but it is generally the theory). Thus, under current doctrine -- indeed under the very paradigm of American jurisprudence -- the mandate to buy something certainly looks anomalous.
And here, beyond any other paragraph, is where I take issue with the Times. They gloss that "penalties for not buying insurance have been structured as a tax." Oh -- game over, I guess. That's actually selling the Times short; it maintains that while that's not a perfect defense, it is pretty close. That is hogwash. Any meaningful analysis of constitutional jurisprudence would immediately see the problem that this legislation proposes. First, there is no way to avoid this "tax." I either pay or I do not. It is not as if I refrain from buying tobacco, and thus protest the tobacco tax. Certainly, we have income taxes. But those are levied against property. AND -- this is the real kicker -- they are payable to THE GOVERNMENT. Here, yes, there is a tax, but the alternative is paying a private company for health insurance. Thus the mandate is "pay the private individual, or pay us."
At the very least, this makes for an interesting, but completely open question in constitutional law. The Times would pass it off only as "arguable." I cannot tell you why, but I would suspect that they so support the legislation (as I do, in some parts) that they would rather not examine the constitutional arguments against the legislation too closely. I find such a position a travesty in the nation's greatest paper. Likewise, I would posit that the Times cannot honestly opine that the Attorneys General are doing their constituents a disservice by filing this lawsuit. They honestly believe that the state budgets will be so encumbered by Medicaid expansion that they have no choice but to enjoin its enactment. Likewise, why should they not be zealous guardians of the choices and individual liberty, in the context of a mandate, that the citizens of their states enjoy? I find it odd that the Times does not at least entertain that rationale.
I make no projections as to whether the claims (found here) will be dismissed, will prevail, or will be ridiculed. I do know that at least the mandate question presents a very lively, open, and undecided constitutional argument. And I also know that the Times should not dismiss the legal arguments out of hand simply because it so loves the legislation.
And my reaction, this time, to the editorial page is this: the New York Times is best at reporting news, and worse when commenting on that news, but worst when analyzing legal claims.
First, I wrote off the editorial page's jurisprudential views when it recently came close to endorsing an argument based on the privileges and immunities clause of the Fourteenth Amendment. That clause, famously (if tragically) gutted in 1873 by the Slaughterhouse Cases carried NO weight in the oral arguments in McDonald v. Chicago. Justice Scalia, perhaps the closest proponent on the Court of adherence to original meaning (his recent writings would characterize his position as adherence to "meaning," not "intent," as the Times would characterize it), might as well have laughed in advocate Alan Gura's face (on whose side may very well rule) when he observed, "Well, I mean, what you argue is the darling of the professoriate, for sure, but it's also contrary to 140 years of our jurisprudence." The Times did not outright endorse such a view, but it did seem to import some enthusiasm to Gura's argument. Such hopefulness betrays, I think, a shallow understanding of constitutional law.
So, aside from my nigh diametrical opposition to the positions that the Times advocates, I take serious issue with their theories of advocacy. Thus, when I see them submit a constitutional argument to their own critique, I give very little deference to their conclusions. But I would seek to discuss the merits of their claims.
1) Virginia's claim to nullify will fail. A lengthy piece of a lengthy article I submitted to the N.C. Law Review detailed the thorough discreditation that the oudated, hoary doctrine of nullification has received. Despite the Virginia and Kentucky Resolutions, almost no Founders would endorse nullification, or "interposition," as John C. Calhoun termed it.
2) The challenge to the exchanges will fail. The bill is deftly drafted so as not to require the states to implement Federal law (a commandment firmly laid down by Printz v. United States). The federal government will step into to provide the framework for the exchanges if the state governments fail to do so (and thus forgo Federal dollars). Conceivably, the requirement that exchanges host all policies sold in the state may very well be a violation of the Commerce Clause, but it is not.
3) The Commerce Clause challenge will fail. First, the Supreme Court has declared the sale of insurance "commerce." Furthermore, the bill is drafted to ensure that no Federal regulations impinge on the states' ability to regulate insurance. The McCarran-Ferguson Act later provided that insurance regulation remains within the purview of the states, but that still does not repudiate the 1944 decision in Southeastern Underwriters, in which the Supreme Court declared insurance a form of interstate commerce.
4) The individual mandate claim may very well prevail. Now, as a second-year law student my knowledge of the constitution is hardly exhaustive, but I cannot think of any Supreme Court opinion, or any significant doctrine of the Court, that sanctions a mandate to buy something. Indeed, the prevailing view of the guarantees of the Bill of Rights would hold that the Constitution guarantees only "negative" rights. In other words -- you are not guaranteed a right to speak (i.e. -- you may not be physically, financially able to do so), but you are guaranteed that the government may not restrain that right (at least unreasonably; this is a gross oversimplification of constitutional rights across the board, but it is generally the theory). Thus, under current doctrine -- indeed under the very paradigm of American jurisprudence -- the mandate to buy something certainly looks anomalous.
And here, beyond any other paragraph, is where I take issue with the Times. They gloss that "penalties for not buying insurance have been structured as a tax." Oh -- game over, I guess. That's actually selling the Times short; it maintains that while that's not a perfect defense, it is pretty close. That is hogwash. Any meaningful analysis of constitutional jurisprudence would immediately see the problem that this legislation proposes. First, there is no way to avoid this "tax." I either pay or I do not. It is not as if I refrain from buying tobacco, and thus protest the tobacco tax. Certainly, we have income taxes. But those are levied against property. AND -- this is the real kicker -- they are payable to THE GOVERNMENT. Here, yes, there is a tax, but the alternative is paying a private company for health insurance. Thus the mandate is "pay the private individual, or pay us."
At the very least, this makes for an interesting, but completely open question in constitutional law. The Times would pass it off only as "arguable." I cannot tell you why, but I would suspect that they so support the legislation (as I do, in some parts) that they would rather not examine the constitutional arguments against the legislation too closely. I find such a position a travesty in the nation's greatest paper. Likewise, I would posit that the Times cannot honestly opine that the Attorneys General are doing their constituents a disservice by filing this lawsuit. They honestly believe that the state budgets will be so encumbered by Medicaid expansion that they have no choice but to enjoin its enactment. Likewise, why should they not be zealous guardians of the choices and individual liberty, in the context of a mandate, that the citizens of their states enjoy? I find it odd that the Times does not at least entertain that rationale.
I make no projections as to whether the claims (found here) will be dismissed, will prevail, or will be ridiculed. I do know that at least the mandate question presents a very lively, open, and undecided constitutional argument. And I also know that the Times should not dismiss the legal arguments out of hand simply because it so loves the legislation.
Friday, March 26, 2010
David Brooks and the "End" of Economics
David Brooks wrote a compelling piece today in the New York Times. Normally, I love everything that Brooks writes, but I had some hesitation really embracing his conclusion in this article. His column today contends that economics, as a "science," will die when economists start to factor in human nature into their analyses. I do not think it will do so, and I think Brooks (much as it pains me to say) may be wrong on this. Let me try to explain why.
I will begin by saying that David Brooks makes the most sense of any commentator/social scientist/talking head out there today -- period. He submits all his inquiries to his own thoughtful, thorough critique, and he writes persuasively and forcefully (as well as humorously). So I kind of surprise myself saying that I am disagreeing with him.
The subject of Brooks' article, economics, confounds me. I grow increasing irritated with economics as a discipline. In my own career as a law student, for example, I find myself confronted economic analysis of the law, and I cannot stand it. Society should not pursue a course of legal action based simply on the idea that the outcome is "efficient." It should pursue the moral outcome. In my mind, the law and economics movement misses this. Judge Posner is much smarter than I am, so I am sure he can rejoin this argument, but that is my critique. Secondly, in my job as an Articles Editor on the NC Law Review, I find many of the articles that I am reading crammed with regression analyses, data sets, and other mathematical chicanery that I have trouble understanding. The problem is not that these data exist; the problem is that the authors seek to base their argument oftentimes on empirical analysis and not moral analysis. When authors use as much empirical data and economic analysis as they do, I get the sense that they don't think arguments based on morality, common sense, or history quite cut it. So I began Brooks' article squarely in his camp.
People are not rational actors. Brooks notes this, and this has long been the Achilles heel of economics. In my mind, Marxism suffers from the same crippling logical flaw. Neither Marxism nor economics take into account human nature. Simply put: you cannot make behavioral predictions about a society when you so grossly misunderstand its people. Brooks notes that the discipline is moving in a "more humanist direction." Economists, presumably, are starting to respond to this age-old criticism that their theories suffer from the supposition that humans make choices rationally.
Brooks concludes that economics will still serve a function, so he does not completely throw out the baby with the bathwater. But I quibble with his complaint that the models did not see the financial crisis coming. Not every model is perfect, and not every discipline can predict things. In a broad sense, one may say that economists did predict this: this is a massive, massive market correction. People will adjust their behavior accordingly, as will markets. But Brooks obviously criticizes the failure to predict this specific crisis. First, I do not pretend to know enough about economic scholarship to know whether any forecasts were out there predicting a global financial meltdown. Secondly, plenty of people saw the risks associated with the behavior of lenders that was going on. And perhaps this fuels his criticism: when a discipline is supposedly the best-equipped to spot a problem fails to do so, but outsiders do, obviously, that discipline has failed.
But I think that Brooks should simply stick to criticizing economics as a discipline. It is simply unfair to an academic discipline to say that it failed to predict a certain outcome. Derivatives, credit default swaps, and many of the other financial instruments that contributed to the economic meltdown were all so new and intertwined in so many unforseen ways that the very real possibility exists that academia had simply not kept up with finance. (Obviously, neither had law. See this article on Brooksley Born, the former head of the Commodities Futures Trading Commission, and how she had more or less predicted this catastrophe.) It's an amazingly complex system. But I don't argue that a particular field of study should predict easy things and forgive economics because particular situation on these facts was simply just too hard to make. I argue that you cannot fault any discipline for failing to predict one specific event.
Academic disciplines are imperfect. Science is for sure imperfect. Any field of learning that relies on trial and error process to obtain information must, by definition, rely on assumptions that further study will later disprove. By testing hypotheses, you arrive at a clearer, more complete picture of whatever you are studying. Economics does the same thing. The financial crisis should simply continue to inform economics as an academic discipline: it should function as yet another set of data. Because we cannot predict the weather well a week out does not mean that we should scrap the discipline of meteorology. So I take issue with Brooks' fault of economics because it did not predict the financial crisis.
Yet Brooks does raise an interesting point. If a government agent like Brooksley Born (an extremely smart lawyer, but not an economist) can predict the economic crisis, why did economists not? No one really has an answer. I would wager that several people grew uneasy at the growth of the derivatives market and saw the lack of regulation as a serious problem. But with Brooks' thesis, that economics is a faulty discipline because it starts with a prima facie untenable premise, I completely agree. People are not rational all the time (indeed, many would argue that I am rarely rational). And it explains many things. Just not all. Science, indeed, cannot explain all. I would point to the apochryphal story of the evolution of the Harvard seal. Originally, one book of the three books was closed to show that man cannot know all. But now, that book is open: man can know all, the seal seems to proclaim. And that is the problem with modern scholarship. That is the problem with secular humanism: there is no humility, there is no recognition that man cannot grasp all there is to know about the world. Man's knowledge is definitively bounded. And scholarship must recognize that point.
I will begin by saying that David Brooks makes the most sense of any commentator/social scientist/talking head out there today -- period. He submits all his inquiries to his own thoughtful, thorough critique, and he writes persuasively and forcefully (as well as humorously). So I kind of surprise myself saying that I am disagreeing with him.
The subject of Brooks' article, economics, confounds me. I grow increasing irritated with economics as a discipline. In my own career as a law student, for example, I find myself confronted economic analysis of the law, and I cannot stand it. Society should not pursue a course of legal action based simply on the idea that the outcome is "efficient." It should pursue the moral outcome. In my mind, the law and economics movement misses this. Judge Posner is much smarter than I am, so I am sure he can rejoin this argument, but that is my critique. Secondly, in my job as an Articles Editor on the NC Law Review, I find many of the articles that I am reading crammed with regression analyses, data sets, and other mathematical chicanery that I have trouble understanding. The problem is not that these data exist; the problem is that the authors seek to base their argument oftentimes on empirical analysis and not moral analysis. When authors use as much empirical data and economic analysis as they do, I get the sense that they don't think arguments based on morality, common sense, or history quite cut it. So I began Brooks' article squarely in his camp.
People are not rational actors. Brooks notes this, and this has long been the Achilles heel of economics. In my mind, Marxism suffers from the same crippling logical flaw. Neither Marxism nor economics take into account human nature. Simply put: you cannot make behavioral predictions about a society when you so grossly misunderstand its people. Brooks notes that the discipline is moving in a "more humanist direction." Economists, presumably, are starting to respond to this age-old criticism that their theories suffer from the supposition that humans make choices rationally.
Brooks concludes that economics will still serve a function, so he does not completely throw out the baby with the bathwater. But I quibble with his complaint that the models did not see the financial crisis coming. Not every model is perfect, and not every discipline can predict things. In a broad sense, one may say that economists did predict this: this is a massive, massive market correction. People will adjust their behavior accordingly, as will markets. But Brooks obviously criticizes the failure to predict this specific crisis. First, I do not pretend to know enough about economic scholarship to know whether any forecasts were out there predicting a global financial meltdown. Secondly, plenty of people saw the risks associated with the behavior of lenders that was going on. And perhaps this fuels his criticism: when a discipline is supposedly the best-equipped to spot a problem fails to do so, but outsiders do, obviously, that discipline has failed.
But I think that Brooks should simply stick to criticizing economics as a discipline. It is simply unfair to an academic discipline to say that it failed to predict a certain outcome. Derivatives, credit default swaps, and many of the other financial instruments that contributed to the economic meltdown were all so new and intertwined in so many unforseen ways that the very real possibility exists that academia had simply not kept up with finance. (Obviously, neither had law. See this article on Brooksley Born, the former head of the Commodities Futures Trading Commission, and how she had more or less predicted this catastrophe.) It's an amazingly complex system. But I don't argue that a particular field of study should predict easy things and forgive economics because particular situation on these facts was simply just too hard to make. I argue that you cannot fault any discipline for failing to predict one specific event.
Academic disciplines are imperfect. Science is for sure imperfect. Any field of learning that relies on trial and error process to obtain information must, by definition, rely on assumptions that further study will later disprove. By testing hypotheses, you arrive at a clearer, more complete picture of whatever you are studying. Economics does the same thing. The financial crisis should simply continue to inform economics as an academic discipline: it should function as yet another set of data. Because we cannot predict the weather well a week out does not mean that we should scrap the discipline of meteorology. So I take issue with Brooks' fault of economics because it did not predict the financial crisis.
Yet Brooks does raise an interesting point. If a government agent like Brooksley Born (an extremely smart lawyer, but not an economist) can predict the economic crisis, why did economists not? No one really has an answer. I would wager that several people grew uneasy at the growth of the derivatives market and saw the lack of regulation as a serious problem. But with Brooks' thesis, that economics is a faulty discipline because it starts with a prima facie untenable premise, I completely agree. People are not rational all the time (indeed, many would argue that I am rarely rational). And it explains many things. Just not all. Science, indeed, cannot explain all. I would point to the apochryphal story of the evolution of the Harvard seal. Originally, one book of the three books was closed to show that man cannot know all. But now, that book is open: man can know all, the seal seems to proclaim. And that is the problem with modern scholarship. That is the problem with secular humanism: there is no humility, there is no recognition that man cannot grasp all there is to know about the world. Man's knowledge is definitively bounded. And scholarship must recognize that point.
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