Don't Assume a Can Opener
What answers do politicians need most from economists in a moment of populism and geopolitical change?
Remember the joke about economists marooned on a desert island with nothing but a can of soup? “Assume a can opener” goes the punchline, which captures current policy debates in which experts offer solutions that ignore this moment of deep social discontent and disorienting geopolitical upheaval.
Yes, we know the free movement of goods and people is best for growth, but constituents want to keep their old jobs and don’t want so many strangers moving in. No, we shouldn’t accumulate so much debt, but how can we balance budgets when there’s so much that we really need to do now? Of course, we worry about rising temperatures, global poverty and artificial intelligence running amok, but have you seen the price of a Hershey bar?
Imagine if more economists and political leaders explored trade-offs instead of absolutes. They would develop government interventions that meet today’s most pressing worries without undermining the long-term benefits of open markets, innovation and entrepreneurship. Consider this a first draft of an agenda we’d like our best economists and most reasonable politicians to work through together.
1. How much debt is too much? The European Union still clings to 60% of GDP, even though some economists believe the trouble really starts at 90%. But no one doubted the importance of pandemic stimulus that now has America's debt held by the public near 100% and Japan’s near 260%. A glib answer to the question is that if these debts were already unsustainable then investors would not sustain them. A better explanation is that debt levels are less important than having growth rates that exceed interest.
For all the talk of fiscal rules to limit spending, a better rule may be to spend twice as much time on enhancing productivity and half as much eliminating programs that merely make this year's deficit less scary. More transparent analysis of spending that boosts expansion and cuts that minimize contraction would go a long way to supporting growth that makes even large debts sustainable.
2. How can global imbalances be fixed? The short answer is that they can’t be fixed in a world of people who read different economic textbooks. It's a difficult enough conversation within Europe’s currency union, where German politicians and voters believe national success is measured in the size of a trade surplus, oblivious to the growth they are effectively denying their neighbors. It’s an impossible conversation with China, where central planners envision a modern manufacturing juggernaut that has already turned its key markets more protectionist.
Tariffs have long been terrible policy, raising domestic costs and slowing growth, but this is where expertise can help increase the political leverage and reduce the economic damage. At least President Biden’s tariffs on electric vehicles that we’re subsidizing ourselves make some sense. President Trump’s promise to slap a 10% tariff on everything is a political stunt that could use some sound economic analysis that measures the inflationary costs against any potential gain.
3. How much national security can we afford? Call it the “small yard, high fence problem” made famous by National Security Advisor Jake Sullivan in describing the Biden Administration’s approach to export controls to China. It sounds right to keep our most advanced computer chips from a country we might meet in war someday. But what about selling machine tools that China may use to make either tanks or lawn chairs? Economists don’t have good answers about how much national security a country needs but should offer reasonable estimates about the actual costs—and more critically—the opportunity costs, of the fences we are building.
For all the talk of fiscal rules to limit spending, a better rule may be to spend twice as much time on enhancing productivity and half as much eliminating programs that merely make this year's deficit less scary.
4. How much industrial policy is too much? America is back in the business of bolstering “strategic” manufacturing sectors both to correct market failures and to boost key industries. Without a proper price for carbon emissions, clean energy alternatives don’t yet stand a chance and subsidies make sense for electric vehicles and charging stations. There is also surely a logic for boosting efforts in research and commercialization, but we need more guidance on where “support” ends. In the 1970s, the promise of a technology that could transmit documents and images instantly and cheaply over great distances might have steered billions of government dollars into developing fax machines.
5. Will artificial intelligence destroy jobs faster than it creates them? Technological innovation replaces old industries with new ones naturally. AI just does it much faster, offering unimaginable power to take on countless replicable tasks like tracking employment forms, coding new software and standardizing lease contracts. But these mid-level white-collar jobs are set to evaporate much faster than the blue-collar roles that disappeared over decades as more automated factories came online. Beyond guidelines that make these algorithms more ethical, equitable and reliable, governments need ideas on how to encourage applications that empower low-skilled workers rather than force them into very early retirement.
6. Will the climate transition undercut growth? Politicians often have different – and simplistic - answers to this question, but economists should help them sort through the very differentiated impacts of the transition. If clean energy regulations and carbon tariffs hurt growth and raise prices, clean energy innovation creates jobs and reduces energy costs. Massive government climate programs are inflationary, but they create jobs, too. By definition, a successful transition will eventually leave large parts of the hydrocarbon economy stranded and moribund.
7. How can we best harness Africa's demographic boom? This is one that everyone agrees is important before they go back to devote most of their attention to the rest of this list. As rich countries grow older, some 40% of Africa’s population is 14 years old or younger. By 2050, one in four humans will be African. There’s a neo-Malthusian argument that the continent faces disaster as more people fight over fewer resources, triggering vast waves of emigration. But better policies that encourage urbanization, investment and access to export markets have already delivered promising results in many countries. Weak governments can’t magically adopt complex reforms at once, but progress comes only when the economics accommodates the volatile politics.
Policy nuance gets lost in today’s politics, but economists and other experts abdicate their responsibilities if they press ideas that aren’t politically possible. A debate that accepts the costs of political expediency can drive change in ways that shiny theoretical ideas cannot.
Of course, that doesn’t mean we should entirely forget the virtues of a good can-opener.
Excellent list Christopher. I partly disagree with the last point: I think economists should clarify the trade-offs and then let the politics pick the choice. Letting political realism shape economic advice will otherwise too often lead to bad or ineffective advice.
Your criticism of Germany is very fashionable among economists, but I am always puzzled by it. We don't blame American companies for becoming globally successful; but when too many German companies do it, we blame Germany for "stealing growth" from others -- implicitly arguing it should instead adopt some of the poor policies seen in places like Italy and France, I imagine?