Economics in the Next Ten Years?

A young economist, or an economics journalist interested in what the young are working on, could do a lot worse than reading through, as I did the other day, 55 very short papers written by distinguished economists describing the large questions they think are likely to dominate the next generation of research in their respective fields.

They are among 252 papers by experts in various disciplines who responded to an invitation by the National Science Foundation’s Directorate for the Social, Behavioral and Economic Sciences  to describe “grand challenge questions” that transcend near-term funding cycles, questions which therefore might benefit from investment in infrastructure.

From the response, this much is immediately apparent:  interest in financial crises, medical systems engineering and, perhaps above all, new instrumentation share pride of place at the top of the list. A golden age of evidence-based economics lies ahead, thanks to the computer and the Internet.

Most popular of the pitches, judging from the number of SSRN downloads, is, Why Don’t People and Institutions Do What They Know They Should?, by David Cutler, of Harvard University  (a pungent exploration of the complexity of aligning incentives within and among organizations); followed by A Complete Theory of Human Behavior, by Andrew Lo, of the Massachusetts Institute of Technology(confront and reconcile inconsistencies across disciplines, complete with summer camps for newly-minted PhDs);  Research Opportunities in Social and Economic Networks, by Matt Jackson, of Stanford University (study the patterns of interaction that most economic models abstract away); and Modeling and Measuring Systemic Risk, by Markus Brunnermeier, of Princeton University, Lars Peter Hansen and Anil Kashyap, both of the University of Chicago, Arvind Krishnamurthy, of Northwestern University, and Lo, of MIT (build network models and collect new and often sensitive data) .

Charles Schulze, of the Brookings Institution, and Dan Newlon, director of government relations for the American Economic Association, assembled the economists’ responses and published them in a single pdf file – a 300-page compendium in which the leaders of the present generation expound on the opportunities for the next. Schultze and Newlon grouped the papers one way in their introduction.  I sorted my reading slightly differently as the papers came off the printer..

Under the heading of globalization:  Stanley Fischer, Governor of the Bank of Israel, recommended attention to demographic trends. “It’s hard to believe that Russia, Japan, China, Europe, are simply going to stand by while their countries and economies become smaller and less significant… Presumably at some point they will make intensive efforts to reverse current trends (in China’s case the trend that must bother them is that India will become more populous).”  Esther Duflo, of MIT, plumped for more ambitious experiments in development. Daron Acemoglu, of MIT, advocated more fundamental work on institutions; Alberto Alesina, of Harvard, recommended paying more attention to the role of culture, the genesis of trust in particular.  Dani Rodrik, of Harvard, pressed for a program in diagnostics.

In macroeconomics: Randall Krozsner, of the University of Chicago, offered a concise blueprint for improving the dialogue between financial economics and macro, beginning with more attention to economic history. Kenneth Rogoff, of Harvard, described a three-item wish list, including a better cost-benefit analysis of financial-market regulation. Martin Neil Baily, of the Brookings Institution, described a series of fundamental questions and appended a strong brief for evolutionary economics. Ricardo Reis, of Columbia University, suggested investigating more carefully the potential upside of transfer programs such as Medicaid, tuition assistance, disability insurance and early retirement for combating recessions. Glenn Hubbard, of Columbia, called for more modeling and estimation of fiscal policy multipliers “outside of the heat of battle of individual policy debates.” And Herbert Gintis, of the Santa Fe Institute, plumped for more agent-based modeling.

With respect to the economics of organizations, often with reference to social medicine, Jonathan Gruber, of MIT (architect of the Romney/Obama restructuring of health insurance), noted that “what has been apparent to lay-people for many years has become clear to economists as well in recent years:  too much choice can reduce public well-being.  He urged economists to move beyond simply documenting anomalies to designing mechanisms for policy makers offering the “right” amount of choice.  Nicholas Bloom, of Stanford, recommended devoting more research to the work/family trade-off. Oliver Hart, of Harvard, plumped for putting contract theory to work to understand financial institutions. And Deidre McCloskey, of the University of Illinois at Chicago, advocated paying more attention to the estimated quarter of national income devoted to the production of “sweet talk,” meaning something other than the simple transmittal in information:  persuasion, as, she wrote, for example: “Your price is absurdly high”; “We need to work together if our company is to succeed”; “I have a brilliant idea for making cooling fans  for automobiles, and you should invest in it”; “the new iPhone is lovely.”

As for How-To, William Nordhaus, of Yale, recommended that more research on the class of problems involving global public goods – climate change, over-fishing, cyber warfare – be organized as cross-disciplinary work involving the knowledge of “local” experts (climate scientists, ecologists, marine biologists, energy specialists, for example, in the case of global warming), and that care be taken to situate such studies in their social and political dimensions as well.. (Lawrence Goulder, of Stanford, backed him up, as did, in their way, Julie Nelson, of the University of Massachusetts at Boston and Evelyn Fox Keller, of MIT emerita.) Alvin Roth, of Harvard, and Peter Cramton, of the University of Maryland, filed separate briefs on behalf of more work market design, Roth stressing clearinghouses of various sorts and Cramton, auctions. Shane Greenstein, of Northwestern, John Lerner, of Harvard, and Scott Stern, of MIT, urged a program of  theoretically grounded empirical work on the economics of digitization.  Peter Diamond, of MIT,  recommended a three-pronged program in basic theoretical research – the intricacies of capital-gains taxation, the incorporation of behavioral economics into equilibrium analysis, and the study of systemic risk. Drew Fudenberg, of Harvard, stressed developments in predictive game theory. And Scott Page, of the University of Michigan, advocated developing practical measures of social complexity.

And the royal road of opportunities for new forms of economic instrumentation?  Hal Varian, chief economist at Google, held out the most startling vista: use newly available Internet-based  monitoring technology to replace interviews and surveys in familiar programs such as the Panel Study of Income Dynamics (PSID) and create single-sources panels, by now familiar among marketing studies, to collect data and conduct experiments for governmental and public-private purposes.  David Card and Emmanuel Saez, of the University of California at Berkeley, and Raj Chetty and Martin Feldstein, of Harvard, renewed their plea that the NSF should push for the development and expansion of direct, secure access to micro-data collected by the government. James Poterba, of MIT and the National Bureau of Economic Research, advocated for investment in four broad areas: measuring and modeling interdependencies in financial markets; designing and evaluating fiscal policies; understanding energy markets and crafting policies to affect them; and investigating the relationships among networks and household behavior. Dale Jorgenson, of Harvard, described a new architecture of the US National Accounts, the first major modification since they were devised in the wake of the Great Depression. James Heckman, of the University of Chicago, noting that American society is becoming polarized and less productive, proposed a research agenda for understanding the dynamics of skill formation (a recommendation buttressed by David Autor, of MIT, and Lawrence Katz, of Harvard).  Robert Moffitt, of Johns Hopkins University, described an ambitious new household panel to augment the forty-year old PSID. And John Haltiwanger, of the University of Maryland, described the daunting challenges of reconfiguring US statistical systems to make “drill-down” analysis of the economy a reality.

Spend a day like that and you’ll think we’re lucky to have so much trouble, because we’re going to learn so much from it. And when new lessons are learnt, there’s the new journal Annual Review of Economics  in which to read about them. The third volume of ARE has appeared, considerably augmenting the Journal of Economic Literature, with 25 articles on recent developments, including Charles Manski on “Choosing Treatment Policies Under Uncertainty” and Andrew Postlewaite on “Social Norms and Social Assets,” and an illuminating account by James Anderson, of Boston College, of how the gravity equation entered economics, thereby providing a much more realistic treatment of considerations of distance than before – a charming story of how economics happens, even for those of us who can only hum the equations.