Thinking like an Economist

How Efficiency Replaced Equality in U.S. Public Policy

Elizabeth Popp Berman

• Publisher: Princeton University Press
• Year: 2022
• Print ISBN: 9780691248882, 9780691167381
• eBook ISBN: 9780691226606
• Topic: Social Sciences
• Subtopic: Business General
• Index: Social Sciences

The story of how economic reasoning came to dominate Washington between the 1960s and 1980s—and why it continues to constrain progressive ambitions today

For decades, Democratic politicians have frustrated progressives by tinkering around the margins of policy while shying away from truly ambitious change. What happened to bold political vision on the left, and what shrunk the very horizons of possibility? In Thinking like an Economist, Elizabeth Popp Berman tells the story of how a distinctive way of thinking—an "economic style of reasoning"—became dominant in Washington between the 1960s and the 1980s and how it continues to dramatically narrow debates over public policy today.

Introduced by liberal technocrats who hoped to improve government, this way of thinking was grounded in economics but also transformed law and policy. At its core was an economic understanding of efficiency, and its advocates often found themselves allied with Republicans and in conflict with liberal Democrats who argued for rights, equality, and limits on corporate power. By the Carter administration, economic reasoning had spread throughout government policy and laws affecting poverty, healthcare, antitrust, transportation, and the environment. Fearing waste and overspending, liberals reined in their ambitions for decades to come, even as Reagan and his Republican successors argued for economic efficiency only when it helped their own goals.

A compelling account that illuminates what brought American politics to its current state, Thinking like an Economist also offers critical lessons for the future. With the political left resurgent today, Democrats seem poised to break with the past—but doing so will require abandoning the shibboleth of economic efficiency and successfully advocating new ways of thinking about policy.

1

Thinking like an Economist

In 2008, Barack Hussein Obama was elected to the presidency of the United States on a promise of “hope and change.” The first Black president, born fifteen years after Bill Clinton and George W. Bush, Obama’s election represented for many the turning of a page: the arrival of a new, multiracial America that would be able to transcend its racist past and build a brighter, more inclusive future.

Beyond the symbolic importance of breaking what the New York Times called the “last racial barrier,” many of Obama’s supporters anticipated that he would usher in substantial policy change.¹ After eight years of the George W. Bush presidency, these voters hoped Obama would find a way to ensure that all Americans had healthcare, rein in Wall Street, and finally address the mounting crisis of climate change. Progressive Democrats, in particular, were excited and energized by the results of an election that had once seemed so unlikely.

Obama did oversee the resolution of the 2008 financial crisis and the nation’s long, slow climb out of the Great Recession. He had some major legislative accomplishments, which included the Affordable Care Act (ACA), the Dodd-Frank financial reforms, and a massive economic stimulus package. Yet even before 2010, many progressives began expressing disappointment with Obama’s policy leadership.²

What stands out in retrospect about the Obama presidency is its continuity with the recent past. The truly ambitious new policies—ones that might have been top-of-mind for Democrats in 1970, or 1935—never materialized. This is not because such possibilities were pursued unsuccessfully; they were never even seriously considered. And the policies that were proposed tended to share some characteristics more commonly associated with Republican administrations: a focus on leveraging choice, competition, incentives, and the power of markets in the pursuit of outcomes that would be not just effective, but efficient.

Take healthcare policy. Obama’s signal accomplishment in social policy, “Obamacare,” was modeled after Republican Mitt Romney’s 2006 Massachusetts healthcare reform bill. Obama’s version combined elements from both Republican and Democratic health reform plans of the early 1990s.³ The ACA increased the number of people with insurance, but it did not establish universal coverage or a right to healthcare. It established a complex system that sought to harness competition between insurers to keep costs down and incentivized the purchase of insurance with subsidies for those with lower incomes. The law also levied penalties against those who chose to forgo insurance. While some Democrats mentioned the possibility of universal, single-payer healthcare—which had been the party’s platform in the 1970s—the insider consensus was that such an approach was not only politically unrealistic but also actively undesirable because it would fail to keep costs down.⁴

Financial reform offers another example. The Dodd-Frank Act, passed in the aftermath of the 2008 financial crisis, was meant to ensure that banks deemed “too big to fail” could never again threaten to bring down the entire financial system with them. Yet while the bill introduced new regulatory requirements and created the Consumer Financial Protection Bureau, Dodd-Frank did little to take on the power of the banks.⁵ In the late 1990s, a bipartisan deregulatory impulse had led to the repeal of the Glass-Steagall Act, which had separated commercial and investment banking, and to rapid expansion of the biggest banks.⁶ But even after the 2008 crisis, policymakers never seriously reconsidered reinstating the division between commercial and investment banks. The idea of using antitrust policy to break up the banks was never on the table.⁷

Or consider policies to address climate change, a core plank of Obama’s 2008 campaign. The administration originally supported the Waxman-Markey Bill, a 2009 cap-and-trade bill that would have limited greenhouse gas emissions for the first time, but the proposal died in the Senate.⁸ Obama then turned to regulation as a next-best option. New fuel economy standards and a plan to reduce power plant emissions tried to use the authority of the Clean Air Act to address climate change, with very modest success.⁹ Both the cap-and-trade and regulatory approaches built on an economic framework that sought to use market forces (in the former case) or cost-benefit calculations (in the latter) to achieve efficient policy results. The strategy of simply instructing government to determine safe levels of emissions and requiring firms to meet them, as Democrats might have proposed in the 1970s, was not even discussed.

Obama was, of course, faced with many constraints that shaped both the options he considered and what he could actually accomplish: Republicans in Congress, more conservative members of his own party, the particular scrutiny he received as a Black man in the White House, and, notably, the worst recession in seventy years. The limits on what he was able to realize as president are not solely explained by a failure of imagination. But what is so striking about Obama’s time in Washington is not that he sought to achieve fundamental change and failed. It is how constricted the very horizons of possibility seemed to be.

Moments of crisis like 2008 can be moments of political transformation. As Rahm Emanuel, Obama’s chief of staff, suggested that year, “You never want a serious crisis to go to waste.”¹⁰ So why, then, did the Obama administration not produce, or even seek, more fundamental change, despite coming to power during just such a crisis and having, for two full years, control of both the House and the Senate? Why did it remain committed to an incrementalist, modestly ambitious vision of government, even as the country faced unprecedented challenges? And should we expect the same from the Biden administration, which inherited much of Obama’s legacy (and many of his advisors), and came to power during a global pandemic, but also at a time of greater mobilization on the political left?

There is no single right answer to this question. The Democratic Party’s enduring commitment to a market-friendly, technocratic approach to policy since 1990 has many sources, including the influence of the tech and finance industries within the national Democratic Party, the ever-rightward shift of Republicans, the relative weakness of organized movements on the left, and the depth and complexity of interest-group politics in domains like healthcare and climate policy. Any one of these makes transformative change hard; combined, they can make it feel impossible.

This book addresses a critical, yet underappreciated, historical change that helps explain Democrats’ apparent lack of ambition, among other political shifts: the rise of a distinctive way of thinking about policy—what I call the “economic style of reasoning”—that has become prevalent in Washington. The economic style of reasoning is a loose approach to policy problems that is grounded in the academic discipline of economics, but has traveled well beyond it. It is often perceived as politically neutral, but it nevertheless contains values of its own—values like choice, competition, and, especially, efficiency. Today, its dominance as a framework for thinking about policy problems is often taken for granted, but this has not always been the case.

In the chapters that follow, I provide an account of where the economic style of reasoning came from, how it spread and was institutionalized in Washington, and what its political effects have been. Between the 1960s and the 1980s, two intellectual communities—both initially led by liberal technocrats who thought government could solve social problems and improve the working of markets—introduced this distinctive style to new parts of the policymaking process. One was a group of systems analysts who came from the RAND Corporation and offered new answers to the age-old question, “How should government make decisions?” The other was a loose network of industrial organization economists who came to Washington to ask, “How should we govern markets?” I follow the movement of these economists and their fellow-travelers into a variety of policy domains and show how they helped to institutionalize an economic style of reasoning through law, regulation, and organizational change.

I also demonstrate the political effects of this change. The high value that the economic style placed on efficiency, incentives, choice, and competition frequently conflicted with competing political claims grounded in values of rights, universalism, equity, and limiting corporate power. As the influence of the economic style became more durable, it became harder for those competing claims to gain political purchase. While the economic style had the potential to conflict with conservative as well as liberal values, in practice, its predominant political effect has been to reinforce the conservative turn that began in American politics in the 1970s. For Republicans, economic reasoning remained a means to an end; for Democrats, the values of economics became an end in themselves.

The results of this turn continue to play out in politics today. Material interests play an undeniable role in determining which ideas get political attention in the first place. But once a particular intellectual framework is institutionalized, it can take on a life of its own, defining the boundaries of what is seen as politically reasonable. For Democrats, the institutionalization of the economic style has limited political options over the last thirty years, even as social movements and an increasingly organized left have introduced new voices and a new level of dissatisfaction with the status quo. Whether those voices will gain greater influence will, once again, depend on collective action as well as ordinary interest group politics. But their success will also depend on their ability to reform or dislodge a way of thinking about policy that has become thoroughly naturalized, and that is much less politically neutral than it appears.

The Economic Style of Reasoning and Its Importance

Philosopher Ian Hacking initially proposed the term “style of reasoning” to capture the distinctive ways of thinking made possible with the emergence of statistics.¹¹ But styles of reasoning are not scientific paradigms, nor are they particular theories or models. Instead, they are collections of orienting concepts, ways of thinking about problems, causal assumptions, and approaches to methodology.¹²

The economic style of reasoning is a loose approach that began turning up in Washington as early as the 1950s, but that really spread in policymaking between about 1965 and 1985. It starts with basic microeconomic concepts, like incentives, various forms of efficiency, and externalities. It takes a distinctive approach to policy problems that includes using models to simplify, quantifying, weighing costs and benefits, and thinking at the margin.¹³ It also includes causal policy stories linked to economic theories—that, for example, investing in education will increase human capital and raise incomes.¹⁴

The style is grounded in the authority of PhD-producing economics departments, which reproduce it, certify those credentialed to use it, and, over time, gradually drive its evolution. These departments are at the center of what microbiologist and philosopher Ludwik Fleck called an “esoteric circle,” one made up of those who publish in top economics journals and create new knowledge in the discipline.¹⁵

A weaker version of the style circulates well beyond the rarified air of elite economics departments. Economics PhDs teach in law, policy, and business schools, where graduate students in other disciplines are exposed to the basics of the style. Indeed, as sociologists Tim Hallett and Matt Gougherty show in their ethnography of a public affairs program, learning to “think like an economist (without becoming one)” is integral to pursuit of the master’s degree.¹⁶ An even broader set of people learn the style’s elementary concepts in Econ 101 classes, or in other undergraduate courses grounded in economic reasoning.

This much larger group of people, who lack PhDs in economics but are familiar with the basic principles of economic reasoning, make up concentric “exoteric circles” of those influenced by the economic style. Their numbers include faculty in professional schools oriented toward it, producers of policy knowledge who apply it, and policymakers and advocates who adopt its approach, sometimes unawares.¹⁷ While the inhabitants of these exoteric circles may not be familiar with the cutting edge of the discipline, what’s happening at the frontiers of knowledge may not matter much for policy purposes. As economist Alain Enthoven, one of Robert McNamara’s whiz kids, wrote in 1963—and others have reaffirmed—“the tools of analysis that we use [in policymaking] are the simplest, most fundamental concepts of economic theory [that] most of us learned as sophomores.”¹⁸

In practice, the economic style is a loose and flexible approach to analyzing policy problems that has evolved gradually over time. But the style does reflect two core stances whose implications can be seen playing out in a variety of policy domains. First, it maintains a deep appreciation of markets as efficient allocators of resources. This does not mean that its adherents believe that markets are perfect, that deregulation is always the answer, or that market failures are not a problem. But it does mean that they tend to see government’s role as creating the legal framework that will facilitate well-functioning markets and correct for any market failures. It also means that they tend to view policy domains through a market lens. They display an affinity for introducing market-like elements—like choice and competition—into areas, such as education or healthcare, that are not governed primarily or solely as markets.

Second, the economic style places a very high value on efficiency as the measure of good policy. Once a particular objective has been democratically chosen, adherents of the economic style regard a good policy as the most cost-effective means to reach that objective. Policy goals themselves can also be evaluated through the lens of efficiency: an appropriate level of regulation, for example, is the one that will maximize net benefits to society. The economic style portrays efficiency as a politically neutral value. Any objective can be achieved in a more or less efficient manner, an...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• 1. Thinking like an Economist
• 2. The Economic Style and Its Antecedents
• 3. How to Make Government Decisions
• 4. How to Govern Markets
• 5. The Economic Style and Social Policy
• 6. The Economic Style and Market Governance
• 7. The Economic Style and Social Regulation
• 8. How the Economic Style Replaced the Democratic Left
• 9. The Economic Style in the Age of Reagan
• 10. Conclusion
• Acknowledgments
• Note on Sources
• Notes
• Bibliography
• Index