Tuesday, June 24, 2008

Beware the Boogeyman

Economists tend to view politicians differently than the non-economist. We believe there are some things that presidents cannot control. We view politicians less as a crusader for the common good and more as a crusader for their own reelection. We understand that some things, like economic growth, go in cycles, and that allowing the cycle to take its natural course is better than trying to tame it.

Economists have this view because there is ample evidence that it is correct, and we think incessantly about policy issues. As teachers of economics, I believe it is our duty to articulate this alternative view of politics to students. Students will forget elasticities and models soon after leaving class, but a healthy skepticism of politicians is a more lasting accomplishment.

For politicians to have value to the public, they must be able to give us something. One way to create value is to find a problem, create a boogeyman at the root of the probleme, and claim only they can protect us from this boogeyman - if they are elected!

We are told income inequality is not the result differing levels of education, but because corporate CEO's and Wal-Mart prevent the common man from earning his fair share. We are told that high oil prices is due to greedy oil companies and speculators. These events cannot be due to supply and demand, because no one can "protect us" from supply and demand. They must be due to a boogeyman (CEOs, speculators), because politicians can create laws to fight boogeymen.

This is serious business. The best way to bring our economy to its knees is to fight oil companies by nationalizing oil, yet as the clip below shows, some politicians claim this is what must be done.

Or maybe we should enact a windfall tax to punish oil companies from earning "excessive" profits. Politicians are seriously considering this also. It is at this time we should inform students that the "owners" of oil companies are primarily regular people like policeman and teachers who have pensions. In these teachable moments we should show graphs like the one below showing oil companies already pay huge taxes.

Most events in the world concerning money are caused by supply and demand, not boogeymen. If we do our job right, the next time oil prices spike, our students will immediately suspect a supply and demand explanation like the one shown in the graph below, and not a boogeyman who only politicans can slay.

A healthy skepticism of politicians is more important than a thorough understanding of demand elasticities. Let us make sure our our lectures reflect this priority.

(Note: thanks to the excellent blog Carpe Diem for the graphs)