Saturday, May 27, 2006

Miron on Subsidizing Economics

My friend and colleague Jeff Miron argues against government subsidies to economics research:

Economists broadly, and even many libertarian-leaning economists, support government funding for economics research. Is that position defensible?

My answer is no. Economic research is a good thing, and knowledge is a public good that might be underfunded by the marketplace. But economists cannot argue convincingly against other bad government policies unless we hold ourselves to the highest possible standard.

I made a similar argument to a New Yorker reporter ten years ago. He quoted me in an article called The Decline of Economics (12/2/96):
"Is economics making enough progress to justify the millions of dollars a year that the taxpayer spends to subsidize economic research? I think economists are probably overfunded, given the rate at which we make progress.... Economists are like dairy farmers. We think we deserve every penny we get."
When the New Yorker piece came out, I was contacted by Dan Newlon, the economics program director at the National Science Foundation, who hands out the government largesse. Dan inquired whether I had been quoted correctly. I said I had. He then advised me that we economists should not be "airing our dirty laundry in public."

The key issue here concerns externalities. Economists who favor subsidies to research point out (correctly) that there are positive externalities to knowledge creation, so there will be too little in the absence of any government intervention. On the other hand, subsidies require tax revenue. Because taxes are distortionary, it is not enough that the externalities be positive: they must be large enough to justify the deadweight loss from extra taxation.

Dairy farmers can assert they deserve subsidies because farms are scenic and convey positive externalities to on-lookers. Economists are skeptical about such self-serving claims and want to see a serious cost-benefit analysis. But we economists are far too willing to cut ourselves some slack when it comes to our own subsidies. Miron is an admirable exception.