Governments often employ economists as policy analysts or consultants, to provide advice on policy. That relationship between the government and the economist is a principal-agent relationship (regardless of whether the economist is a government employee or a consultant), as my ECONS102 class covered this week.
In a principal-agent interaction, one person or group (the agent) is given the power to decide how to use resources that ‘belong’ to someone else (the principal). In the case of economists working for government, the government is the principal and the economist is the agent. The 'resource' that the agent is using is their work time, which has been paid for by the government.
Now, the government wants the economist to use that work time to provide unbiased economic or policy advice. [*] However, the economist has their own goals and motivations. They might use that work time to scroll TikTok, and then use ChatGPT to write the advice. Or, they might use the time to provide biased advice, based on their own political preferences. Either way, this is detrimental to the interests of the government. This is the essence of the principal-agent problem (or the agency problem).
Do economists act that way? Many economists (including, at times, myself) argue that we are non-partisan, and unbiased in our policy advice, even if we hold particular political views. But is that actually the case?
That is the question addressed in this 2024 article by Zubin Jelveh (University of Maryland), Bruce Kogut, and Suresh Naidu (both Columbia University), published in The Economic Journal (ungated earlier version here). They first link over 53,000 economists from the American Economic Association member registry in 1993, 1997, 2002, and 2009 to two measures of political activity: (1) their campaign contributions (between 1979 and 2012) drawn from the Federal Election Commission's website; and (2) their signing of one or more of 35 petitions aligned with the political left or right.
Next, Jelveh et al. obtain the full text of over 62,000 academic articles and over 17,000 NBER Working Papers published by a subset of 2471 of the economists from the larger sample, between 1973 and 2011. They then rank each of the articles and papers in terms of 'ideological valence', based on the phrases that appear in it, and use that to derive several different 'ideology scores' for the writing of each economist.
Jelveh et al. then start to do some analysis of the ideology scores, finding first that:
...the fields of finance, macroeconomics and industrial organisation are more conservative, while labour is considerably more liberal than the average. Other fields, such as history and international trade, show less political valence. We further see that faculty at business schools are more conservative, as are professors affiliated with ‘freshwater’ schools, while ‘saltwater’ schools have a left-wing bent. Professors of European origin also seem to be somewhat more conservative, and there seems to be no association with Latin American origin, full professor rank or top five department ranking.
The 'saltwater schools' are predominantly those on the east coast of the US, like Harvard or MIT, while the 'freshwater schools' are predominantly those in the Midwest, such as Chicago or Minnesota. Those results, and the results by field of economics, will not surprise many people who know those schools or those fields.
The more interesting results involve the next stage of the paper, where Jelveh et al. look at several economics debates, where there is a clear left-right divide in terms of expected effects. For example, conservative economists may be more likely to believe that the minimum wage reduces employment, while liberal economists may be more likely to believe that it doesn't. Jelveh et al. take several meta-analyses on the minimum wage, and similarly political topics, and look at the relationship between the estimated elasticity in each paper in the meta-analysis, and the estimated political ideology of the authors. They find a statistically significant relationship - elasticities reported by more conservative economists tend to be consistent with more conservative policy prescriptions, while elasticities reported by more liberal economists tend to be consistent with more liberal policy prescriptions.
Economists have political leanings (as does everyone else), Jelveh et al. show that those political leanings are correlated with the results that economists report in their research. This isn't to say that economists are engaged in falsifying data to support their political beliefs. Jelveh et al. have no evidence of that. However, their results could arise if economists choose to apply methods or investigate datasets that are more likely to lead to results that are consistent with their beliefs. Or, economists may simply choose not to publish results that are inconsistent with their beliefs. Either way, this research provides some evidence that knowing the political preferences of economists may be important in interpreting the results from their research.
In my ECONS102 class, we discuss various ways that the principal can act to reduce the principal-agent problem. Those options include stricter monitoring of the agent, paying efficiency wages, or performance-based pay (or delayed payment). In this case, the government might ask the economist agent to fully document their research, or subject it to careful peer review. This would constitute stricter monitoring. However, the relationship between the government and the peer reviewer opens up an additional layer of potential principal-agent problems (what are the political preferences of the peer reviewer?). The government might pay a wage to the economist that is much higher than the equilibrium wage, hoping that would motivate them to produce higher-quality and less biased work (because if they didn't, they would lose their job and have to work elsewhere for less). Government might also use performance-based pay, or may hold back payment until after a peer review, or a replication of any analyses. However, for all of those solutions, some form of monitoring is still required in order to determine the quality of the work. There is an additional problem, though. Efficiency wages and performance-based pay work best when the agency problem involves the effort the agent puts into their work. Those solutions may be less effective when the problem arises from sincerely held beliefs about which models, methods, or evidence are most appropriate.
It seems that the principal-agent problem for governments employing economists (and, possibly, other consultants) is challenging to solve. Perhaps the best that governments can do is insist on transparency around economists' assumptions, methods, and evidence, and subject their analyses to replication and peer review. Political preferences may still matter, but good institutions can make it harder for those preferences to determine the advice that governments receive.
[HT: Marginal Revolution, back in 2024]
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[*] Or, maybe the government wants the economist to provide economic or policy advice that accords with the preferred policy platform of the government, rather than independent or unbiased advice. In that case, the nature of the principal-agent problem changes. Nevertheless, in both cases, what really matters is whether the economist's goals and motivations are aligned with those of the government.
