Ever feel frustrated with the quality of policy analysis from an economist’s perspective? Consider picking up Elizabeth Popp Berman’s Thinking like an Economist. The author is a sociologist who teaches organizational studies at the University of Michigan. Her book documents the rise and proliferation of economic perspectives in the way government officials make policy. As you may imagine, her perspective is quite different from the typical reader of this journal. An economist who reads her book may realize that the state of policymaking could be worse and may even chuckle at how influential economic ideas have become.

Berman uses the phrase “economic style of reasoning” to describe how economists see the world. She focuses on microeconomics. According to her, two principles are key: First, this way of thinking “maintains a deep appreciation of markets as efficient allocators of resources.” Second, she continues, “the economic style places a very high value on efficiency as the measure of good policy.” Her characterization is reasonable.

Economic style of reasoning / The author asks two questions that guide her history of policymaking. The first is, how should government make decisions?

Economists working for the RAND Corporation used “systems analysis” to answer this question. The approach combined operations research and cost–benefit analysis to solve problems. RAND economists set up the Planning–Programming–Budgeting System (PPBS) at the Defense Department under secretary Robert McNamara in the early 1960s. Berman describes the method as follows:

PPBS began by specifying the broad goals of an agency or office; identifying the various programs that might be used to achieve those goals; quantifying, to the extent possible, the cost-effectiveness of those alternative programs; and then using that information as a guide to budgeting.

President Lyndon Johnson ordered the adoption of PPBS to make decisions throughout his administration. Although government agencies neither wholeheartedly nor widely embraced it, the author credits the system for establishing the economic style of reasoning in the executive branch. From there, Congress based the Congressional Budget Office on the economic style, and university departments of public administration around the country taught it to their students.

Political goals / Berman tells stories about how economists think without teaching readers how to think like an economist. This is no textbook. It is a history filled with names, dates, and agencies.

That brings us to the second question guiding her history, how should we govern markets? Early on, government officials regulated industry with “social and political goals” in mind. Social goals include “protecting small business, or ensuring ‘fair’ prices.”

As for a political goal, the author writes, “Lawmakers advocated for breaking up large firms because they represented a dangerous concentration of power.” Economists specializing in industrial organization jettisoned “social and political goals” in favor of allocative efficiency. Harvard University economists thought in terms of “structure,” “conduct,” and “performance.” The more firms, the better. Mergers were suspect. Abnormal profits indicated a lack of competition.

This view was ultimately challenged by University of Chicago economists, who downplayed structure, conduct, and performance. For example, a merger that increased industry concentration was not necessarily undesirable because it might lower prices to consumers. Whereas Harvard economists reasoned that an activist antitrust policy was necessary to maintain competition among firms in an industry, Chicago economists took exception. They reasoned that big business was not necessarily anticompetitive; free entry would preserve competition. “Chicago’s approach,” Berman sums up, “suggested that government rarely needed to intervene, even in concentrated markets.” Officials at the Antitrust Division of the Department of Justice and at the Federal Trade Commission adopted economic perspectives, especially the Chicago school’s, over time.

Social policy / The economic style of reasoning influenced what Berman calls “social policy” and “social regulation.” The former covers poverty, health care, and education. President Johnson sold his Great Society legislation by appealing to the “logics” of “universalism, equality, and rights.” Based on those principles, everyone has a right to income, health care, and education. An economist will raise the issue of cost. This difference between the rationale for the Great Society and the stark reality of tradeoffs benefited economists. Their numbers and their stature rose in response to legislative efforts in these policy areas.

Take poverty. There is a rationale for “social insurance.” Berman states, “Social insurance programs focus on protecting citizens from risk through universal coverage—for example, through national health, unemployment, or old age insurance.” These programs presumably prevent people from falling into poverty. “Advocates of social insurance like universal programs,” she adds, “in part because of their political durability.” Because almost everyone receives benefits, in other words, the programs will be popular and difficult to remove. Economists objected. The author explains, “Social insurance programs benefited—unnecessarily, in the economist’s view—the well-off as well as the needy, making the programs both less progressive and more expensive.” Milton Friedman advanced his idea of a negative income tax. Fellow economists, in particular James Tobin while he was on President John F. Kennedy’s Council of Economic Advisers (CEA), argued on its behalf. Economists drew up a version of the negative income tax for Richard Nixon’s administration. Although Congress did not take up that bill, Berman uses the episode as evidence of the growing influence of economists.

What the author refers to as “social regulation” covers the environment and working conditions. Congress passed much legislation in the early 1970s that begat regulations. Berman repeats her theme that the original motivation for these regulations was noneconomic, even anti-economic. Economists asserted their way of thinking in response.

Case study / Take the Clean Air Act of 1970 (CAA). According to the author, “It reflected ideas about the importance of rights (in this case, to health), the promise of technology, and the dangers of regulatory capture.” Some proponents were so optimistic about technology that they believed more demanding regulations would actually spur innovations that would make complying with the regulations possible. Authors of the legislation believed that by making regulations “inflexible,” they would prevent regulatory capture. The author tells us that the CAA “was also specifically written to exclude economic reasoning, on the grounds that allowing consideration of costs would open the door to delay and foot-dragging.” It is no surprise that legislation designed to ignore economic reality would attract opposition from business and economists.

Berman illustrates the conflict with ozone regulation. The original regulation was 0.08 parts per million (ppm). That level, she admits, “was selected hastily, with limited technical justification.” Economics was not a factor in setting the level because the CAA forbade its use. Following protests from industry, Environmental Protection Agency administrator Doug Costle recommended raising the level to 0.10 ppm. Charles Schultze, President Jimmy Carter’s head of the CEA, ordered the Regulatory Analysis Review Group (RARG) to weigh in. RARG staff focused on costs, though not benefits, and determined that the best level would be 0.16 ppm. Some EPA officials at the “air office” reminded everyone that the letter of the law proscribed cost analysis. The head of the EPA’s Office of Planning and Management, inclined to use economics, suggested 0.15 ppm. One wonders what the role of science was in making the decision. Berman offers this:

Each office sought support from White House science advisors to resolve the impasse. Perhaps reluctant to decide the debate itself, the science office punted, suggesting that a standard in the 0.10 to 0.16 ppm range would be appropriate.

In the end, the EPA administrator set the new regulation at 0.12 ppm. Both sides—those who refused to consider costs and those who insisted on it—were unhappy. Sen. Edmund Muskie, the “architect of the CAA,” scolded Costle, Schultze, and economist Alfred Kahn for using costs to set the permissible ozone level.

When to reason economically / The author’s appreciation of the economic way of thinking is hard to assess. She assumes that an active government is a legitimate and effective way to make the world a better place, and approves of economics as cost analysis. She states:

In the domains of social policy and market governance, liberals took the lead in advocating for the economic style. They professed sympathy to the larger goal of using the government’s power to improve the public welfare; they simply disagreed about the best way of achieving that goal.

By “liberals,” she means people more like members of the Democratic Party than classical liberals. By “the best way” she means least costly. For instance, assuming that people have a right to housing and the government has a role to help poor people get it, economists can help determine whether public housing or vouchers are a better way to accomplish the goal. But if one is skeptical of an active government’s ability to produce favorable outcomes, the author appears to disapprove of what economics might reveal. Ronald Reagan’s administration presumed that a smaller role of government was better. In the case of housing policy, the Office of Policy Development and Research at the Department of Housing and Urban Development “shifted its attention to studying the deregulation of housing production, in keeping with the administration’s political priorities, rather than searching for the most efficient forms of housing assistance.” This reviewer’s impression that Berman disapproves of reducing regulations in the housing market may be wrong, but it would not be wrong to use economics to investigate how deregulation might achieve the goal of more affordable housing.

Economists took different approaches to evaluating regulations depending on their political stripes. Economists who leaned to the left took the objective of a regulation as a given, Berman explains, and then searched for lower-cost alternatives of accomplishing that objective. Economists who leaned to the right tallied both benefits and costs. Reagan’s Executive Order 12291 required analyzing both benefits and costs (unless forbidden by legislation). The author criticizes the Reagan administration for using economic reasoning in a “selective” and “strategic” manner. “When economic reasoning came into conflict with Reagan’s underlying preference for less regulation,” she writes, “the administration prioritized less regulation over the mandate of efficiency.” This was evidently not always the case. She shares the story of how the Reagan administration initially intended to allow more lead in gas. But when confronted with the results of a cost–benefit analysis, it opted instead to regulate lower levels of lead. (See “The EPA’s Faustian Bargain,” Fall 2006.)

Absolute principle / The author offers advice for those who want to shape policy; progressives would be her primary audience. The claims on which she bases this advice plus the advice itself make up some of the most thought-provoking passages in the book.

Consider this assertion of Berman’s: “The economic style does not allow for commitment to absolute principles—for moral values that are ends in themselves, rather than objectives to be evaluated in terms of costs, benefits, and trade-offs.” On the basis of that claim, Berman advises progressives to free themselves from the shackles of cost considerations and argue for rights instead.

Her advice suffers from a failure to acknowledge the difference between positive rights and negative rights. Her endorsement of “student loan forgiveness” strains her credibility. The “moral case” for student loan forgiveness that she refers to must be subtle if not preposterous.

Berman’s book is a detailed history of policies covering antitrust, health care, education, the environment, and working conditions. There is repetition, though it is tolerable. The author convinces the reader that there has been an “institutionalization” of economic thinking across the three branches of government, as well as universities and think tanks. She resents how economics crowds out “concerns about rights, equality, power, democratic process, and the politics of making policy.” This resentment detracts from an otherwise good understanding of economics. She claims, “Arguments based on claims about absolute rights, which implied that cost should not be considered, lost legitimacy.” But to ignore costs is to ignore reality. A policymaker who disregards science would rightly be considered closed-minded. So, too, would a policymaker who disregards economics.