Research Questions for Economists
alternatives to doing sociology
I blame Steven Levitt. He earned fame and fortune by using his economics training to do sociology.
Which is more dangerous, a gun or a swimming pool? What do schoolteachers and sumo wrestlers have in common? Why do drug dealers still live with their moms? How much do parents really matter? How did the legalization of abortion affect the rate of violent crime? These may not sound like typical questions for an economist to ask.
—Advertising blurb for Freakonomics
Meanwhile, there are issues that I think economists could look into.
One issue that I mentioned recently is the changing structure of small business in the United States. My eyeballs tell me that we are seeing more lawn care services and fewer mom-and-pop retailers. Can data confirm a shift from retail to services? Are home-based businesses thriving or shriveling? Will Amazon and Wal-Mart ultimately kill independent retailers?
Another structural change concerns work. If we classify jobs as working primarily with things, primarily with people, or primarily with symbols, how has the distribution been changing in terms of employment opportunities and compensation levels? How might we extrapolate the trends of the past 20 years to the next 20 years?
Over the last few decades, profits in the financial sector have grown faster than the economy as a whole. Is this a good thing? This is a question on which there are more opinions than useful studies. Where are the profits of the successful financial firms coming from? Is it providing better service and support to the nonfinancial sector? Is it small investors and smaller banks getting chewed up by the big institutions? Is it financial firms taking advantage of opportunities created by regulation or government support? (When I was at Freddie Mac early in its heyday, I would have emphasized the latter.)
There are interesting economic questions concerning “green” technology. What is the cost of the infrastructure to make solar and wind power available where and when energy is needed? What sorts of materials scarcity might arise? If scarcity eventually makes the use of one material uneconomical, what is the cost of using the next-best alternative?
Why does the health care sector operate the way that it does? Why is pricing so opaque? What are the drivers of cost? How do hospitals and other service providers cover fixed costs?
Can we identify the largest sources of waste in the health care system? My guess is that an intensive study of a single hospital or two might be more informative than an attempt to sort out aggregate statistics. Maybe we should start by asking which medical procedures are performed widely in the United States and only rarely elsewhere. Do these procedures result in much better outcomes?
A related area of research is mental health treatment. What are the most cost-effective ways to deal with mental health problems? Can government investment in mental health earn a high return, for example by reducing crime? How do other countries that approach mental health treatment, and what do costs and benefits look like?
What are the cost drivers in public schools? I think it would be worth examining particular school districts. I remember that years ago when I looked at the Montgomery County (Maryland) public schools, I was amazed that the student/employee ratio was only 6, even though average class sizes were 25. Arithmetically, this meant that there were a lot of non-teaching staff. It might be interesting to examine schools in other countries to compare cost structures with those in the United States.
Finally, the secular decline in interest rates has received some attention among researchers, but not enough. Unless you are close to my age, you will not be able to guess what interest rates were in 1970. It is possible that people were irrationally reluctant to save in those days. But to me it looks like they are irrationally willing to tolerate low returns now. I do not expect the issue to be settled by more research, but I think that economists could learn a lot by trying harder to understand why interest rates are so much lower today. Are global capital markets more integrated than they used to be, with interest rate differentials shrinking? Or are there still significant risk premiums that differ by country and by type of investment?
I can think of two hypotheses about the decline in interest rates that have opposite implications. One hypothesis is that we have had a bulge in middle-aged people, who are prodigious savers. This will soon turn into a bulge in old people, who will be spending down their savings. See The Great Demographic Reversal. The implication is that interest rates will soon turn around and start rising again.
The other theory is that human ingenuity is making everything cheaper, but our inflation statistics are biased on the high side. If we were measuring inflation correctly, the true inflation-adjusted interest rate would not have fallen so much. If this is true, and if this trend continues, we should not expect interest rates to rise.
It is a bit unfair to blame Levitt, even tongue in cheek. It is more important to ask who is the customer for economic research.
Industry: Tends to focus on what is going to happen in the near future, or on producing research to get politicians to make rules in their favor. Hospitals don't want to know why they are expensive; they already know this. What they want is something that shows politicians and voters why they should be given more money.
Academics: If you are trying to get and secure a job at a university you need to signal that you can attract students and money with your work, and that you believe the right things. All are satisfied by being a sociologies: students want to learn how to fix the world by making people do what they want (leave people alone is popular only with a few), money comes in via donations from groups and governments that want reasons to get people to do what they want, and of course the dominant religion revolves around making people do what you want them to do.
Government: The government does not generally want to know why its schools are awful, because it made them that way. Likewise with every other aspect where the fix is "stop messing with it."
Laypeople: Like economics that explains what they see and doesn't upset their worldview much, and they don't generally see interest rates and the like very often. Unfortunately they generally also share the worldview of the universities they attended.
It is extremely difficult to have an academic job without doing research with a paying customer. It is very difficult to do research without an academic job. Add in a dash of "I don't want to leave the office, so lets just use available datasets," a sprinkle of "I have never worked for an actual business, and there you go, a recipe for most economists having no idea how businesses and markets function and little incentive to find out.
For medical cost structure I would simply do a study comparing outpatient surgery costs at the Surgery Center of Oklahoma with an arbitrary “insurance” hospital. I suspect most of the “cost” of surgery is simply excess charges to make up for unfunded government mandates combined with rent seeking.