Last week, the economics profession lost one of its leading lights – Harvard professor Alberto Alesina. The Italian economist, who died of a heart attack at age 63, helped revolutionize the field of political economy.
Economists are often criticized for ignoring the political aspects of their theories. At least since the end of World War II, economists have generally seen their role as offering expert advice to wise technocratic leaders - "whispering in the ears of princes." But in the real world, leaders with both the wisdom to listen to academic experts and the power to implement any much less all of their recommendations are quite rare; more often, the political world is a tangle of interest groups, culture wars, partisan bickering and electoral expediency.
Some economists throw up their hands at this mess and conclude that if leaders aren't going to listen to reason, so be it. Not Alesina. He waded directly into the tangled mess, using theory and data to try to tease out the complicated interplay between politics and economics.
One of the big questions Alesina tackled was why the US doesn't have the generous welfare benefits of advanced countries in Europe. His answer, along with co-authors Edward Glaeser and Bruce Sacerdote, was twofold. First, US institutions -- the Senate, the electoral system, the legal system -- were designed much earlier than their modern European equivalents, and are thus more oriented toward protecting private property above all else. But in addition, the economists found evidence that racial animosity was a source of American exceptionalism:
Opponents of redistribution in the United States have regularly used race-based rhetoric to resist left-wing policies…Within the United States, race is the single most important predictor of support for welfare. America's troubled race relations are clearly a major reason for the absence of an American welfare state.
Listening to conservative talk-show hosts such as Rush Limbaugh, who derided Obamacare and other Obama administration social programs as "reparations," it's hard to argue with Alesina's conclusion.
Alesina also believed that racial and ethnic divisions could inhibit a country's economic growth. With co-authors Reza Baqir and William Easterly, he found that US cities with more ethnic fragmentation were less effective at building roads, picking up trash and spending money on education -- all things that contribute to economic growth. And with Easterly and Janina Matuszeski, he found that post-colonial states with boundaries that cut across ethnic groups tended to do worse economically than those with more natural borders like rivers and mountains.
To some, this might seem like a confirmation of right-wing ideas that diversity is bad for a country. But although it might help explain the success of homogenous countries such as Sweden and South Korea, Alesina's theory is much more subtle than it might appear. As he explained in a 2003 paper, the key isn't how similar the inhabitants of a country might appear on paper, but how much they see themselves as one people; fractionalization is in the mind, rather than in the genes. That implies that the way forward for the US and other diverse countries, to become more equal and prosperous, is to de-emphasize racial and ethnic divisions and promote a shared identity.
Alesina's research, of course, covered much more than the question of ethnic tensions. He also researched the link between inequality and growth. Some economists believe that the key to growth is to cut taxes and deregulate the financial system; the increased inequality that results from these policies, they argue, is simply the price of greater efficiency. But Alesina had the opposite theory -- inequality, he reasoned, leads to social discontent, which foments political instability, reducing economic growth. Looking across recent history, he and co-author Roberto Perotti found that more unequal countries are more likely to fall into political chaos and suffer economic decline. So time and again, Alesina shows that politics can turn intuition about markets on its head.
It's worth noting that there was one case when his emphasis on politics may have led Alesina astray. After the 2008 financial crisis, Alesina and his co-authors argued that it was possible for spending cuts to be expansionary in a recession. A key idea was that spending cuts convince the public that a government will be fiscally responsible in the future, and makes consumers more confident to spend in the present. But later research by various economists at the International Monetary Fund found that the conventional wisdom is right -- austerity in a recession hurts growth. In the case of stimulus, brute economic forces tend to be more powerful than political ones.
But even though politics doesn't always dominate market forces, it does so often enough that the economics world can ill afford to ignore the insights that Alesina uncovered. The world is not ruled by wise, selfless technocrats, but by the chaotic sentiments of the masses. Good advice is never enough; there must be some way of making economics work in the eyes of the people it's designed to benefit.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.