Is Economics Useful for Public Policy?

Abstract

Economists have always played an important role in major public policy debates. Even so, I believe that the role of economists in these public policy discussions has often been misguided because it has typically relied upon “best practices,” stated in the form of “general guidelines” or even “universal principles.” However, “best practices” are not best if the specific situation does not conform with the assumptions that underlie the advice. So my first conclusion is a cautionary, and negative, one: Specific circumstances differ so profoundly across individuals, firms, markets, countries, and time that most any attempt to define “best practices” that apply in all circumstances will lead to profoundly misleading public policy recommendations. However, even if economics cannot identify “the” truth, it can often identify “a” truth. So my second conclusion is a more positive one: Economists should continue to develop multiple theories that inform public policies, but we should also focus our efforts on identifying and testing the critical assumptions that drive the results of these theories, recognizing that the validity of any assumptions will depend intimately on specific circumstances. I illustrate these two main conclusions with specific examples from my own work. I conclude with some “best practices” recommendations of my own, recognizing the obvious irony of such an effort.

U.S. State and Local Fiscal Policy and Economic Activity: Do We Know More Now?

“…The mixed results also likely occur because of the differences in underlying circumstances of the studies. Consistent with Alm's (, p. 835) observation on economic policy advice more generally, it may be too much to ask that economists provide advice on state and local taxes and expenditures “that apply in all circumstances.”…”

What Motivates Tax Compliance?

“…Finally, I believe – or rather I hope – that there will be increasing recognition that any answers that emerge from our research will necessarily apply only to the specific setting that is being considered. As I have argued elsewhere (Alm, ), ‘[s]pecific circumstances differ so profoundly across individuals, firms, markets, countries and time that most any attempt to define ‘best practices’ that apply in all circumstances will lead to profoundly misleading public policy recommendations'. These difficulties should not discourage the search for, say, specific policy guidelines that apply to a specific setting at a specific point in time.…”

“…However, even if economics cannot identify ‘the' truth, it can often identify ‘a' truth, and the possibility of identifying ‘a' truth suggests the ways in which economists can play a useful role in public policy discussions. So, as I have also argued (Alm, ), ‘[e]conomists should continue to develop multiple theories that inform public policies, but we should also focus our efforts on identifying and testing the critical assumptions that drive the results of these theories, recognizing that the validity of any assumptions will depend intimately on specific circumstances'.…”

Financial constraints and firm tax evasion

“…More generally,Alm (2017) argues that any answers that emerge from empirical research apply only to the specific setting that is being considered; that is, specific circumstances differ so profoundly across individuals, firms, markets, countries, and time that most any attempt to take conclusions from a single study and apply them in all circumstances will lead to profoundly misleading policy recommendations.…”