Enabling Better Policy Decisions

Insights from social and economic research can empower policymakers and aid their decisions, saving governments money and improving opportunities for economic growth.

Excerpted from The Future Postponed, Massachusetts Institute of Technology, 2015

David Autor: Associate Department Head of Economics, and Professor of Economics

James Poterba: Mitsui Professor of Economics

Research in the social and economic sciences tends toward smaller projects, and smaller research teams, than the mega-projects that are often found in the physical and natural sciences. Cumulatively, the insights gained from these investigations can have significant impact on regulatory policy, on healthcare policy, and on strategies to stimulate economic growth, enabling the design of policies that more effectively accomplish their intended goals.

Designing New Markets. Over the past two decades, the federal government has auctioned off parts of the broadcast radio/TV spectrum to enable new applications such as mobile telephony and wireless broadband. These auctions have not only catalyzed huge new industries and transformed the way we live and do business, they have also netted the federal government more than $60 billion. The auctions were extremely complex, involving multiple rounds of contingent bidding, because of the unique character of spectrum leases: the value of some spectrum in one city or region depends on who owns the spectrum in neighboring regions. The design of these auctions—in effect, the design of new public markets for spectrum—has been guided by research into game theory, a branch of economics that began with the mathematician John von Neumann and has been pushed forward by university researchers in recent decades. “Design” in this context means specifying the rules of trade and the way prices are determined.

Spectrum is only one example. Economic research has played a central part in creating auction markets for off-shore oil leases, for the matching of K-12 students in large city school districts like New York and Boston to the array of available schools, and even for the trading of kidneys between donors and potential recipients. The rise of electronic commerce has created new opportunities for more sophisticated pricing by sellers and bidding by potential buyers—for products and for ser- vices such as advertising. Many of the design principles that have allowed U.S. tech firms like Google, Amazon, and eBay to grow into global dominance have deep roots in recent economic research. Understanding the efficiency proper- ties of different market structures in these new settings requires both theoretical research on the design of these markets and data-based analysis of their performance.

More complex auction strategies guided by research into game theory have netted the U.S. government more than $60 billion and helped catalyze huge new industries in electronic commerce.

Economic and Behavioral Contributions to Health. The rising incidence of chronic disease—diabetes, stroke, cardiovascular disease—and of predisposing conditions such as obesity threatens to become a financial tidal wave that could overwhelm our healthcare system. It is well-known that patients’ choices of diet and exercise, their compliance with treat- meant regimes, and their willingness to seek care play a critical role in health outcomes for these conditions. So a critical area of research is to understand the factors that influence such choices and to design more successful ways to influence behavior. Mobile phone reminders to refill drug prescriptions and incentives of various kinds have been shown to improve treatment compliance in some circumstances; generating support from peer groups can have the same effect. Access to insurance coverage has been shown to increase use of preventative measures. Behavioral interventions that arise from social science research are particularly attractive because they are often much less expensive than medical treatments, especially hospitalization. But much remains to be done, even as funding levels are being reduced. At a time when health costs are a significant national concern, designing and testing new behavioral interventions is an area with high potential benefits.

Insights from Big Data. Because economists and other social scientists can’t usually run laboratory experiments, empirical research has been mostly based on survey data collected
by government agencies such as the Bureau of Labor Statistics and the Bureau of the Census. These surveys, which provide data that has been collected in consistent fashion for many years, remain critical to understand labor mar- ket activity and a wide variety of individual economic choices important for policy making, and yet are now threatened with budget cuts. At the same time, there is a huge new opportunity in applying Big Data analytic tools to administrative records. Data collected in connection with programs such as unemployment insurance and Medicare, and potentially even data from tax returns—with careful safeguards for individual privacy—could shed light on economic patterns over long periods of time. Such patterns are difficult to study with survey data. Building the data infrastructure that would facilitate research access to these databases and designing secure access protocols would open a wide range of issues for economic research. This is an area where European countries, especially in Scandinavia, are moving well ahead of the U.S. in providing data access, enabling the linking of multiple datasets, and gaining useful insights for improved policy design.

Can the U.S. and other developed nations continue to grow, or do they face slow-growth stagnation while developing countries such as China continue to grow rapidly?

Understanding the Causes of Long-Run Economic Growth. Economic growth is what fuels higher incomes, improved living standards, and the capacity to address national challenges.
But can the U.S. and other developed nations continue to grow, or do they face slow-growth stagnation while developing countries such as China continue to grow rapidly? At present, economic theory describes growth as dependent on inputs of human capital, investments in plant and infrastructure, and scientific and technology innovation, but there is no agreement on their relative importance or the optimal design of public policy to stimulate growth. Research on the linkages between public and private R&D spending, patenting and publication, and ultimate commercialization of ideas could provide new insights, as could greater understanding
of the role of education in improving economic growth. And such research would be facilitated by greater access to federal data bases with information on grants and on patents; by
measuring the impact of educational inputs through comparison of cross-state differences in K-12 education systems; and by tracking the international migration of science and techno- logy talent. Disparities in public policies toward entrepreneurship across states and countries
or in different structures for R&D tax credits or corporate taxes, also provide a valuable opportunity to assess the links between policies and outcomes. Research on such issues has the potential to be controversial, but it is also a critical step toward building consensus for policies that could reduce disparities and improve opportunities at local, state, and national scale. If improved policy design could raise the annual rate of national income growth by even a very small amount, it would have a dramatic long- term effect on living standards.