• February 19, 2015

February 19, 2015?Do you like\r\nto shop online and buy cheap gasoline? If so, you might want to save some of\r\nyour gratitude for economists.

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That?s the message from Robert\r\nE. Litan, arguing that his profession has contributed to business and\r\ntechnological innovations in recent decades. Litan made his case to economists\r\nand analysts at Nathan Associates as part of the firm?s ?Economists Present?\r\nseries.

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Yes, economists failed for the\r\nmost part to warn of the financial crisis and Great Recession of 2007?2009.\r\nThis failure by the relative handful of economists who engage in forecasting\r\nhas severely damaged the profession?s reputation.

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But economists can also be\r\nthanked, at least in part, for the policy changes that enabled the Internet to thrive\r\nand U.S. oil and gas production to boom, said Litan, author of Trillion Dollar Economists (Wiley Press\r\n2014)?the title representing an attempt to quantify their contribution.

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Economic thinking and\r\nstatistical techniques also underlie auction-based selling of ads at Google,\r\nconditional pricing for travel booked at Priceline, inexpensive index-based\r\nmutual funds, the ?Big Data? revolution, and predicting how professional\r\nathletes will perform, Litan said. Even successful matchmaking?of men and\r\nwomen, organs and donors?has an economic underpinning.

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?We?ve had a huge impact and\r\nnobody realizes it,? said Litan, who has four decades? experience as a lawyer\r\nand economist in government, think tanks, private practice, and business. Litan\r\naddressed his book to a business audience among other groups of readers,\r\nincluding economists themselves, ?who short sell themselves, don?t understand\r\nhow influential and important they really are.?

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The Internet Revolution

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Deregulation of air\r\ntransportation and trucking in the late 1970s and early 1980s, combined with the\r\nbreakup of AT&T?s telecommunications monopoly in the 1980s, cleared the way\r\nfor the Internet?s explosive growth. Internet retailers would not have been\r\nable to ship rapidly under regulations that existed before 1980, and AT&T?s\r\nbreakup sped the replacement of copper telephone wires with fiber optic\r\ntechnology?the ?backbone of the Internet.?

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?It is not at all clear that\r\nSergey Brin and Larry Page, founders of Google, or Jeff Bezos, the founder of\r\nAmazon, would have been interested or able to launch their now iconic companies\r\nhad not the Internet been ready for them when they had hatched their ideas and\r\nwere ready to implement them,? Litan said. ?The breakup of AT&T, an idea\r\npromoted by economists, helped make the timing right.?

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Transportation would not have been\r\nderegulated ?without many years of prior economic research, and most likely\r\nwithout articulate economists? like Alfred Kahn, Elizabeth Bailey, and Darius Gaskins\r\nin government positions, ?and their economist appointees in key regulatory\r\npositions,? said Litan, who previously served in the White House Budget Office\r\nand as an attorney in the Justice Department?s Antitrust Division.

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Oil and Gas Boom

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Economists played an ?unsung\r\nrole? in the surge of U.S. oil and gas production, starting with the Ford and\r\nCarter administrations. Economists ?were instrumental in decisions dismantling\r\nenergy price controls? after controls under Nixon and Ford caused gasoline and\r\nnatural gas shortages.

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When energy prices again rose\r\nin the 2000s, politicians refrained from attempting controls, and ?higher\r\nprices did what economists predicted they would do??created an incentive to exploit\r\nnew sources through twin horizontal drilling and fracking.

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?So score several points for\r\nthe technologists and risk-taking oil and gas production companies, but score\r\nat least one point (maybe two) for the economists in the background,? he said.

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Responding to Future Crises

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More economic ideas are on the\r\nshelf awaiting implementation by businesses and policymakers?most likely in\r\nresponse to crisis.

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Congestion (or value) pricing\r\nfor roads?such as charging more to drive in high-traffic areas?will become\r\neasier to impose when political gridlock paralyzes public highway spending,\r\nleading governments to authorize more private roads. Premium\r\nsupport?vouchers?for the Medicare eligible population will eventually be\r\nadopted as more people age and medical costs rise. A carbon tax to mitigate\r\nclimate change has a chance, especially if combined with a reduction in the\r\nsocial security tax to preserve revenue neutrality. Don?t be surprised if\r\nCongress adopts a consumption or value-added tax to narrow deficits.

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Some other innovations: ?pharma\r\nbonds? to raise money for clinical trials, and financial instruments based on\r\nhousing prices to prevent another financial crisis.

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International Development

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Litan, who has also written\r\nabout entrepreneurship and capitalism, will tackle international development in\r\nhis next book. Like his friend the Peruvian economist Hernando de Soto Polar,\r\nLitan is interested in the role of property rights and the informal economy in global\r\ndevelopment.

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Litan was shocked that\r\nenhancing property and contractual rights was omitted from the Copenhagen\r\nConsensus Center?s list of top policy interventions to promote growth and\r\nadvance living standards. ?It?s not sexy enough,? he said.

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Vast numbers of ?visible yet\r\ninvisible? people exist without an identity on record, depriving them of access\r\nto benefits, property, or finance, unknown even to the states where they live.

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?Getting plugged into the rest\r\nof the world is the development challenge of our time,? he said.

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