Economists have long been shunned by politicians for their annoying habit of reminding people that changes to economic policy help some people while hurting others. This truth is summarized in the mantra, “there’s no such thing as a free lunch.”
While economists’ evangelizing of this truth often makes them no fun to be around at parties, a frank understanding of both the costs and benefits of policy changes is crucial to effective policy intervention.
Consider a few currently relevant examples. First, the potential impact from President Donald Trump’s frequent haranguing of Federal Reserve Chairman Jerome Powell to lower the short-term interest rate known as the Federal Funds rate. A decline in this interest rate will very directly impact short-term interest rates in the economy, and is an important factor in determining longer term rates.
President Trump’s desired decline in rates is great for firms that are wishing to borrow money to develop new products, open new markets, or increase productive capacity. Similarly, lowering interest rates often helps households interested in making large, debt-financed purchases like homes and cars. Real estate developers and those who otherwise supply the needs of these households and firms benefit.
On the other hand, these lower rates harm savers by decreasing the return that they can earn on their savings, while disadvantaging firms that have less access to capital markets. Furthermore, lowering interest rates during periods of economic growth tends to push up prices, which erodes the value of households’ savings and the purchasing power of workers’ wages.
For a second example, consider the recent tariff deals struck by the U.S. with the European Union. While details of the implementation of the deal are scarce and leave a lot of room for changes in the costs and benefits of their implementation, a general reduction in tariffs charged by EU countries and an increase in tariffs charged by the U.S. on imports from Europe produces both winners and losers in the American economy.
Those who provide goods that will see increased exports to the EU (weapons manufacturers, for example) will be helped by the new agreement, while households that purchase imported goods from Europe (e.g. Italian fashion, German cars, or French cheese) will see increased prices at online retailers, car dealerships, restaurants and grocery stores.
Finally, consider the passage of the Big Beautiful Bill in July. This bill, which lowers tax rates for some households, also increases the debt burden that future generations will have to bear and removes Medicaid benefits from some users.
That there are winners and losers from any policy change does not mean that it doesn’t matter what economic policies are implemented when thinking about the society as a whole.
A common feature of many policies is that they have concentrated benefits and diffuse costs. For example, trade negotiations with the EU included a provision requiring EU countries to purchase more armaments from American manufacturers. This has the potential to increase profits at American defense manufacturers substantially, enriching the owners of these companies greatly. However, these benefits to defense contractors will be offset by the increase in prices that Americans face on imported goods.
As an example of the potential magnitude of this effect, a 0.5% increase (about $239 per person) in per capita personal consumption costs in the U.S. spread across the country’s 340 million residents implies an increase of $81 billion dollars per year in the cost paid by American households. (Any cost increase multiplied by 340 million residents will be a big number).
Understanding who benefits from a policy and who pays the costs, and in what quantities, is one of the most important ways of understanding how a policy will change the nature of an economy. Some policies, particularly those that place large restrictions on naturally occurring prices as do broad-based tariff policies, reduce the market’s natural ability to allocate resources to the places where they are most valued and encourage investment in industries that do not add as much value to people’s lives.
Understanding the extent to which the costs of a policy outweigh the benefits depends on how much one values the happiness of different groups within the society, as well as the empirical reality of changes in quantities produced and prices charged.
The complexity of measuring the impacts on a dynamic economy of substantial changes in tariffs, an expansionary budget bill, and potential political influence on interest rates is a complicated task. Luckily, there are individuals who have trained for years to do just this.
Economists and statisticians at the Bureau of Labor Statistics, the U.S. Bureau of Economic Analysis, and the Federal Reserve, as well as many other government agencies and universities across the world, have received graduate degrees and devoted their professional lives to helping to ensure that we are, as accurately as possible, measuring the fundamentals of the economy correctly. While I do not know every employee working on these difficult and important measurement tasks, those with whom I have interacted are intelligent, competent, and professional individuals who perform their work to the highest standards. The training they have received includes decades of accumulated wisdom in measuring things like employment, prices, output, investment, and many other indicators of the health of the economy.
As a country, we allocate resources to this task in order to understand how policies like changes in tariffs or taxes are impacting the well-being of American businesses and households. The U.S. has been revered throughout the world for the accuracy and impartiality of this data collection process.
On many levels, the non-political nature of economic and social data collection helps businesses and households understand when to buy cars and homes and how much to save for their children to go to college. It helps businesses decide whether they should build a new factory or hire more workers. It also helps Federal Reserve officials decide on whether interest rates should go up or down.
On August 1, President Trump fired Bureau of Labor Statistics commissioner Erika McEntarfer because, in his words, “In my opinion, today’s Jobs Numbers were RIGGED in order to make the Republicans, and ME, look bad.” With this firing, the President placed an asterisk by future estimates done by the BLS and potentially other agencies. Investors are likely to begin asking, “what would the number have been if the agency head was not afraid that they were going to be fired for reporting something that makes the economy look bad?”
There is little evidence to suggest that the BLS’ estimates were politically motivated. Revisions to employment numbers are a regular occurrence and do not, on their own, constitute evidence of political behavior on the part of the BLS. This move, however, puts America’s reputation for apolitical statistical measurement of the economy at risk - as it does the American public’s ability to trust future estimates of important economic quantities.
This risk reduces the ability of businesses and households to trust the data generated by the government which makes it more difficult to make wise decisions about the future. It also increases the administration’s ability to mask the true impact of the policies that they implement.
The firing of trained, competent, statisticians, economists and analysts, a practice strongly associated with autocratic countries where statistics can be manipulated by dictators wanting to manage perceptions of government success, also has concentrated benefits and diffuse costs.
The administration benefits from getting to spin the economy’s performance in a way that is counterfactual and beneficial to them. American households bear the cost through decreased ability to make decisions based on the underlying reality in the economy, as well as a decreased trust in the institutions of government that have, in part, led to America’s economic miracle.
The cost-benefit calculation is clear. The executive branch of government should do what it can to strengthen the credibility of the branches of government that collect and disseminate economic data. Firing Commissioner McEntarfer, a well-trained and experienced analyst and administrator, hurts the American people’s ability to understand the impact of the dramatic changes in economic policy undertaken by the current administration.