A Real-World Economist: Krueger and Empiricists Challenge Theorists
By LOUIS UCHITELLE
PRINCETON, N.J. -- As he pulled up the charts one after another on his office computer, Alan Krueger grew enthusiastic. Children do better all through their schooling, he declared, if by fourth-grade they have spent just one year in a class of only 15 students. The tall green bars and rising red lines on Krueger's charts told the story in simple-to-understand detail. Poor children in particular are helped by early attention from a teacher.
"Small classes later on may have less impact," Krueger said, rehearsing the punch line of a speech he would give a few days later. "I infer that very young children become socialized in a small class. They learn how to behave in school. They are more likely to take the SAT exams in high school, and to earn more later as workers."
Empirical economists talk that way, as if each finding is a nugget of fresh, significant insight. Many are. No group within the profession is challenging accepted wisdom more vigorously. But Krueger does so rather cautiously. For all his enthusiasm, he is reluctant to prescribe small classes as national policy without more research.
There is a reason for his hesitation. Empirical economists may be increasingly pressing theorists, but abstract thinkers still dominate academic economics with their explanations of how people and markets behave. Theory, for example, says that employment should fall when the minimum wage rises, but empiricists have uncovered exceptions. And for all the profession's emphasis on education as the key to higher earnings, economic theory fails to provide a blueprint for improving learning. Empiricists are trying to fill the breach with studies like Krueger's.
Many are less than a decade out of graduate school, which makes Krueger, a 38-year-old Princeton University professor and the editor of the prestigious Journal of Economic Perspectives, already an elder statesman of the growing empirical movement. It is bringing to economics what amounts to a reality check.
"Theory is being forced to be much more specific," said George Akerlof, a theorist at the Brookings Institution who, like some others of similar bent, is now doing more empirical work. "The whole intention of empirical economics is to force theory down to earth."
And the profession is paying heed. The John Bates Clark Medal, awarded by the American Economic Association every two years to an outstanding economist in his 30s, has gone to empirical economists the last two times. In 1995, the winner was David Card, a frequent collaborator of Krueger's, and in 1997 to Kevin Murphy at the University of Chicago.
Krueger is frequently mentioned as a candidate for this year's award, to be selected this month. So is Andrei Shleifer of Harvard, a Russian-born empiricist, whose specialty is the study of financial markets operating in different legal and political settings. There are other possibilities as well for perhaps the most prestigious award in economics short of the Nobel.
Empirical economists test a theory or a belief by coming up with just the right data or observations. Krueger likens the process to medical research, where a drug is the equivalent of a theory or belief and the empirical work is the testing among thousands of people, some of whom get the drug and some a placebo. He came to his conclusions about class size after tapping into a Tennessee study of 11,600 children who had been placed randomly in small or large classes.
Public schools might work just fine if tax money were channeled to the right programs, like small classes for very young students, says Krueger, whose mother and wife are public school teachers, and whose two children attend a public elementary school here. So why doesn't he campaign for such reforms?
"If you ask, 'Why am I cautious,' there are two reasons," he said, talking across the wide, curved desk in his sunny office. "The strength of a researcher is not in being an advocate, but in making scientific judgments based on the evidence. And empirical research teaches us that nothing is known with certainty -- even the class-size results, which seem so definitive."
That reluctance is at odds with Krueger's public profile. A Democrat, he served as chief economist at the Labor Department in 1994 and 1995. The journal he edits has a circulation of 25,500, making it the most widely read in the profession. He pumps out half-a-dozen research papers a year, a considerable pace in economics, and travels every other week to seminars and conferences. "What I like to do is give the data its own voice," he said.
Inevitably, however, Krueger is asked for recommendations. What, his audiences want to know, should be done? That's when he balks. He is not in the business of making value judgments, he insists. Once economists get caught up in value judgments, they become reluctant to accept the findings of their own research when the findings contradict their beliefs. "Astronomy was plagued until the 16th century," he said, "by value judgments about the centrality of man."
So he declines to advocate President Clinton's proposal to spend $12 billion to reduce class size nationwide. Convincing as it seems, the Tennessee experiment, started in 1986, is not sufficient, he says. Further research is needed involving at least 12 states. "Economics has to construct theory very slowly, block by block," he said. "There is no other choice."
Krueger's cautiousness represents one strong faction of empirical economics. Edward Leamer, at the University of California at Los Angeles, belongs to another, less diffident group. He insists that theory and findings be yoked together, early on.
Leamer studies the impact of trade on American wages. His thesis is that there is an impact, one broader and more complicated than standard theory has acknowledged. An apparel worker, for example, driven from his job by cheap imports, may seek work as a waiter or warehouse hand, perhaps driving down wages in those fields. A few years later, apparel imports decline, but Japanese machinery imports rise and machinery workers accept a wage freeze. The impact on wages continues, with different evidence.
"Economics is so theory-driven," Leamer said, "that until you have a theory that explains your findings, people will retain the old theory. You need new theory to drive out old theory."
Krueger resists that lesson, but he is still reeling from it. So is Card, now at the University of California at Berkeley. A minimum-wage study they did in the early 1990s, while Card was at Princeton, has brought them much more notoriety than they ever anticipated. They found an eye-catching exception to the theory that employment falls when the minimum wage rises.
The study was very much in character for Krueger, who has a knack for spotting what empiricists call "natural experiments," where chance circumstances usually create the experimental variables. (In laboratories, in contrast, scientists can control the variables much more precisely.) Card, for instance, now wants to study what happens when affirmative action is eliminated, as it has been at the University of California. Krueger came up with a question that can be answered empirically: What are the best black students doing, turning to universities elsewhere or still enrolling in California?
"If you look at my curriculum vitae, you will find more papers that no one has read than in Alan's, 10 to 1," Card said. "He does not waste time on research he does not consider important and practical."
Their minimum-wage research, initiated in the late 1980s, soon after Krueger got his Ph.D. at Harvard and came to Princeton as an assistant professor, seemed important to both of them. Their first studies involved California. But when New Jersey in 1992 raised its minimum to $5.05 an hour from $4.25, they jumped at the opportunity for a natural experiment.
Entrenched theory holds that supply and demand tend to balance each other. When the minimum wage rises enough, as it did in New Jersey, then demand among employers for minimum-wage workers declines. So when Krueger and Card surveyed fast-food restaurants in New Jersey, compared them with nearby Pennsylvania, where the minimum was unchanged, and found no impact on employment, there was an uproar. They published their study in 1994, just as Krueger started at the Labor Department, where his boss, Robert Reich, was pushing for an increase in the minimum wage, later enacted. Card-Krueger, as they came to be known, were accused by some economists of shoddy research for a political goal and blithe disregard for theory.
"They don't root their findings in existing theory and research," says James Heckman, a University of Chicago labor economist and empiricist. "That is where I really deviate from these people. Each day you can wake up with a brand-new world, not plugged into the previous literature."
Krueger and Card have reaffirmed their minimum-wage findings. They insist that what happened in New Jersey could be explained without upending supply-and-demand theory. Special circumstances played a role. The New Jersey minimum had been unusually low. Employers found they could fill vacancies more easily at the higher wage, and employee turnover fell, two cost savings. Another wage increase might indeed reduce employment, Krueger says.
But for all his caution, standard theory is no longer the same in his eyes. "We tested the supply-and-demand curve," he said, "and it needs to be amended."
Empirical economics blossomed in the mid-20th century, feeding on the growing quantities of economic data the government collected and the new polls that explored consumer attitudes and behavior. "There was this outpouring of data in the '50s and '60s, and then it became dangerous, all these numbers and not enough theory to organize them," said.
Theory, with its emphasis on abstract, mathematical modeling, took command by the 1960s. Only in the last decade has empirical economics gradually regained a footing, first in labor economics and then in finance, education and trade. Computers make the data easier to process.
By the early 1990s, nearly half the articles in economics journals dealt with empirical research, up from 27 percent in 1960, one study showed.
Krueger grew up in Livingston, N.J., where his father, an accountant, still practices. His mother taught first grade in nearby East Orange. "The Worldly Philosophers," Robert Heilbroner's tales of the great economists, first aroused his interest. But he followed his sister, Barbara, to Cornell and enrolled in its School of Industrial and Labor Relations, thinking he would become a lawyer. "It seemed like what people went into," he said, "and I had seen the movie 'Norma Rae."'
His goal soon changed. As research for a paper, he found himself analyzing data on productivity and wages, a typical empirical inquiry. He took to the statistical detective work. From Cornell he went on to Harvard, earning a doctorate in economics in 1987. Within weeks of graduation, he had landed at Princeton, thanks to a chance encounter with Orley Ashenfelter, a Princeton labor economist.
There he soon fell in with Card, forming one of the more enduring collaborations in economics. It is a collaboration, as Ashenfelter put it, that "reports results neither man had anticipated beforehand."