Are economists contributing to the well being of society?  In the midst of our ongoing macro challenges, a huge food fight had broken out among macro bloggers but let's not forget micro.  Today, the NY Times provides a good example of why economic models are useful.  In this article about the foreclosure abuse settlement, the reporters are concerned that this legislation will reward banks for activity they would have engaged in even in the absence of the settlement.  To quote one source in the article; ""The credits over all, Mr. Black said, “are a pretty sweet deal for banks since it gives them a pat on the back for what they are already doing.”"


So, we are back to basics and asking "who is at the margin?"  Intuitively, how much would the price of a meat pizza have to fall by to induce a vegetarian to eat one? How much would the price of gas go up by to induce Dick Cheney to buy a Prius?  


Returning to the foreclosure settlement, an economic model is needed to predict which banks and how such banks will change their behavior when they face the new rules of the game embodied in the Foreclosure Abuse Settlement.   Note that this requires a "counter-factual" analysis.  We need to estimate how for profit banks would have acted in the absence of the regulation and how they will act when faced with this regulation.  By comparing these two outcomes, we can measure the benefits of this regulation.  A simple before/after comparison that compares the actions of banks before and after the regulation isn't good enough because the pre-regulation period may not be an "apples to apples" valid comparison with the economic conditions that the banks face today.  


In a world where you do not have a twin and cloning is not allowed, how can we know what would have happened to you had you made other choices.  For example, I have been a Professor at UCLA for 6 years now.  Who would I be now  (in terms of research productivity, hair loss etc) had I remained at Tufts for the last six years?  To answer this, we need a model of individual choice!  Such a model will be a constrained optimization problem featuring the decision maker's goal subject to  the constraints he/she faces where regulation is an additional set of constraints and incentives.  


In my West Wing (Aaron Sorkin) fantasy world of policy making, policy makers would engage with academic economists and have a credible estimate of the benefits and costs of a given policy before it is enacted. The NY Times appears to be mocking this policy saying that its marginal effect on banks will be small because everyone is "infra-marginal".