Some responses to the responses to my “4-economic mistakes” piece.

July 22nd, 2019 at 8:54 am

I got lots of interesting feedback on a piece I wrote for Vox about long-held but empirically wrong assumptions in some key areas of economics, assumptions that have been asymmetrically harmful. That is, their costs consistently fall on those with low- and moderate incomes and their benefits help the wealthy.

Some argued that I didn’t go far enough. Dean Baker, a friend and frequent co-author, argued that I pulled punches regarding globalization, which “…was designed to hurt workers. We could have had globalization where we reduced IP barriers and trade in professional services (e.g. doctors).” (Baker explores such themes in his book Rigged, a close, older cousin of themes in my Vox piece.) Various respondents added other harmful policies supported by bad economics, such as Kevin Drum’s reference to supply-side tax cuts.

But the main complaint was that I was too blaming of economists, not all of whom promote these wrong ideas, and that I conflated economists and policy makers. In fact, I explicitly tried not make that conflation in the piece, which starts with arguably the most important economic official in the world, Fed chair Jerome Powell (a lawyer, not an economist, but still…), agreeing that estimates of the “natural rate” of unemployment have been too high.

On globalization, I emphasize that trade theory itself is very clear that expanded trade generates winners and losers, and explicitly tagged policymakers:

“But the theory never said expanded trade would be win-win for all. Instead, it (and its more contemporary extensions) explicitly said that expanded trade generates winners and losers, and that the latter would be our blue-collar production workers exposed to international competition. True, the theory maintained (correctly in my view) that the benefits to the winners were large enough to offset the costs to the losers and still come out ahead. But as trade between nations expanded, policymakers quickly forgot about the need to compensate for the losses.”

But I also want to be careful to not be overly exonerating. In trade debates in the 1990s, as any Economic Policy Institute veteran will tell you, pure win-win arguments, like the one I pulled out of the 1994 Economic Report of the President, dominated among economists. EPI’s arguments that elevated the plight of those hurt by trade were treated as heresy, and not just by politicians trying to pass NAFTA, but by economists. Just ask EPIers like Rob Scott, Thea Lee, and Larry Mishel, who have the scars to prove it.

On the minimum wage, I personally recall debates with economists—and such debates persist to this day (though I readily grant that there are now fewer of them)—that essentially argue “if you raise the price of something, people will buy less of it, full stop.” As Robert Cherry reveals in this survey of older textbooks, the notion that increases in minimum wages could help low-wage workers was, as I said, treated as akin to believing that water flowed uphill.

Also, the piece stressed the point that prominent, powerfully placed economists were motivated by “crowd-out” arguments in the pretty recent past.

To underscore a theme that maybe didn’t come across strongly enough, excellent, evidence-based work is throwing off many of these old chains. The piece was again explicit about the important minimum-wage analysis by economists to test the assumption that increases mostly harm their intended beneficiaries (I mention the late Alan Krueger, as he was a trailblazer, but he was far from alone). There’s been similarly important work on the folly of budget austerity, like the renown Blanchard analysis I review here. So, while I understand where my fellow econo-travelers would take umbrage (justifiably provoked by some of the writing), the point is not that every economist always makes these mistakes. It’s that these mistakes were, and in some cases, still are, made with high frequency, and at great cost. There’s even a credible argument that the denial of trade’s downsides helped elect Trump, especially when you consider how the geography of the electoral college intersects with the people and places most hurt by expanded, imbalanced trade.

Something else I didn’t emphasize enough is that none of these relationships is etched in stone. The Phillips Curve could steepen (i.e., the negative correlation between unemployment and inflation could revive); excessive public borrowing could push up interest rates; it’s of course possible to set the minimum wage too high. The key economic point of the piece is that these, and every other asserted relationship in economics, must constantly be empirically evaluated. (The “constantly” is important. Elasticities change over time.)

The key political point is that the first-order assumptions I challenge invariably support capital over labor, and that this power bias is a big reason such bad economics persist, even in the face of better economics.

Finally, a few people asked what we should do in the four areas upon which I focused. I’ve written reams about that and don’t have the patience to dig up links. But on estimates of the too-high natural rate, the key is to be evidence-based, as was/is the practice of the Yellen/Powell Fed. Absent price/wage pressures, realized and expected, it’s hard to make a convincing case that actual unemployment is below the “natural rate.” On globalization, I’ve written tons on ideas to help, some of which I tick off in the piece. On austerity, see the link above re the Blanchard piece re good debt, bad debt. On the minimum wage…raise it!

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3 comments in reply to "Some responses to the responses to my “4-economic mistakes” piece."

  1. Rick McGahey says:

    Regarding trade, NAFTA, and compensating the losers, Jared is exactly right. I was staff director of the congressional Joint Economic Committee. During the NAFTA debate we fought on the economics with the Clinton administration. We put together an aggressive compensation program for those who would lose their jobs, in part trying to call the bluff of those who said there would be such massive gains from the treaty. But such a program was not central to the administration’s push for NAFTA, along with a refusal to enshrine labor rights directly in the agreement, etc. We also documented that the econometric studies used to argue for NAFTA were based on a very few models that were just recycled and re-published under a lot of different banners, making it look like there were more pro NAFTA analyses than there actually were.

    • Jared Bernstein says:

      Thank you! Those are the sort of facts I remembered, but too vaguely. Such history is very germane these days.

  2. Nick Estes says:

    I’m sorry I didn’t see this when it came out. I certainly agree with your observations and find it well-argued.

    As to crowding-out: virtually all your economist friends and colleagues (and the CBO) still believe that higher deficits will cause higher interest rates–eventually. (See Furman & Summers in Foreign Affairsm or William Gale’s book “Fiscal Therapy”.) They say Modern Monetary Theory is wrong for rejecting what to them is a truism. The problem is that they simply haven’t absorbed into their worldview how banks actually work. There is no limited supply of loanable funds such that increased borrowing by the federal government is competing with funds for private business. Banks create the money when they make a loan. The LM curve is horizontal at an interest rate structure essentially dictated by the Fed. Moreover, when the government deficit spends, it introduces new savings into the economy (cash or Treasury bonds). Financing the deficit doesn’t subtract from “national savings”. This is WHY the interest rate hasn’t risen. The Fed can simply control it because the supply of loanable funds is infinite.

    You correctly praise AOC at the end of your piece. Keeping an open mind about new understandings like this is what she is all about. Thanks.