A colleague sent me this interesting Bloomberg article the other day: “Economists have lost the trust of politicians.” Is that true, and, if so, is it a plus or a minus?
Let’s first dispense with President Trump (there’s a thought . . .), whom the piece describes as “the extreme case” who takes “pride in doing the exact opposite of what mainstream economists would prescribe. . . . But if the economics profession were being honest with itself, it would have to admit that the problem goes deeper than . . . Trump.”
It is not hard to marshal facts as to why this might be the case. Queen Elizabeth II spoke for many when, after a deregulated finance sector helped inflate a housing bubble that ushered in a global downturn, she asked British economists, “Why did nobody notice it?”
In fact, a precious few, notably economist Dean Baker, explained what was happening vividly and in real time, but his warnings were ignored. Instead, politicians listened to Federal Reserve Chairman Alan Greenspan, who, after the crisis, proclaimed, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
The Bloomberg piece further argues that economists have largely lost politicians’ ears because they “haven’t had very useful solutions to the big problems politicians are being asked to fix,” including slow productivity and wage growth, the rise of inequality, an austere fiscal policy that has been highly damaging, and persistent regional disparities with profound political implications.
I’m sympathetic to these arguments, but I think the problem, as embodied in the Baker/Greenspan example, goes deeper, especially in the United States: It is the interaction of bad economic advice, wealth inequality and pay-to-play politics (I have a longer essay on this here).
Greenspan was merely riffing off Nobel winners who argued that rational behavior would lead financial firms to self-regulate, something that, for the record, more realistic economists have known to be false since Adam (Smith). Politicians who blather on about how introducing “market forces” into health care requires cutting public health programs have no problem finding top-flight economists to back them up (despite work in the 1960s from another Nobelist, Ken Arrow, showing how health care fails to conform to standard market assumptions).
Trump’s economics team is exhibit A in the current incarnation of this interaction: Its allegiance to disproved trickle-down policies has not only led to false claims that tax cuts pay for themselves, but it incessantly argues that it’s pro-growth to help the rich but anti-growth to help the poor.
To state the obvious, such economic arguments facilitate precisely the upward redistribution of income, wealth and power that has long characterized conservative politics.
But because economics is misused doesn’t mean it can’t be helpful, especially a realistic brand that does its best to take the world for how it is, not for what the (implicitly conservative) models say it should be. In this spirit, allow me to briefly tout some promising areas of work (follow the links for more).
Capital concentration: Based on the news that Apple’s market cap is now 5 percent of the U.S. GDP — $1 trillion — last week the New York Times reviewed a growing body of research into the extent that “the rise of so-called superstar firms is contributing to the lackluster wage growth, shrinking middle class and rising income inequality.”
Upward redistribution: Baker and others are busy documenting how policies with classical economic rationales, such as patents and intellectual property protections, are interacting with real-world politics to redistribute hundreds of billions in rents — basically, profits derived from protectionism — to the top of the wealth scale.
Regional disparities: Economists have typically argued that geographical mobility — “go someplace better” — was the solution to depressed areas. Now, some are digging deeper and thinking about policies to help grow jobs and investments in left-behind places.
Trade: Though this one is among the slowest to change, Trump’s ascendancy has forced some in our field to rethink whether persistent trade deficits are always as benign as we’ve assumed. There’s important work on the macroeconomic distortions of unwanted capital flows, recognition that under certain conditions, trade deficits mete out long-term damage to people and their communities, and even some rethinking of what trade agreements would look like if those at the table went well beyond the investor class.
Productivity and wages: Cutting-edge work by the Economic Policy Institute has documented the split between productivity growth and median compensation, and the role of weakened worker bargaining power in this critically important dimension of inequality.
The long-term benefits of the safety net: Using data that tracks people over their lifetimes, analysts have debunked overblown negative assumptions about near-term work disincentives and, most important, shown long-term benefits to recipients’ health, earnings and education.
Alternative fiscal policy: Empirical critiques have undermined the rationale for budget austerity in weak economies, even with elevated public debt. Also, some of us are hammering the rising importance of countercyclical fiscal policy, especially when monetary policy has too little firepower.
Given the deeply embedded, wealth-driven power play described above, it’s much harder than it should be for this work to break into the policy sphere. But many of these authors commonly advise politicians (e.g., Baker and I were recently consulted by Rep. Ro Khanna (D-Calif.) on a smart jobs program he introduced).
I suspect the problem isn’t that politicians aren’t listening to economists. It’s more that the wrong politicians are in control, and they’re getting the wrong economists to tell them what they want to hear.