Sadly, that is the world in which we now live: In many areas of economic policy, initial studies turn out to be incorrect, yet they take on a life of their own, being quoted, cited and tweeted to such an extent that few people bother to question their veracity. Cognitive scientists refer to this as the “truth effect,” which occurs when people believe something simply because it is widely repeated. Here are four prime examples of urban myth economics in action.
“Small businesses are the font of job creation!” This myth originated in a 1979 research paper by MIT professor David Birch, who purported to show that between 1969 and 1976 two-thirds of jobs were created by small businesses. This was big news, and it remains conventional wisdom. However, economists scrutinized Birch’s analysis and reached different conclusions. Some pointed out that he had confused small establishments with small firms (e.g., calling a Citibank branch office a small business). Others have suggested it is not small firms that are the big job generators, but new businesses. Yet the myth persists.
“Technology is destroying jobs!” In 2013, Oxford’s Carl Frey and Michael Osborne touched off a technopanic with a study predicting 47 percent of U.S. jobs could be eliminated by technology over roughly 20 years. But the study suffered from major methodological flaws, such as relying on measures that led them to predict robots would replace fashion models, manicurists and barbers. Really? If you think robots will soon be cutting our hair, you’ve been watching too many “Jetsons” reruns. Yet even after about eight years of historically low U.S. labor productivity growth (if tech was destroying jobs, labor productivity growth should be increasing), the myth persists.
“Top earners are making off with all the income gains!” Thomas Piketty and Emmanuel Saez’s landmark 2003 study “Income Inequality in the United States, 1913–1998” found that the top 10 percent of earners took home 91 percent of income growth between 1979 and 2002, while median income declined 8 percent. It was an arresting discovery that reinforced many people’s assumptions. But the methodology was so flawed that even Piketty and Saez reached a different conclusion 15 years later, admitting that inequality had increased much less than that and median incomes had risen 33 percent — a 41-point difference. But most people continue to believe the earlier conclusion.
“Monopolies are jacking up prices!” Economists Jan De Loecker, Jan Eeckhout, and Gabriel Unger asserted in 2020 that the prices companies charged above their costs of production tripled between 1980 and 2016. Their analysis is regularly cited as evidence we have a monopoly problem. But it is just not true. If markups tripled, then why didn’t profits increase? And why did markups increase faster in smaller firms and in industries with lots of competition? The reality is that they mismeasured firms’ costs, ignoring growth in spending on marketing, software and R&D.
Demonstrably wrong though these myths may be, they have had a very real impact on policy: Birch’s job-creation myth led policymakers to favor less efficient small firms over more efficient larger ones, showering them with tax preferences and other benefits. Frey and Osborne’s job-destruction myth has led policymakers to entertain anti-growth schemes such as taxing automation equipment. Piketty and Saez’s inequality myth has led many policymakers to abandon their faith in growth in favor of only redistribution. And De Loecker, Eeckhout and Unger’s price-markup myth has fueled the “anti-monopoly” fire, which holds the potential to distort U.S. antitrust laws in ways that will damage growth and innovation.
There are many possible explanations for why urban myth economics persists, from the reward structures of academics and journalism to increased political polarization incentivizing advocates to use myths to drive their preferred policy changes. Whatever the case, it is incumbent on academics, think tanks, pundits, journalists and policymakers to be more careful. As the old saying goes, “A lie can travel halfway around the world while the truth is still putting on its shoes.”