There’s been a spate of recent books and articles trying to understand where economics went wrong and to offer a new path forward, in the sense of structuring the economy in ways that have greater potential to improve overall social well-being. As I’ve been paging through these analyses, I’ve been struck by what I think and hope is the promise of a fundamental change in the practice of economics.
Simply put, it is possible — though far from inevitable — that a new economics, one I’ll call “can-do economics,” could evolve in opposition to “can’t-do economics.”
When, a few decades ago, I began my career as a Washington political economist, it quickly became clear that a big part of the job of mainstream economists was to explain to well-meaning, progressive policymakers why they couldn’t do the things they wanted to do.
Initiatives such as raising minimum wages, pursuing very low unemployment, strategic government investments in certain industries, running federal budget deficits, regulating financial markets or reducing post-tax inequality through progressive taxation would all backfire. Wage mandates undermine “market equilibriums” leading to massive unemployment; too-low unemployment triggers spiraling inflation; if the government tries to pick sectoral winners, it will distort the market’s allocative efficiency; public sector budget deficits will crowd out private borrowing and push up interest rates; regulating finance will thwart its innovations; taxing the wealthy will kill their motivation, thereby hurting investment, growth and jobs.
All of this has turned out to be wrong. And now we have the potential to move from can’t-do to can-do economics. Minimum wage increases, budget deficits, low unemployment, industrial policy and so on not only can have their intended effects; they are necessary to offset structural economic inequalities. That’s not to say we can set wage floors with no regard to potential job losses or that historically large budget deficits and low unemployment will never pressure interest rates or inflation. But the evidence shows that we can’t assume the old, negative outcomes, and thus must constantly test the waters.
In contrast with the old school, can-do economics firmly rejects the assumption that the private economy will automatically settle into optimal conditions that policy actions can only distort. The central economic assumption must flip from equilibrium to disequilibrium. For example, we cannot assume “the market” will deliver full employment. In fact, while can’t-do economics was obsessed with preventing inflation, can-do economics is obsessed with getting to and staying at full employment. It begins from the recognition that power imbalances and excesses of unregulated capital will leave out large groups of people (often based on racial differences), inflate credit bubbles and pollute the environment. In can-do economics, market failures are not the exception. They’re the rule.
This is all 40,000 feet up, so let’s get granular.
— Can’t-do economics argued that unemployment below 6 percent, then 5 percent, then 4 percent, would lead to spiraling inflation.
— Can-do economics recognizes that we cannot reliably identify the lowest unemployment rate consistent with stable inflation, so we should allow the jobless rate to fall as low as it can and carefully monitor price and wage inflation.
— Can’t-do economics argued that public budget deficits crowd out private borrowing and lead to worse investment outcomes.
— Can-do economics recognizes that low interest rates relative to growth rates and global capital flows seeking safe U.S. government bonds significantly lower the economic costs of budget deficits. Thus, the government can often safely borrow to make productive investments.
— Can’t-do economics argued that inequality was a function of meritocratic outcomes, and to offset such outcomes through the tax code would dampen the incentives of the successful.
— Can-do economics recognizes that racial discrimination past and present, housing segregation, unequal access to the pathways of upward mobility, the fall in unionization and labor protections, and the rise of concentrated employer power means that market outcomes themselves are a function not of meritocracy, but of power imbalances.
— Can’t do economics argues that free trade is always worth pursuing.
— Can-do economics recognizes that there is no such thing as “free trade” (see, for example, patent protectionism that Big Pharma lobbyists got into the new NAFTA). Trade is managed by rules set up by trading partners, and these rules have winners and losers.
Now for the caveats, of which there are many. Whenever paradigms shift, there’s a danger of going too far in the opposite direction. As I noted, the relationships between unemployment and inflation or deficits and interest rates aren’t dead and must be monitored. Trade deals may be often corrupt, but trade flows can be highly beneficial — not just to us, but to developing countries that need capital to grow. In other words, avoiding protectionism is a value of both the old and the new economics. While lower fiscal costs support deficit-financed, productive public investments, that doesn’t mean dysfunction governments will spend wisely.
There’s also a risk that I’m leaning too far over my skis. I’ve long argued that what keeps the old economics alive, despite its constant empirical failures, is the deep-pocketed power structure that supports it. That’s why we keep getting trickle-down tax cuts that fail to pay for themselves or boost investment, as advertised, but simply exacerbate inequality. That power structure remains solidly in place, and it will use its entrenched power — its media access, bought-and-paid-for politicians and a think-tank network — to continue to elevate can’t-do economics.
But there is a new cohort of can-do economists (to meet some of us, see these links) and policymakers. Regarding the latter, I know they’re out there because every week I get an email from one of them asking, in so many words, “Why can’t we do X?” — where X is an idea prohibited by can’t-do economics. (I won’t name names because these are private communications.)
Good question, I reply. You can. Now go do it!