We humans make a big deal out of years that end in a zero, as they lead us to contemplate another decade gone, a new decade ahead. For economic policy, the 2010s were particularly important for the way they overturned some critical pillars of conventional economic wisdom. Here’s my rundown of the most important lessons, with links to data to provide evidence for the claims.
1. The unemployment rate can fall a lot lower than most economists thought without triggering inflationary pressures. This might be the biggest insight of the decade, as it has led the Federal Reserve not just to facilitate the lowest jobless rate in 50 years (currently 3.5 percent), but also to admit that it doesn’t really know the lowest unemployment rate consistent with stable inflation. The Fed used to think that rate was 6, then 5 and now 4. But as the figure shows, unemployment has been at or below 4 percent for close to two years, and inflation remains below the Fed’s 2 percent target. Given that a big part of my life’s work has been to document the benefits of full employment to economically vulnerable groups, you can understand why this one comes first.
2. Budget deficits cannot be assumed to place upward pressure on interest rates. As the decade closes, fiscal policy is into an unusual experiment: running large budget deficits alongside low unemployment. Standard economic theory would predict such fiscal policy would lead to overheating in terms of higher inflation and interest rates. Yet both remain at historically low levels. What changed? For one thing, global capital flows increased, as investors found in U.S. Treasury bills a safe haven for their excess savings. For reasons I articulate here, this doesn’t mean deficits no longer matter. (Should interest rates rise, for instance, our debt service will create a heavier burden than would otherwise be the case.) But it does, or at least should, pry open what has been a terribly cramped debate dominated by deficit hawks who argued, against the evidence, that unless we balance the budget, interest rates will soar. Much as the first lesson provides the chance to run hotter-for-longer labor markets, this one opens the possibility of using deficit-financed investments to help people and places long left behind.
3. Weak worker-bargaining power has long been a factor driving inequality. In the past decade, the increasing clout of certain employers has joined the mix. As large employers have come to dominate certain industries — Apple in tech, Facebook in social media, Amazon in retail — they’ve been able to control labor standards within their industries, a development that has been helped along by the federal government’s abandonment of such standards as minimum wage, overtime rules and employee classification (misclassifying regular workers, protected by various workplace laws, as independent contractors). What’s interesting is that companies such as Amazon don’t use their clout to fatten their margins by jacking up prices; they do so by pushing down labor costs and blocking unions. (Amazon founder and chief executive Jeff Bezos owns The Washington Post.)
4. Progressive health-care reform, wherein the government plays a larger role in coverage and cost control, works. The decline in the share of Americans without health coverage following the implementation of the Affordable Care Act is one of the greatest policy accomplishments of the decade. These coverage gains happened as health-care price growth slowed to the extent that cost projections of government spending on health were much higher before the ACA than after it, especially for government-financed health care. (See this figure.) That is, we were able to cover all those people, mostly at government expense, and spend less than we thought we would. Now, if the complicated, “kludgey” ACA can achieve those results, imagine what a single-payer plan could do!
5. Trickle-down tax cuts (still) don’t work. They neither boost business investment nor “pay for themselves,” as their advocates claimed they would. Instead, they rob the Treasury of much-needed revenue and exacerbate post-tax inequality. Obviously, I’m referring to President Trump’s 2017 tax plan. The sad truth about this one is we already knew trickle-down was fairy dust, so chalk this up to yet another harsh lesson of what goes wrong when government becomes a fact-free zone.
6. Antipoverty programs don’t just reduce poverty today, they improve the outcomes of their beneficiaries many years hence. A fascinating and important strand of research that developed over the past decade took advantage of data that tracked children into adulthood, examining outcomes for kids from low-income families with and without government assistance. Consider the Supplemental Nutrition Assistance Program. Most people think SNAP is a consumption program that raises the ability of recipient families to meet their basic needs, which it does. But as this figure shows, it’s also an investment program, with long-term benefits for children in households that receive it, improving health and educational outcomes. Similar results are associated with Medicaid and refundable tax credits.
7. A tax on carbon may be the best policy to fight climate change, but given the forbidding politics, we’d better find a substitute — fast. A decade ago, the cost of a gallon of gas was $2.60. Today, it’s $2.54. Consider that in the context of all we’ve learned over the decade about the environmental damage caused by burning fossil fuels, and you may agree with me that this is the most fatefully misleading market signal of our time. Economists, myself included, tend to believe that the best way to fight climate change is by correcting that faulty price signal through a carbon tax. But we must admit that our politics will not support such a change: Carbon-tax initiatives failed multiple times in Washington state, of all places. So we must consider other ideas, like the Green New Deal, that focus less on directly raising the cost of fossil fuels and more on generating the politics that will support deep investments in renewable energy.
There are, of course, other economic lessons. The past few years offer another relearning opportunity: Trade wars don’t work. Two important lessons came at, or even a bit before, the beginning of the decade: One, absent adequate regulation, financial “innovations” will blow up the economy. Two, when they do, good old-fashioned Keynesian stimulus helps put it back together. One huge lesson that’s as much politics as economics is that ignoring people and places hurt by globalization, as both political parties did for years, is terrible policy and even worse politics, especially given the intersection of these places with the geography of the electoral college.
And then there are the lessons I’m overlooking, surely a long list — and a reminder that the other thing that happened over the past decade is that we all got 10 years older. In that spirit, thanks for following my column, and seasonally adjusted greetings to all!