economic theory – Sheila Kennedy

Economic Propaganda

I will be the first to admit that my knowledge of economics is incredibly superficial. (Perhaps I’m being defensive, but I suspect that “superficial”–or even “non-existent” also describes the technical economic expertise of most of my fellow Americans.)

As I previously explained, my recent reading about Modern Monetary Theory was prompted by the gift of a book on the subject; that book then triggered some additional research. (Calling my google searches “research” might be a misnomer…) At any rate, I found an essay from The American Prospect to be both interesting and “on point.”

The article was authored by Nick Hanauer, whose ability to explain matters in accessible and understandable terms has made him one of my favorite economic pundits.

If the basic foundation of Modern Monetary Theory (MMT) is that it is most closely based upon reality–upon the way that American monetary and fiscal systems actually work–the Prospect article provides additional evidence that far too many pundits and economists continue to assess policy using economic frameworks that are no longer accurate.

As the subhead says, “The alleged science doesn’t match up to the real world.”

The article focuses upon six myths that continue to muddy the waters of economic analysis.

Americans have been hammered for decades with an economic message that amounts to this: When wealthy people like me gain even more wealth through tax cuts, deregulation, and policies that keep wages low, that leads to economic growth and benefits for everyone else in the economy. And equally, that investing in you, raising your wages, forgiving your debt, or helping your family would be bad—for you! This is the trickle-down way of thinking about economic cause and effect, and there can be no doubt that it has substantially contributed to the greatest upward transfer of wealth in the history of the world.

You would think that trying to sell such a disastrous outcome for the broad mass of citizens would be incredibly unpopular. No politician would outright say they want to shrink the middle class, make it harder to get by, or reward hard work less. No politician would outright say that rich people should get richer, while everyone else struggles to make a decent life.

But this message has been hidden under the confusing, technical-sounding, and often impenetrable language of economics. Many academic economists do important work trying to understand and improve the world. But most citizens’ experience of economics comes from hearing a story—a narrative that rationalizes who gets what and why. The people who benefit from trickle-down policy the most have deployed economists to work their magic to tell this story, and explain why there is no alternative to its scientific certitude.

Hanauer points out that no economic model can fully reflect the “extraordinary complexity of human markets.” Models are intended to provide decision-makers with a sense–an overview– of the likely impacts of a particular policy proposal. But the assumptions upon which these models are based will determine their predictions. In other words, if the assumptions are wrong, the models will also be wrong.

And these models are deeply and consistently wrong…The problem is that few people take the time to explain what these faulty assumptions are, why they all promote the worldview of the rich and powerful, and why they shouldn’t be treated as science but as a trickle-down fantasyland.

Hanauer proceeds to explain–at length, and in language that non-experts can understand– what is wrong with six of those underlying assumptions:

public investments will “crowd out” private investment, and are by definition less productive than private investments.
workers’ wages are a direct reflection of their productivity.
higher taxes on corporations and high-income people reduce growth and investment.
investing in poor people reduces economic activity, and that immigrants are less productive than domestic American workers.
ten-year budget horizons are adequate for analysis.
performance is measured by looking at GDP and revenue– rather than overall well-being.

As Hanauer concludes:

Until we build models that reflect how the economy really grows, our leaders and the media should eye models from mainstream economists with skepticism. Models trying to convey the effects of policy should reflect the basic understanding that when more people have more money, that’s good for business. We need models that understand the basic principle that when the economy grows from the middle out, that’s good for everyone, and when more people participate in the economy, their consumer demand drives job creation and sparks innovation. In other words, our economic models must reflect the world as it really is—not as it was portrayed in the trickle-down Econ 101 classrooms of the 20th century.

All available evidence supports living in the world as it really is.

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Cities

A reader recently sent me an article from Governing addressing an issue near and dear to me: are people moving out of cities in significant numbers? Has the pandemic increased those numbers?

I’d seen a couple of New York Times articles about an exodus from New York City to “healthier” outlying areas, and of course, there is an ongoing debate about the sustainability of the national population shift from small town America to the nation’s cities. The article addressed two highly pertinent questions: are lots of people really leaving cities, and why do people move anywhere?

As most readers of this blog have figured out by now, I’m a “city girl.” (Well, “girl” might be stretching things…) I’m a huge fan of urban life, and a believer in the social and intellectual benefits of density and diversity, so I was interested in an article that looked at what the evidence suggested, rather than what various theories have propounded. And the article actually started by distinguishing theory from reality

There’s an old joke about economists that I’ve always liked. A junior professor goes to his senior colleague with a brilliant new idea. The older man dismisses it. “That may be fine in practice,” he sniffs, “but it will never work in theory.”

Economists are like that, at least many of them. They don’t like to have reality intrude on their abstractions. One of the best examples has to do with mobility. Years ago, I read an article by a prominent economist downplaying the problem of a small-town factory that spews out pollution. What’s the big deal, he asked. There must be another town nearby without a soot-belching factory. The residents of the first town could just move over there. Pretty soon the polluter would get the idea.

It works in theory. But it isn’t the way most people behave. They don’t like the idea of uprooting themselves. This may be because they don’t want to leave their friends and relatives, because they cling to hometown memories and traditions, or maybe because they just don’t feel like cleaning out the garage. In any case, they don’t move. Or if they do, they don’t go far away.

The article acknowledged the predictions that have been worrying me–the economic forecasts of an “outpouring of affluent Americans from virus-plagued cities to safer rural climes.” One libertarian predicted a flood of “fresh college graduates and new parents” lighting out for Mayberry, accompanied by employees no longer tethered to corporate buildings downtown. (This rosy scenario overlooks the fact that COVID is currently ravaging the nation’s “Mayberries.”)

So what does the evidence show?

There has been an outflow from many urban neighborhoods, but it hasn’t been very large. Last June, a careful study by the Pew Research Center found that 3 percent of Americans reported moving permanently or temporarily for reasons related to the coronavirus. In November, the number was up to 5 percent. That’s not a trivial number of people, but it’s far short of a national exodus…

It’s also interesting to see where those folks are going. The largest destination of people leaving San Francisco last year was across the bay, to Oakland and surrounding Alameda County. The three next most common destinations were all in the Bay Area as well. Other targets were Denver; Portland, Oregon; and Austin, Texas–not Mayberry.

Most people who did move cited economic reasons–job loss, especially–not the pandemic.

Most cities that lost population in 2020 didn’t lose it because of people leaving. They shed population because newcomers weren’t coming. In New York City, according to a McKinsey study, the ratio of arriving workers to departing ones was down 27 percent. This, too, is only common sense. Why would you move into New York when jobs were disappearing there? Similar numbers apply to Los Angeles, Boston and Seattle.

This has the makings of a significant event. Nearly all the big cities that gained or held onto population numbers in the past decade did so because of immigrants arriving from outside the United States. If they stop coming for an extended length of time, big-city populations could drop significantly even if the mass exodus continues to be a myth.

The racist assault on immigration has had an effect on cities. As the article notes, America’s most vibrant cities have become enclaves of affluent professionals and modestly paid service workers–the bulk of whom have been immigrants. If the immigrants stop coming, we’re likely to see a shortage of urban workers and a decline in demand for housing in many urban neighborhoods. That could make central cities more attractive, and not just to immigrants– it could fuel added arrivals by young professionals. Or…??

I’m sure economists will have a theory…

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Learning from Experience

I know I have harped on the dismaying extent to which our policymakers legislate on the basis of ideology rather than evidence, but I want to revisit that theme again today.

Several people have commented on my recent post/IBJ column about the drug war–and the enormous sums we continue to spend (in a time of austerity, no less) on a policy that everyone sentient knows has not only failed miserably, but in many ways has been counterproductive.

As a civil libertarian, I would have great qualms about the drug war even if it HAD been effective. But let me suggest another policy area where ideology has trumped experience.

It always seemed to me that the argument against confiscatory tax rates having a negative effect on job creation made sense. (Leave aside the question of what constitutes a “confiscatory” rate for now.) If I am a wealthy person, and I know that even a successful investment in a new factory or other job-creating enterprise will yield a minimal after-tax return, why should I take that risk? And even if lower tax rates leave me with more dollars in my pocket that I DON’T invest, filling my order for that fur coat and yacht creates jobs, too.

Unfortunately, experience has not supported that eminently logical proposition. As a number of economists have documented, job creation has actually IMPROVED after tax increases. Again, actual performance depends on how much of an increase, on what, and how steep the rate is following the increase. But increases in the general income tax rates have demonstrably NOT harmed job creation-quite the contrary.

There are many reasons why we have experienced this puzzling departure from theory. The most likely is that–contrary to the belief that people are “rational actors,” humans are more complicated, and what constitutes a “reward” or “incentive” will vary widely from individual to individual. I can attest that many academics who could make much more money in the private sector work as hard for the recognition of their peers as many private-sector folks work for financial rewards. (As I so often tell my students, “it’s more complicated than that theory might suggest.”)

The real question, however, is not why a particular, perfectly reasonable, theory didn’t hold up. The real question is, why do so many people stubbornly cling to the theory and ignore the evidence provided by actual experience?

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