Economics 101, Economism, and Our New Gilded Age

By James Kwak

My new book—Economism: Bad Economics and the Rise of Inequality—is coming out on January 10 (although, of course, you can pre-order it from your local monopoly now). If you’d like more information about the book, the book website is now up at economism.net. (I used Medium instead of WordPress.com this time.) The post below, which is also the top story on the book website, summarizes the main themes of the book.

Income inequality is at levels not seen for a century. Many working families are struggling to get by, only kept afloat by Medicaid and food stamps. The federal minimum wage is just $7.25 per hour—below the poverty line even for a family of two. The bright outlook for corporate profits has driven the S&P 500 to record levels. Surely it makes sense to raise the minimum wage, forcing companies to dip into those profits to pay their workers a bit more.

But that’s not what you learn in Economics 101. The impact of a minimum wage is blissfully easy to model using the supply-and-demand diagram that dominates first-year economics courses.

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A price floor in the labor market—that’s what a minimum wage is—causes demand to exceed supply. The difference is unemployment, and the reduction in the employment level represents value lost by society. People who want the minimum wage are well-meaning but muddle-headed do-gooders who don’t understand economics. As Milton Friedman wrote in Capitalism and Freedom, “minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it.”

That’s what Economics 101 teaches you—but it’s not what many economists actually think.

Economists polled by the Chicago Booth School of Business are evenly split on whether an increase in the minimum wage to $9—or even $15—would significantly increase unemployment. Professional opinion is divided exists because detailed empirical research is inconclusive, with several recent studies (e.g., Dube, Lester, and Reich 2010 and 2014) and meta-studies (Doucouliagos and Stanley, Belman and Wolfson) showing no significant impact on employment.

In policy debates and public relations campaigns, however, what you are more likely to hear is that a minimum wage must increase unemployment—because that’s what the model says. This conviction that the world must behave the way it does on the blackboard is what I call economism. This style of thinking is influential because it is clear and logical, reducing complex issues to simple, pseudo-mathematical axioms. But it is not simply an innocent mistake made by inattentive undergraduates. Economism is Economics 101 transformed into an ideology—an ideology that is particularly persuasive because it poses as a neutral means of understanding the world.

In the case of low-skilled labor, it’s clear who benefits from a low minimum wage: the restaurant and hotel industries. In their PR campaigns, however, these corporations can hardly come out and say they like their labor as cheap as possible. Instead, armed with the logic of supply and demand, they argue that raising the minimum wage will only increase unemployment and poverty. Similarly, megabanks argue that regulating derivatives will starve the real economy of capital; multinational manufacturing companies argue that new trade agreements will benefit everyone; and the wealthy argue that lower taxes will increase savings and investment, unleashing economic growth.

In each case, economism allows a private interest to pretend that its preferred policies will really benefit society as a whole. The usual result is to increase inequality or to legitimize the widening gulf between rich and poor in contemporary society.

I became aware of the subtle power of economism during the 2009–2010 financial reform debate, when bank lobbyists invoked economic logic to protect their clients’ profits from new regulations. As far as I can recall, I first wrote about it in a 2011 blog post titled “The Smugness of Unintended Consequences.” My new book, Economism: Bad Economics and the Rise of Inequality, offers an intellectual history of the rise of economism in the late twentieth century, case studies of its impact in several different policy domains, and—I hope—the tools to enable readers to understand both the merits and the limitations of arguments based on Economics 101. Because the first step in overcoming an ideology is understanding how it works.

The Deduction Fairy

By James Kwak

Incoming Treasury Secretary Steven Mnuchin promised a big tax cut for corporations and the “middle class,” but not for the rich. “Any tax cuts for the upper class will be offset by less deductions that pay for it,” he said on CNBC.

This is impossible.

The tax cutting mantra comes in two forms. The more extreme one claims that reducing the overall tax burden on the rich will turbocharge the economy because they will save more, increasing investment, and will also work more, starting companies and doing all those other wonderful things that rich people do. The less extreme version is that we should lower tax rates to reduce distortions in the tax code, but we can maintain the current level of taxes paid by the rich by eliminating those famous “loopholes and deductions.” Donald Trump the candidate stuck with the former: his tax proposal, as scored by the Tax Policy Center, gave 47% of its total tax cuts to the top 1%, who also enjoyed by far the largest reduction in their average tax rate.

Mnuchin’s comment implies that he favors the latter version: lowering rates but making it up by “broadening the base.” This math might work for the merely rich—say, families making $200,000–400,000 per year. Take away the mortgage interest tax deduction, the deduction for retirement plan contributions, and the exclusion for employer-provided health care—which together can easily shield $50–75,000 in income—and you could probably fund several percentage points of rate decreases. (Of course, it would be politically impossible to completely eliminate those tax breaks, but that’s another story.)

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What You Can Do

By James Kwak

Several of my friends, some of whom I haven’t spoken with in a long time, have reached out to me over the past week to discuss what to make of last week’s election. I imagine this is happening with a lot of people.

Although I don’t have any simple answers, I do have some thoughts on what we can do in response to the prospect of Donald Trump and the Republicans controlling the entire federal government, as well as a large majority of states. But first, we need a short detour—for a bit of perspective.

Maurice Walker is a fifty-five-year-old man with schizophrenia whose only income is $530 per month in Social Security disability payments. On September 3, 2015, he was arrested by police in Calhoun, Georgia for being a “pedestrian under the influence”—something many of us have been guilty of at one time or another. If Walker had been able to come up with $160 (something most people reading this blog could do in seconds), he would have walked free. Instead, he was locked up in jail, without his medication.

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Narratives

By James Kwak

[Updated to add another headline leading with “white voters.”]

Two days later, some of the world’s leading newspapers—or their headline-writers, at least—are saying it was all or largely about race:

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screen-shot-2016-11-10-at-10-01-57-amThe respective roles of race and class in this year’s election are a highly contentious issue. I’d like to add to that contentiousness as little as possible while pointing out that this race-based framing isn’t really supported by exit poll data. I want to get ahead of the vitriol by stipulating that the exit polls don’t provide conclusive evidence for either side.

OK, here’s the data:

 

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Those are vote shares in the presidential election by racial or ethnic group. The numbers at the right show you the shift from the previous election.* In this case, the Democratic-Republican gap among white voters shifted by 8 points toward the Republican. That’s evidence that the election was about white voters, right?

Except those are the 2012 exit polls. The 8-point shift is relative to the 2008 exit polls.

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The Biggest Voter Suppression Campaign of All

By James Kwak

This election day, spare a thought for the largest group of citizens who aren’t eligible to vote: children.

When I was in high school, I believed strongly that there should be no voting age whatsoever. Anyone should be able to vote, no matter her age. Well, I still feel that way, particularly after watching my ten-year-old daughter knocking on doors and explaining to adults why she doesn’t want her school to be grade-reconfigured. And I feel that way even though I also have a four-year-old son whose vote could be bought for a lollipop. (Whether he would stay bought is another question.)

There are two main arguments against a voting age. The first is that any plausible justification for a minimum voting age could be better served by some other test—which would be illegal. Many people think it is obvious that children shouldn’t be allowed to vote because they are uninformed, irresponsible, lack the necessary cognitive skills, are easily swayed by their parents, or something along those lines. (Note that similar arguments were made about all the other groups that used to be unable to vote.) But if the point of a voting age is to ensure that the electorate is properly informed about the issues and the stakes, we could administer a test, which would do a better job than an arbitrary age cutoff. (Who is the vice president? Which house of Congress approves judicial nominations? Etc.) That test would violate the Voting Rights Act, just like literacy tests.

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Models of Economic Policymaking

By James Kwak

The evening that he won the Iowa caucus in January 2008, Barack Obama said this:

Hope is the bedrock of this nation. The belief that our destiny will not be written for us, but by us, by all those men and women who are not content to settle for the world as it is, who have the courage to remake the world as it should be… . [the belief that] brick by brick, block by block, callused hand by callused hand, … ordinary people can do extraordinary things.

That speech is at the opening of K. Sabeel Rahman’s new book, Democracy Against Domination. It invoked one of the central mobilizing themes of Obama’s 2008 campaign, which set him clearly apart from Hillary Clinton: the idea that the senator from Illinois would usher in a new kind of politics, a more democratic, more inclusive approach to government as opposed to business as usual inside the Beltway.

Well, that didn’t happen. Whatever you think of President Obama’s policy goals and accomplishments, he had little impact on how our political system works. Plenty of blame for that goes to the Republicans, who set out from Inauguration Day focused exclusively on making him a one-term president. But it’s also true that the new president did not make political reform a priority during those first two years when he had majorities in both houses of Congress.

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The Last Chapter Problem

By James Kwak

Like many analytically minded liberals, I’m good at identifying problems and less good at coming up with solutions—a common disease sometimes called the “last chapter problem.” I recently finished reading The Reconnection Agenda by Jared Bernstein (which you can even download from his blog), which takes the opposite approach.

The problem he addresses is one that we all know about—inequality, stagnant real wages, the divergence between productivity gains and living standards, etc. Bernstein recalls a meeting with a group of insiders in 2014, when a pollster interrupted a discussion of the post-Great Recession economic recovery to say:

If you mention the word “recovery” to people, they don’t know what you’re talking about. And they conclude you don’t know what they’re talking about. It’s not just that they feel disconnected from an economy that’s supposedly growing. It’s that they don’t think anyone understands or knows what to do about their situation.

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