Home > The Economics Profession > Evidence of intelligent life in the economics profession

Evidence of intelligent life in the economics profession

from Dean Baker

Last month, former Clinton Treasury Secretary and top Obama adviser Larry Summers ripped into those arguing that more education is the answer to the country’s inequality problems:

“The core problem is that there aren’t enough jobs. If you help some people, you could help them get the jobs, but then someone else won’t get the jobs. Unless you’re doing things that have things that are affecting the demand for jobs, you’re helping people win a race to get a finite number of jobs.”

He made these comments at a conference put on by the Robert Rubin funded Hamilton Project held at the Brookings Institution.

If the significance of these comments is not clear, the most important economic figure of the mainstream of the Democratic Party was demolishing one of the party’s central themes over the last two decades. He was arguing that the problems of the labor force — weak employment opportunities, stagnant wages, and rising inequality — were not going to be addressed by increasing the education and skills of the workforce. Rather, the problem was the overall state of the economy.

The standard education story puts the blame for stagnant wages on workers. The key to getting ahead is getting a good education. The story Summers was telling at Brookings is that the blame is on the people who design economic policy. It is their fault that workers aren’t able to secure decent paying jobs.

Summers is responding to evidence that can’t be reconciled with the education story. As my friends and colleagues Larry Mishel, John Schmitt, and Heidi Shierholz have shown, inequality has continued to grow since 2000 in spite of the fact that there has been no increase in demand for workers in highly skilled occupations. Similarly, there has been little change in the wage premium that college educated workers enjoy relative to less educated workers, as pay for the typical college grad has barely risen since the turn of the century.

For this reason, anyone who blames stagnating wages on a lack of education is ignoring the data. With the data no longer supporting the theory, at least some mainstream economists have chosen to adjust their views.

This is not the only issue on which mainstream economists have changed their tune. It is now common to hear Summers and other prominent economists talk about the problem of “secular stagnation,” the idea that the economy could suffer from a shortage of demand over a sustained period of time.

This view was routinely ridiculed in the economics profession less than a decade ago.  The standard view was that the economy could only suffer from a lack of demand for short periods of time when it was in a recession, but recessions were self-correcting. This meant that the economy would quickly bounce back to full employment levels of output, so a shortage of demand need not be a concern. The key to producing more was to fix the supply side of the economy. Even the research department of the International Monetary Fund (I.M.F.) now recognizes the problem of inadequate demand, although the I.M.F. economists designing country programs seem to have not yet gotten the message.

Economists are also now much more critical of trade. It is now widely accepted that the patterns of trade over the last three decades have lowered the wages of a large segment of the workforce. And prominent economists like Joe Stiglitz and Jeffrey Sachs have openly warned about the negative effects of trade agreements like the Trans-Pacific Partnership.

And the luster of an ever bigger financial sector with increasingly complicated financial instruments has also faded. A recent paper from the Bank of International Settlements showed that a bloated financial sector was a drag on growth. And Simon Johnson, the former chief economist at the I.M.F. has been a tireless critic of too big to fail banks and the policies that support them.

Each of these changes involves an enormous shift in the economic profession from views that were the absolute orthodoxy less than two decades ago. Back in the 1990s, the policy types and political figures who held the views now espoused by Summers, Krugman, Stiglitz, and Sachs were not just wrong, they were not serious people. They were know-nothings who didn’t understand modern economics.

This new thinking in the economics profession is a remarkable break with the past. It should be viewed in the same way as Pope Francis’ effort to reconcile the Catholic Church with the modern world. But just as Francis must do battle with hardliners, the orthodoxy remains well entrenched in the economics profession.

Many elite economists still insist that unemployment due to inadequate demand is not a problem. They continue to press concerns over budget deficits, as though the economy would somehow be better off if we cut annual spending by $500 billion (@ 2.7 percent of GDP) to balance the budget. And the Federal Reserve Board stands ready to start raising interest rates, as if higher inflation is a problem that need concern us any time in the foreseeable future. And most economists still argue that any trade deal is a good thing, if politicians label it a “free-trade” deal.

But those of us who want to advance a progressive economic agenda must recognize the opening that has taken within the profession. There is no longer a mainstream consensus for bad economic policy that redistributes upward. That is real progress.

View article at original source.

  1. March 3, 2015 at 4:13 pm

    Once again we launch into La La Land, a place where infinite growth on a finite planet is the way out of specie suicide due to … faster and faster growth on a finite planet.

    Inadequate demand for the possibility of infinite output, pollution and resource extraction is hampering the oligarchs acquisition imperative and causing them distress with war being the strongest currently available growth option.

    A day will come when all the old economists who guard their perks are dead gone. Then a new actual science covering the interaction of commercial needs and Earth will finally emerge. Raw shame and embarrassment will ensure the new young scientists do not name their discipline “economics.”

  2. March 3, 2015 at 7:48 pm

    Speaking of the economics profession, it could be thought provoking to recall Keynes’ definition of an economist:
    http://economicsociology.org/2015/03/01/who-is-an-economist-here-is-keynes-answer/

  3. March 4, 2015 at 12:44 am

    To use a simple, bordering on ridiculous analogy, if money were fruit growing on a tall tree, current obscene wealth inequality on Earth can be seen as that tall tree with most of the fruit (money) at the top of the tree – out of the reach of billions of people who consequently can’t spend it. If economists see themselves developing ways to get to the top and shake the fruit down to the ground where it “nourishes” people, then the path toward healthy economic solutions begins/comes into view.
    Some possible ways to shake the fruit to the ground are eliminating the global tax evasion industry (www.taxjustice.net), return to progressive taxation, increase in the minimum wage, public banking (www.publicbankinginstitute.org), new creative ideas such as zero tax on first $50,000 income, a maximum wage of $100 million (or $200 million.. one billion), maximum wealth of $1 billion, greater land taxation, anti-usury laws, effective legal deterrent to white-collar crimes, and so on.
    The wealth inequality pendulum has swung too far in the direction of concentrated wealth, to the real detriment of billions of people around the Earth. The painful negative consequences are there for all to see. Actions that change the direction of the pendulum will become manifested sooner or later, depending on how determined people around the world are to make it happen.

  4. March 4, 2015 at 2:49 am

    If wage increases lead to inflation, then at least we will know how the employing class and government have formulated their policies. However, unemployment is not simply a difference between vacancy rate and searchers, as in a matchmaking schema. The problem is that the longer the unemployed are unemployed, the greater their skill loss. The lost skills are not only technical but also interpersonal. Hence, the discussion devolves into education and re-education of the unemployed who must compete with new graduates. As educational costs skyrocket, lowering unemployment becomes an impossibility.

  5. Macrocompassion
    March 4, 2015 at 12:49 pm

    With so much intelligence going, how come we are in such a poorly responding situation and have been for years? Its not a lack of brain power but a lack sense about what to do with it.

  6. Ack Nice
    March 4, 2015 at 3:37 pm

    Macrocompassion, the saddest fact of them all is that the sum total of what intelligence there is and has been in the tragicomedic human species right down through the ages … is just about to prove itself to have been as useful to humans as stupidity would have been in its place. (Hey, Garrett, r u watching “the economics” of all those methane craters in Russia??!)

    Anybody else here ever watched the documentary “Inside Job”? Something tells me Mr. Baker hasn’t seen it… but it should be required viewing for every person on this planet:

    http://www.filmsforaction.org/watch/inside_job_2010/

    In my opinion, using Joe Stiglitz’ name and the name Larry Summers in the same breath is an insult to Mr. Stiglitz – an insult of the very highest order. The name Larry Summers does not belong in the same article with the word intelligence, either. What Larry Summers legally deserves is to be arrested, tried, found guilty of treason to the USA, and hung at dawn for the traitor he is. Along with the rest of his murderous cabal of rank criminals.

    I don’t CARE if the imbecile L.S. finally got one thing correct – WHY IS ANYBODY STILL LISTENING TO THIS MADMAN??!! In any sane society, Summers would be a mental patient residing permanently inside a large brick building surrounded by a fence topped with barbed wire slanting inwards… and he’d be rooming with Bill and Hillary, Bush and Cheney, Kissinger, Brezinski, the house of Morgan, the house of Goldman Sacks-us, and too many other names to go on listing… but most of them belong to The Pilgrim’s Society, no doubt. (One can only hope Cecil Rhodes rots in hell…)

    Pick up the clue phone, Humanity – it’s been ringing off the wall for so long… so long

  7. April 8, 2015 at 1:48 pm

    Neoliberal economics confuses the goat with the gardener. Private vices lead to public virtues, as Adam Smith described the wonder of the “invisible hand.’ Ulrich Thielemann, an author and economist in Berlin, emphasizes that profit-making is different from profit-maximizing and that studying economics today is like brainwashing. Nikolaus Kowall, an Austrian economist, insists the neoliberal model promotes profits, not investments and that incentives for investing in the real economy are urgently necessary.
    Reality can break into the dystopia of mainstream economics and paralyzed D.C. One almond needs 1.1 gallons of water. Unlike a chair, an idea can be shared by a whole people. Viva alternative economics and reduced working hours!

  8. Macrocompassion
    April 8, 2015 at 4:51 pm

    Profit is a motivating force yet it doesn’t exist! The 3 returns on the 3 factors of Adam Smith’s 3 factors of production are wages, ground rents and interest (and/or dividends). One or more of these returns was motivated with the idea of it being profitable, yet where in this equation does the profit occur?

    Intelligence is not what is lacking but common sense, see my previous comment plus some HONESTY IN GOVERNMENT by the people, for the people, with the people.

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