Normative Narratives


1 Comment

Economic Outlook: Why Economics Failed (EU Edition)

Special thanks to Dr. Darryl McLeod for the graph!

The Importance of A Strong EU:

In 2012, The European Union won the Nobel Peace Prize, a symbolic award mean to show appreciation for the global importance of a unified European in the midst of the continents  most serious economic downturn since WWII:

The European Union‘s three presidents have collected the Nobel peace prize in Oslo in recognition of six decades of work promoting “peace and reconciliation, democracy and human rights”.

David Cameron was one of six EU leaders who decided not to attend. But his deputy, Nick Clegg, was there to represent the UK at the Nobel Institute.

Attendees heard the Nobel committee president, Thorbjoern Jagland, praise the EU’s role in transforming a European “continent of war” into a “continent of peace”.

“That should not be taken for granted – we have to struggle for it every day,” he said.

European commission president, José Manuel Barroso, said: “This is an award for the European project – for the people and the institutions – that day after day, for the last 60 years, have built a new Europe. “We will honour this prize and we will preserve what has been achieved. It is in the common interest of our citizens. And it will allow Europe to contribute in shaping that ‘better organised world’ in line with the values of freedom, democracy, human rights and rule of law that we cherish and believe in.

Indeed, I have advocated for a stronger role for Europe in ensuring global security, promoting democracy, human rights and rule of law throughout my “End of Team America World Police” series. Europe has to play a greater role in security both for budgetary and practicality reasons; it is much closer to Africa and the Middle East, the U.S. public is war weary, and we cannot have groups such as Boko Haram, ISIS (Islamic State of Iraq and Syria), and the Yemen-based Al Qaeda in the Arabian Peninsula thinking they can act with impunity (or join forces).

The EU is currently holding parliamentary elections, and anti-EU parties expect to gain seats:

These far-right and far-left groups will not win anything approaching enough seats to take control. But they could get around a quarter of them, amplifying their voice in debate and giving them more opportunities to slow down measures that the Brussels bureaucracy and international economists say could help save Europe from a Japan-style “lost decade” of anemic growth and policy stasis.

These include initiatives to bind the 18 countries that use euro currency closer together and open up Europe’s markets to greater competition, including from the United States.

Set up in the 1950s as a common assembly to introduce an element of democracy into the nascent European project, the parliament became directly elected in 1979 as part of push to narrow the chasm between Europeans and the arcane work of integrating their economies that few ordinary people cared about and even fewer could understand.

This anti-EU sentiment, while expected during times of economic downturn, is actually counter-effective. The issue holding back the EU recovery is insufficient integration; and this is not news. Since well before the existence of the Euro, economists have known that while some factors favored the chances of Eurozone success (such as geographic proximity and high level of trade, what is sometimes known as the gravity theory of international trade), others factors raised red flags (lack of fiscal integration, cultural and language differences which hold back the flow of residents from high unemployment to low unemployment areas).

The U.S. is an optimal currency union; everyone speaks English, and can move about the country fairly easily. Furthermore, we have the worlds largest Federal Government and most powerful National Bank anchoring the economy. As bad as the Great Recession was in America, it was irrefutably worse in Europe (and not because of their generous social welfare systems, because of the lack of fiscal integration).

And now the anti-EU sentiments are hunkering down for the zombie apocalypse, instead of fostering the closer bonds (both fiscal and cultural) needed to return the EU to a position of global leadership and prosperity. A strong unified Europe is important both for the European Economy and global security and development, hopefully whoever wins seats in the EU Parliamentary Election understands this.

Why Economics Failed:

This anti-intellectual refute of economic theory reminds me of a recent Paul Krugman Op-Ed, “Why Economics Failed”:

On Wednesday, I wrapped up the class I’ve been teaching all semester: “The Great Recession: Causes and Consequences.” (Slides for the lectures are available via my blog.) And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?

I don’t mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.

Essentially, economics didn’t fail, policy-makers failed ECON 101. Any economist worth a damn understands that economics is always “context-sensitive”. Appropriate economic policies are different during “good times” and economic downturns; economic policy should be “counter-cyclical”, saving up during good times to pay for essential safety net and stimulus programs out of a surplus in bad times. Instead we had the Bush Administration give tax breaks during good times, part of a much larger misguided concept of “starve-the-beast” economic policy.

Of course one could argue most policymakers are aware of the economics and just beholden to vested interests, in which case I would say your probably right more often than not.

And amazingly, across the pond. a parallel dismissal of textbook economics is also playing out in Europe. Instead of pursuing closer fiscal and cultural integration, the EU seem to be drifting apart.

Economics: Art or Science?

I have always believed that Economics is more “art” than “science”, particularly when it comes to responding to crises. In such instances, policy responses have to be made before robust economic analyses can be conducted; policy makers have to rely on intuition and historic lessons, alongside economic theory and context.

But it is not scientific deficit which has led economics to “fail” in recent history. From dogmatic misinterpretation of Adam Smiths “Invisible Hand” (only in the presence of proper safeguards and regulations), to the inflationary / rising borrowing cost effects of fiscal expansion (not in a liquidity trap), to the benefits of currency unions (but only under certain conditions, as explained above), it has been an inability / unwillingness by “conservative” factions on both sides of the Atlantic to grasp the conditions in which certain economic theories operate. As an economist, the solutions to the short-term problems facing advanced economies are frustratingly obvious.

Sometimes I think the only solution is teach everyone economics and political science once in middle school and again in high school. In a functioning democracy people set the agenda, does it not make sense invest in an informed (and therefore more engaged) citizenry?

America the Anecdotal:

America has indeed become the anecdotal nation. We do not have to be, it is a collective conscious choice we have made (or a series of choices we choose not to make). It seems Europe has become anecdotal as well.

Maybe it is part of a concerted effort by fast food chains and entertainment conglomerates to brainwash…No–we cannot blame conspiracies. Sure, vested interests will do all they can to maintain power imbalances, but is this really an excuse, or have the people who live in the world’s most modernized, democratic societies just become lazy and complacent?

I leave my readers with a quote from Matt Taibbi’s best seller “Griftopia”, “America is no longer a country that cares about experts. In fact, it hates experts. If you can’t fit a story into the culture-war storyline in ten seconds or less, it dies. (2 Taibbi references in blogs this week; you go Matt!)

It takes a bit more civic responsibility to build egalitarian, progressive societies; I for one think it’s worth the effort.    

Advertisements


Leave a comment

Economic Outlook: When Gauging Support for Raising the Minimum Wage, Poll its Biggest Opponents

Trend: Minimum Wage -- Real and Nominal Value, 1938-2013

There has been a strong push this holiday season (really dating much farther back) by a variety of labor groups seeking higher minimum wages. Specifically, Walmart employees, Fast-Food Workers, and most recently low-level financial sector employees have taken to the streets to make their demands for “livable wages” heard.

As one who believes in the positive externalities of a more egalitarian society, as well as a proponent of collective action, I am happy to see people using the tools at their disposal to overcome power-asymmetries that have persisted for decades. It would appear that I am not alone in this sentiment–according to Gallup polling, 76% of Americans support raising the minimum wage to $9/hr (69% support raising the minimum wage to $9/hr and indexing the minimum wage to cost of living increases).

Furthermore, the main fear associated with raising minimum wages–that it will lead to higher unemployment–has been debunked:

The idea of fairness has been at the heart of wage standards since their inception. This is evident in the very name of the legislation that established the minimum wage in 1938, the Fair Labor Standards Act. When Roosevelt sent the bill to Congress, he sent along a message declaring that America should be able to provide its working men and women “a fair day’s pay for a fair day’s work.” And he tapped into a popular sentiment years earlier when he declared, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”

Support for increasing the minimum wage stretches across the political spectrum. As Larry M. Bartels, a political scientist at Vanderbilt, shows in his book “Unequal Democracy,” support in surveys for increasing the minimum wage averaged between 60 and 70 percent between 1965 and 1975. As the minimum wage eroded relative to other wages and the cost of living, and inequality soared, Mr. Bartels found that the level of support rose to about 80 percent. He also demonstrates that reminding the respondents about possible negative consequences like job losses or price increases does not substantially diminish their support.

It is therefore not a surprise that when they have been given a choice, voters in red and blue states alike have consistently supported, by wide margins, initiatives to raise the minimum wage. In 2004, 71 percent of Florida voters opted to raise and inflation-index the minimum wage, which today stands at $7.79 per hour. That same year, 68 percent of Nevadans voted to raise and index their minimum wage, which is now $8.25 for employees without health benefits. Since 1998, 10 states have put minimum wage increases on the ballot; voters have approved them every time. But the popularity of minimum wages has not translated into legislative success on the federal level. Interest group pressure — especially from the restaurant lobby — has been one factor.

The social benefits of minimum wages from reduced inequality have to be weighed against possible costs. When it comes to minimum wages, the primary concern is about jobs. The worry comes from basic supply and demand: When labor is made more costly, employers will hire less of it. It’s a valid concern, but what does the evidence show?

For the evidence, lets turn to Dr. Krugman, who succinctly explains the evidence against this valid concern, and how “good” this evidence is:

Still, even if international competition isn’t an issue, can we really help workers simply by legislating a higher wage? Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

It’s important to understand how good this evidence is. Normally, economic analysis is handicapped by the absence of controlled experiments. For example, we can look at what happened to the U.S. economy after the Obama stimulus went into effect, but we can’t observe an alternative universe in which there was no stimulus, and compare the results.

When it comes to the minimum wage, however, we have a number of cases in which a state raised its own minimum wage while a neighboring state did not. If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.

So a minimum-wage increase would help low-paid workers, with few adverse side effects.

But what do these “egg-heads”, in their “ivory-towers” know? They are out of touch with the real world! The person who suffers from minimum wage increases is not the academic, or even the large corporation. It is the small business owner who suffers–Mom and Pop! Well, Gallup polled small business owners on their thoughts of minimum wage increases, and responses were not as overwhelmingly negative as one would think:

vyrfizzd50i0v1wqhs_w_q.png

They were also polled on the effects of a minimum wage increase on how they invest back into their business:

4t56yhgje0ytveiaeoavtg.png

The majority of small business owners responded they would not reduce their current workforce (64%) or reduce worker benefits (60%) if the minimum wage was increased. The largest negative effect would be a reduction in capital spending (38%). However, in the context of a divergence of worker compensation from productivity, and a declining share of income going to labor (in favor of capital), perhaps such a re-balancing is not such a bad thing.

Small business owners are not thrilled about the prospect of a minimum wage increase–they are not expected to be. However, the fact that nearly half support raising the minimum wage says something about small business owners.

Perhaps they recognize peoples purchasing power is tied to their wages, so increasing wages will eventually lead to higher sales (especially considering minimum wage employees have a much higher marginal propensity to consume than wealthier people). Or perhaps these people are simply more in touch with what happens in the communities they live in than their big-business contemporaries. They know people living on the minimum wage aren’t lazy people waiting for a government handout; they are their friends, family, and customers. Perhaps they believe that more egalitarian communities are friendlier, safer places, and are willing to pay a little extra in order to achieve that goal. 

Increasing the minimum wage is overwhelmingly popular, and more popular among small business owners than one would expect. Furthermore, it would save billions of dollars in Welfare programs by ending an implicit subsidy for businesses who pay non-livable wages and stimulate the economy by redistributing income to people who are more likely to spend it.

The time to act has come; people are literally taking to the streets. It is also important to index the minimum wage to cost of living increases, so we do not experience the declining real minimum wage we have had for the past 4 decades. Indexing also avoids a political battle every-time the cost of living changes (which it constantly does).

I for one am interested and excited to see the myriad benefits that decreasing poverty rates and reversing the trend of increasing income inequality have on American society as a whole.