Economists – people being paid for telling stories justifying inequality

30 October, 2012 at 20:54 | Posted in Economics | 2 Comments

If economics was an honest profession, economists would focus their efforts on documenting the waste associated with protectionist barriers for professionals. They devoted endless research studies to estimating the cost to consumers of tariffs on products like shoes and tires. It speaks to the incredible corruption of the economics profession that there are not hundreds of studies showing the loss to consumers from the barriers to trade in physicians’ services. If trade could bring down the wages of physicians in the United States just to European levels, it would save consumers close to $100 billion a year.

But economists are not rewarded for studying the economy. That is why almost everyone in the profession missed the $8 trillion housing bubble, the collapse of which stands to cost the country more than $7 trillion in lost output according to the Congressional Budget Office (that comes to around $60,000 per household).

Few if any economists lost their 6-figure paychecks for this disastrous mistake. But most economists are not paid for knowing about the economy. They are paid for telling stories that justify giving more money to rich people. Hence we can look forward to many more people telling us that all the money going to the rich was just the natural workings of the economy. When it comes to all the government rules and regulations that shifted income upward, they just don’t know what you’re talking about.

Dean Baker

In case you’re in doubt, you might better have a look at e. g. what Harvard economist and George Bush advisor Greg Mankiw writes on the rising inequality we have seen for the last 30 years in both the US and elsewhere in Western societies:

Even if the income gains are in the top 1 percent, why does that imply that the right story is not about education?

I then realized that Paul [Krugman] is making an implicit assumption–that the return to education is deterministic. If indeed a year of schooling guaranteed you precisely a 10 percent increase in earnings, then there is no way increasing education by a few years could move you from the middle class to the top 1 percent.

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

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2 Comments »

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  1. Baker is one of the few Keynesians who still regularly indulges in the anti-monopoly posturing of classical political economy. I’m with him as regards the distributional effects, e.g., especially of intellectual property laws (which are beefed up more and ever more here in the U.S.). But two things bother me about this rhetorical gesturing:

    1) I think Baker misses an important dynamic: as unionization has become effectively impossible in the U.S., frivolous professional licensure laws have provided the main alternative, allowing workers to take a share of the economic rent. The share of the population that has left the unionized workforce is almost identical to the share that has added professional barriers to entry.

    2) That $100 billion in medical spending is also $100 billion in effective demand. Assuming that we’re always at equilibrium, that doesn’t matter, and if people don’t spend it on doctors, they’ll spend it on something else. But in the real world, we can’t count on that shift in spending to occur. (This problem of framing some things as costs and others as income, when in fact every payment is both a cost and income to somebody, is one that is frequent in news stories, political discussions, &c.). Monopolistic structures are at least countercyclical.

  2. I think that Dean Baker’s comments are right on the mark, as he was one of the few prominent economists who predicted the housing bubble.

    There is some economics that is truly empirical (think of Samuel Bowles, James Galbraith, or Lance Taylor); but much of mainstream econ is designed to reinforce the existing social and economic hierarchies.

    By the way, Dr. Syll, what a terrific blog!


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