Why people have no faith in economics anymore

28 June, 2016 at 17:32 | Posted in Economics | Leave a comment

In recent years the public has lost faith the in the economics profession.

One reason for the lack of faith is the failure to predict the Great Recession, but the public’s dismissal of macroeconomists is based upon more than the failure to foresee the dangers the housing bubble posed for the economy. It is also due to false promises about the benefits to the working class from globalization, tax cuts for the wealthy, and trade agreements – promises that were often used to support ideological and political goals or to serve special interests.

In retrospect the evidence for the housing bubble was easy to see and a few people tried to sound the alarm but they were widely dismissed. Even when the warnings were taken seriously the belief was that the consequences from a housing bubble collapse would be relatively minor and confined to the housing sector. Very few people believed there would be a deep and long-lasting recession …

reaganomics_trickle_downThe arguments used to justify austerity policies put forth both by reputable economists and promoted by those with an ideological agenda for smaller government – the idea that reducing government deficits would create a confidence effect and stimulate the economy – turned out to be wrong. Repeated warnings about inflation due to quantitative easing from economists with standing in the profession, warnings that proved false again and again, provided ammunition to those with a vendetta against the Fed.

If we go back a bit further in time, it’s easy to find more examples. Globalization and international trade were supposed to make us all better off. There would be adjustment costs along the way that would hopefully be offset by government policies to help those who paid the cost of the transition, but in the long-run more trade would lift all boats. But that hasn’t happened. Wages for the majority of people have stagnated, there have been large job displacements that government policy has not done much to address, and the gains have gone to those at the top of the income distribution.

Tax cuts for the wealthy were supposed to stimulate growth and make everyone better off. There was dispute about this within the profession, but there were also many economists who provided intellectual support for the claim that tax cuts will create growth and widespread prosperity. The evidence from the Bush and Reagan tax cuts does not support this claim, but it is still made by some economists and this gives those who are serving wealthy interests or who want to force government to shrink by starving it of revenue the cover they need for their arguments …

We do need more humility about what we do and do not know, more willingness to change our minds when the evidence disagrees with our favorite theoretical model, and the willingness to acknowledge disagreement within the profession. But most of all we need to take a strong stand against those inside and outside the profession who misuse economic theory and empirical results for political and ideological purposes.

Mark Thoma

 

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