Thursday, March 10, 2016

Playing the Trump card: Why do economists enjoy trashing their profession?

From Scott Sumner of EconLog. Excerpt:
"During the 1980s and 1990s, there was a growing consensus that:

1. The minimum wage was not a particularly effective anti-poverty program, as it raised unemployment. Even the New York Times editorialized in favor of abolition of the minimum wage, in 1987.

2. Monetary policy drives inflation and NGDP, and fiscal stabilization policy is almost useless. The liquidity trap is not a problem in a fiat money regime.

3. Free trade with China will benefit the US economy, albeit at some cost to workers and companies in import competing industries.

Now all three of these views are under assault. And what I find interesting is the willingness, indeed almost eagerness, of many economists to accept the new heterodoxy. In my view, if the new heterodox view is correct it really calls into question the entire field of economics. Points one and three are some of the most basic ideas in all of economics. We've been lecturing the public for years that they are wrong about free trade. We say, "See, economists know something the public does not".

We've also been telling the public there are no free lunches, and that price floors create surpluses. And with the exception of a few extreme supply-siders, we've been saying that tax cuts and spending increases will raise the budget deficit.

Let's say this is all wrong. Why should the public take seriously anything we say now? We'd have become the laughing stock of the social sciences (no mean feat) and deservedly so. In that case, why not listen to Trump?

I'm especially surprised by how many economists are willing to accept contrarian views when questions are still very much open. Here are some examples:

1. The Card and Krueger study did cast doubt on the view that modest increases in the minimum wage cause more unemployment. But other studies have reached the opposite conclusion. (My own work on the Depression suggests that minimum wages do reduce output.) Even worse, the only plausible theoretical mechanism that I am aware of is the monopsony model of labor markets. That model suggests that if a minimum wage fails to boost unemployment, it will also fail to raise produce prices. But studies show that minimum wage increases clearly do raise product prices. And we still don't know much about the long run effect of higher minimum wages. The entire question is fraught with uncertainly, so why believe the worst about economics?

2. As far as fiscal stimulus, the studies I've seen tend to ignore the problem of monetary offset, either by looking at state and local effects, or by including the eurozone in international cross-sectional studies. Those studies that did properly focus on countries with independent monetary policies (by people like Mark Sadowski, Benn Steil and Dinah Walker, and Kevin Erdmann) did not find any significant impact from fiscal policy. And of course the big difference between the Eurozone and the US after 2011 was due to monetary policy, as the US did as much or more austerity than the eurozone.

3. I recently discussed a paper by Autor, Dorn and Hanson, which suggested the US may have been hurt by the rise of Chinese exports, during the period from 1990 to 2007. Noah Smith seemed convinced by the findings, indeed so much so that he was willing to trash the economics profession:
In his recent book "Economics Rules," Harvard economist Dani Rodrik laments how economists often portray a public consensus while disagreeing strongly in private. In effect, economists behave like scientists behind closed doors, but as preachers when dealing with the public. . . . 
Popular opinion seems to be exactly right about the effect of trade with China -- it has killed jobs and damaged the lives of many, many Americans. Economists may blithely declare that free trade is wonderful, but our best researchers have now shown that public misgivings about these smooth assurances have been completely justified.

And yet as I pointed out, all they really showed was that Chinese exports had negative effects in certain local areas, something we already knew. There was no plausible evidence presented that China trade reduced overall employment. Yet many others, including The Economist, The Atlantic and Tyler Cowen treated this as a very important paper. Maybe it is, but I don't see it.

Marcus Nunes sent me a recent paper by João Paulo Pessoa, from the LSE. Here is the abstract:


How does welfare change in the short- and long-run in high wage countries when integrating with low wage economies like China? Even if consumers benefit from lower prices, there can be significant welfare losses from increases in unemployment and lower wages. I construct a dynamic multi-sector country Ricardian trade model that incorporates both search frictions and labor mobility frictions. I then structurally estimate this model using cross-country sector-level data and quantify both the potential losses to workers and benefits to consumers arising from China's integration into the global economy. I find that overall welfare increases in northern economies, both in the transition period and in the new steady state equilibrium. In import competing sectors, however, workers bear a costly transition, experiencing lower wages and a rise in unemployment. I validate the micro implications of the model using employer-employee panel data."

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