Four common but bad ideas about economics

[lpetrich]

What economists have gotten wrong for decades - Vox - Four economic ideas disproven by reality

1) Going below the natural rate of unemployment could spark an inflationary spiral

2) Everybody wins with globalization

3) Deep budget deficits will crowd out private investment

4) A higher minimum wage will only hurt workers

About (1), there is a bit of economics folklore that states that a good way to fight inflation is to put people out of work. Alexandria Ocasio-Cortez recently questioned Federal Reserve Chair Jerome Powell about that.

Ocasio-Cortez didn’t waste time poking holes at it. She pointed out that the unemployment rate, now 3.7 percent, has fallen well below the Fed’s estimates of the natural rate, which it forecast at 5.4 percent in 2014 and 4.2 percent today. And yet, she noted, “inflation is no higher today than it was five years ago. Given these facts, do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”

Powell’s response, to his credit, was as simple and direct as you’ll ever hear from a central banker: “Absolutely.” He elaborated: “I think we’ve learned that ... this is something you can’t identify directly. I think we’ve learned that it’s lower than we thought, substantially lower than we thought in the past.”

The article contains rebuttals of all four notions.

 

[lpetrich]

All these mistakes have something in common.

In every case, the costs fall on the vulnerable: people who depend on full employment to get ahead; blue-collar production workers and communities built around factories; families who suffer from austerity-induced weak recoveries and under-funded safety nets, and who depend on a living wage to make ends meet. These groups are the casualties of faulty economics.

In contrast, the benefits in every case accrue to the wealthy: highly educated workers largely insulated from slack labor markets, executives of outsourcing corporations, the beneficiaries of revenue-losing tax cuts that allegedly require austere budgets, and employers of low-wage workers.

In this regard, there is a clear connection between each one of these mistakes and the rise of economic inequality.

I cannot overemphasize the importance of recognizing who benefits and who loses from these economic mistakes, because that difference is why these mistakes persist. Every one of the wrong assumptions described here benefits conservative causes, from reducing the bargaining clout of wage earners, to strengthening the hand of outsourcers and offshorers, to lowering the labor costs of low-wage employers. These economic assumptions are thus complementary to the conservative agenda and that, in and of themselves, makes them far more enduring than they should be based on the facts.

One has to ask why none of them have a bias in the opposite direction.

 

[Metaphor]

2) Everybody wins with globalization

But #2 is still true, only that it's a net positive, not that every single player comes out ahead.

 

[Jason Harvestdancer]

Some of those confuse general improvement with Pareto optimum. They are saying that unless nobody is hurt, then it is bad no matter how good it is.

Number one is a Keynesian myth.

 

[laughing dog]

What economists have gotten wrong for decades - Vox - Four economic ideas disproven by reality

1) Going below the natural rate of unemployment could spark an inflationary spiral

2) Everybody wins with globalization

3) Deep budget deficits will crowd out private investment

4) A higher minimum wage will only hurt workers

About (1), there is a bit of economics folklore that states that a good way to fight inflation is to put people out of work. Alexandria Ocasio-Cortez recently questioned Federal Reserve Chair Jerome Powell about that.

Ocasio-Cortez didn’t waste time poking holes at it. She pointed out that the unemployment rate, now 3.7 percent, has fallen well below the Fed’s estimates of the natural rate, which it forecast at 5.4 percent in 2014 and 4.2 percent today. And yet, she noted, “inflation is no higher today than it was five years ago. Given these facts, do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”

Powell’s response, to his credit, was as simple and direct as you’ll ever hear from a central banker: “Absolutely.” He elaborated: “I think we’ve learned that ... this is something you can’t identify directly. I think we’ve learned that it’s lower than we thought, substantially lower than we thought in the past.”

The article contains rebuttals of all four notions.

There is simply no way anyone can rebut #1 as it is literally written, since it is a possibility ("could"). Moreover, there is no reliable way to even measure the natural rate of unemployment.

Number 3 may be an economic myth, but no economist has every proposed or supported the idea that globalization or free trade makes everyone better off.

 

[Horatio Parker]

3 is certainly a myth. For the simple reason that debt issued equals the spending. It's a swap - interest bearing(treasuries) for non- interest bearing(cash).

I'd also point out that the purpose of the job guarantee is related to no 1. A buffer stock consisting of employed people instead of a buffer stock of unemployed.

 

[Loren Pechtel]

Ocasio-Cortez didn’t waste time poking holes at it. She pointed out that the unemployment rate, now 3.7 percent, has fallen well below the Fed’s estimates of the natural rate, which it forecast at 5.4 percent in 2014 and 4.2 percent today. And yet, she noted, “inflation is no higher today than it was five years ago. Given these facts, do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”

Or that the gig economy has changed the "unemployment" rate. Now, when someone is unemployed and sufficiently short of money they'll turn to gig jobs to make a few bucks. Presto, they are no longer counted as unemployed and the unemployment rate goes down. The Fed's numbers weren't pulled out of a hat, they are from observation of reality.

The era of free trade eventually led to large trade deficits with countries with comparatively productive factories to ours but with much lower wages, most notably Mexico and China. As in every other advanced economy, the share of US manufacturing employment had long been drifting down. But the number of US factor jobs held pretty constant around 17 million — until around 2000, when, over the next decade, almost 6 million such jobs were lost. Economists who’ve studied the period now refer to it as “the China Shock.”
[img=https://cdn.vox-cdn.com/uploads/chorus_asset/file/18318983/Bernstein_mistakes_image_2.jpg[/img]

Here they are utterly wrong--what that chart is actually showing is far more due to automation than outsourcing.

There were certainly periods in the past when crowd-out did indeed appear in the data. The 1970s and early 1980s saw larger budget deficits (i.e., more negative) and higher interest rates. But since then, deficits have swung significantly up and down while interest rates have consistently drifted down.

The crowd-out only happens when the government borrowing is enough to alter the markets. Showing that it doesn't happen every time doesn't mean it's false.

(Another myth was that only teenagers earned the minimum; David Cooper’s work shows the main beneficiaries of higher minimum wages are working adults.)

Reality: https://www.bls.gov/opub/reports/minimum-wage/2017/home.htm

Age. Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up about half of those paid the federal minimum wage or less. Among employed teenagers (ages 16 to 19) paid by the hour, about 8 percent earned the minimum wage or less, compared with about 1 percent of workers age 25 and older. (See tables 1 and 7.)

In other words, Vox is telling the truth but painting a false picture. Note that half of the minimum wage workers are of student age. Note, also, table #1 in that link. Note how the older "minimum wage" workers are far more likely to be below minimum wage--and that means tipped. While I'm not finding the table right now I've seen a breakdown on educational level--and at-minimum-wage workers average far less education than the below-minimum-wage workers.

Also, note that my quote referenced the work of David Cooper. That's actually a link in the original, pointing to:

The typical worker who would benefit from a $15 minimum wage is a 35-year-old woman with some college-level coursework who works full time

Since more than half are under 24 there must be something very strange going on here. I suspect the data is being colored by some retirees taking low-wage jobs to have something to do (think Wal-Mart greeter) and we are looking at a double-humped curve. I find no data on the EPI site to check this, though.

 

[bilby]

I don't know how it's calculated in the US, but here in Australia, the government cannot possibly know that I am unemployed. I have done one day's paid work since November; Admittedly I took a couple of months vacation and an overseas trip, and didn't start looking for work until February, so arguably I wasn't unemployed, where that word is shorthand for "unemployed and looking for work".

You could, if you stretched a point, say that as I received six months salary as redundancy pay, my 'unemployment' didn't begin until the end of May.

But I am certainly unemployed and actively seeking work now. And have been for two months.

The reason the government doesn't know (and so doesn't count me), is that I don't qualify for Newstart - my wife's income is too high - so I can't see any point in dealing with the bureaucracy.

I wonder what the actual number of people who are unemployed and actively seeking work is? If I'm not included (and I don't see how I could be, at least until I file my next tax return), who else isn't in the figures?

Right now, I am not only seeking work, but have also enrolled in some training. At my own expense. But officially, I'm not unemployed.

 

[Canard DuJour]

ecomomic mistakes

More like propaganda which is finally becoming indefensible. They've been shoring it up with ever more ridiculous assumptions since forever.

 

[laughing dog]

I don't know how it's calculated in the US, but here in Australia, the government cannot possibly know that I am unemployed. I have done one day's paid work since November; Admittedly I took a couple of months vacation and an overseas trip, and didn't start looking for work until February, so arguably I wasn't unemployed, where that word is shorthand for "unemployed and looking for work".

You could, if you stretched a point, say that as I received six months salary as redundancy pay, my 'unemployment' didn't begin until the end of May.

But I am certainly unemployed and actively seeking work now. And have been for two months.

The reason the government doesn't know (and so doesn't count me), is that I don't qualify for Newstart - my wife's income is too high - so I can't see any point in dealing with the bureaucracy.

I wonder what the actual number of people who are unemployed and actively seeking work is? If I'm not included (and I don't see how I could be, at least until I file my next tax return), who else isn't in the figures?

Right now, I am not only seeking work, but have also enrolled in some training. At my own expense. But officially, I'm not unemployed.

According to this site (https://www.rba.gov.au/education/resources/explainers/unemployment-its-measurement-and-types.html), you are technically unemployed.

Unemployment rates are found via samples taken monthly (according to the link, in Australia, the ABS surverys 50,000 people). The results of those surveys are used to estimate a host of labor statistics, including unemployment and participation rates. While you are not explicitly counted (unless you are surveyed), if the surveys are reasonably representative of the relevant population, your situation is measured by the estimate.

 

[SimpleDon]

What economists have gotten wrong for decades - Vox - Four economic ideas disproven by reality

1) Going below the natural rate of unemployment could spark an inflationary spiral

2) Everybody wins with globalization

3) Deep budget deficits will crowd out private investment

4) A higher minimum wage will only hurt workers

About (1), there is a bit of economics folklore that states that a good way to fight inflation is to put people out of work. Alexandria Ocasio-Cortez recently questioned Federal Reserve Chair Jerome Powell about that.

Ocasio-Cortez didn’t waste time poking holes at it. She pointed out that the unemployment rate, now 3.7 percent, has fallen well below the Fed’s estimates of the natural rate, which it forecast at 5.4 percent in 2014 and 4.2 percent today. And yet, she noted, “inflation is no higher today than it was five years ago. Given these facts, do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”

Powell’s response, to his credit, was as simple and direct as you’ll ever hear from a central banker: “Absolutely.” He elaborated: “I think we’ve learned that ... this is something you can’t identify directly. I think we’ve learned that it’s lower than we thought, substantially lower than we thought in the past.”

The article contains rebuttals of all four notions.

This thread had escaped me. There are many more than just these four.

The idea of general equilibrium. That the economy naturally tends over time to the full-employment equilibrium. This is not been observed in the economy that we have. It is rather a requirement of the fantasy economy that self-regulates that so many wishes were our economy. They constantly confuse the economy that they wish we could have with the economy that we actually have. This is on purpose, among other reasons, there is a widespread belief that if they do this, our economy will magically turn into the fantasy economy that self-regulates.

The Philips curve is not holding up very well. This is the supposed binary relationship between the interest rate and inflation. More later, it is time to go to the soccer match, Atlanta United.

 

[SimpleDon]

Atlanta United won 3-0. It wasn't pretty, 2 own goals by LA and a penalty by video review.

More things that the mainstream economists have gotten wrong for decades.

They don't consider that money and banking have any impact on the economy. This is criminal negligence when you consider that at least every other recession including the two biggest ones were caused by malfeasance (or, being gracious, instability) in the financial sector. And that virtually all of the lost decades in the late 19th century of almost continuous deflation were caused by the US's adoption of the gold standard. And that inflation is a monetary phenomenon. Or Irving Fischer.

Say's law. Ignoring the income distributional effects on the economy. Comparative advantage in foreign trade. The micro-foundations of the macroeconomy. Marginal productivity. Any theory by Milton Friedman or Friedrich von Hayek. The Ricardian Vice. Deregulation. Austerity to recover from a recession. The federal government's budget is like your household budget. Hick's diagrams.

 

[DBT]

The assumption that perpetual growth in consumption is possible appears to common among neoclassical economists and policy makers.

 

[bilby]

The assumption that perpetual growth in consumption is possible appears to common among neoclassical economists and policy makers.

The assumption that it's false seems to be common amongst people who assume that 'growth' is measured in kilograms rather than dollars. Economists aren't interested in the amount of stuff (measured in kg); They talk about growth in value, which is measured in $.

If you bought a house in Sydney for £500 ($1,000) in 1960 (~$14,810 in today's dollars), and it's worth $1,000,000 today, that's 100,000% growth - with the use of zero resources. After adjusting for inflation, it's still 6,752% growth. If inflation adjusted value can increase at all (much less 68 times) for zero use of additional resources, it is clear that the availability of physical resources is not constraining growth.

Materials consumption is constrained by the amount of materials in the reachable lithosphere. It's certainly not infinite, but it's vast - in the order of about fifty trillion metric tonnes, or about 5,000 tonnes per person at the peak projected human population.

That is to say that growth in material possessions will need to stop if it reaches an average current ownership of 5,000 tonnes of stuff per human, as long as we are constrained to only terrestrial materials, and don't go asteroid mining.

And that's current ownership - not the amount that people own or use in their lifetime, but the amount of materials under the direct ownership and control of every man, woman, and child at a given instant.

Of course, growth in material wealth, measured in dollar value, is unlimited, as the only constraint on dollar values is the availability of numbers to describe them - if total human wealth reaches $ℵ₀, I shall be more than a little surprised.

 

[DBT]

Growth entails many things, building houses, office blocks, transport, retail, etc. Look at the consequences of a housing market collapse and its flow on effects in transport, material supply and jobs.

That's just one sector of business activity.

According to some reports, we have already exceeded the carrying capacity of the environment in the long term.

 

[bilby]

Growth entails many things, building houses, office blocks, transport, retail, etc. Look at the consequences of a housing market collapse and its flow on effects in transport, material supply and jobs.

That's just one sector of business activity.

According to some reports, we have already exceeded the carrying capacity of the environment in the long term.

Growth entails an increase in the value of an economy. That's the only thing it entails.

Sure, the things on your list that increase total resource use are some of the current activities that we do, and they contribute to growth. But they are not necessary for growth, and so cannot be a constraint on it.

Resources are used, but they are not consumed. Mass is conserved, and the only thing that stops us from recycling every scrap of material we use is the cost of the energy that is required (and the fact that some of it is still in use - people would get irate if you recycled their house while they were still living in it).

 

[DBT]

Economic growth entails the means by which an economy grows. When policy makers use the mantra, jobs and growth, jobs and growth....they are not referring to growth in ideas, software development, philosophy or scientific progress, they mean material things, infrastructure, construction, new houses being built, transport, retail activity, buying and selling things that are grown,processed, mined or manufactured.

Basically;
''Unfortunately, we live in a world of capitalists who thrive on the great Myth of Perpetual Growth, endless growth, ad infinitum, forever, till the end of time.

But driving the economists’ growth myth is population growth. It’s the independent variable in their equation. Population growth drives all other derivative projections, forecasts and predictions. All GDP growth, income growth, wealth growth, production growth, everything. These unscientific growth assumptions fit into the overall left-brain, logical, mind-set of western leaders, all the corporate CEOs, Wall Street bankers and government leaders who run America and the world.

But just because a large group collectively believes in something doesn’t make it true. Perpetual growth is still a myth no matter how many economists, CEOs, bankers and politicians believe it. It’s still an illusion trapped in the brains of all these irrational, biased and uncritical folks.''