Sunday, July 21, 2019

Four economic ideas disproven by reality.

By Jared Bernstein Jul 19, 2019, 8:00am EDT


The natural rate of unemployment that AOC questioned is one such idea (more on that below). There are three others worth singling out:

that globalization is a win-win proposition for all, an idea that has deservedly taken a battering in recent years;

that federal budget deficits “crowd out” private investments; and

that the minimum wage will only have negative effects on jobs and workers.

Economists and policymakers have gotten these ideas wrong for decades, at great cost to the public. Especially hard hit have been the most economically vulnerable, and these mistakes can certainly be blamed for the rise of inequality. It’s time we moved on from them.


Today, decades of high-quality research (much of it initiated by the late, great economist Alan Krueger) have introduced a much more nuanced view about the true impacts of minimum-wage hikes. But years of economists’ opposition to the policy have left us with a national minimum wage of $7.25 per hour, a level far too low to support the many families that depend on the minimum wage. (Another myth was that only teenagers earned the minimum; David Cooper’s work shows the main beneficiaries of higher minimum wages are working adults.)


Pegging the “natural rate” too high, ignoring the harm from exposure to international competition, austere budget policy, low and stagnant minimum wages — all of these misunderstood economic relationships have one thing 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.


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