The new economics, and how it can create a more just America.
The American economy has some serious, structural problems — and the economists are partly to blame.
At least that’s the verdict of Binyamin Appelbaum, member of the New York Times editorial board and author of the new book The Economist’s Hour. In the book, Appelbaum critically examines economists’ contributions to public policy in the last few decades. Though he does recognize some of my profession’s positive contributions to American life, he is unsparing in blaming some of its most prominent practitioners for policies that have contributed to “the mess we’re in.”
It’s a fair accusation. For decades, the dominant strain of the profession has interacted with conservative politics on a project both sides shared: cutting taxes (mostly for the wealthy), deregulating business, and aggressively steering government interventions away from helping the economically vulnerable under the argument that to do so invited “inefficient” outcomes.
The underpinnings of this “old economics” is simple. Once markets were set up and individual ownership was protected by the rule of law, individuals were assumed to interact in ways that would produce the optimal amount of goods and services that people needed and desired to consume and invest. Left to its own devices — without the interference of unions or minimum wages or food stamps or distortionary taxes — the system would generally hit this optimal equilibrium at prices and wages that matched supply with demand.
To call this the “old economics” is not to imply that it’s no longer with us. To the contrary, from the Trump tax cuts favoring the wealthy to their work requirements hassling the poor, the old principles still dominate the conservative policy agenda. (Of course, Trump himself is unorthodox, and when he ventures outside old-economics territory, as with his trade policies, he’s called out by the profession.)
That’s the bad news. The good news is that there’s a new economics that’s increasingly ascendant, one the rejects the market-centric framework and its conservative policy tools on behalf of Appelbaum’s simple but profound conclusion: “Communities can decide what they want from markets.”
That probably sounds obvious. In democracies, why shouldn’t majorities decide what sorts of economic outcomes they desire and, conversely, those they’d like to avoid? If we want less child poverty, less environmental degradation, less financial risk, less concentrated wealth, and so on, surely we could distribute, tax, and regulate in the interest of achieving those goals.
Not according to the old economics, at least not unless we’re willing to unleash inefficiencies that will unravel the benefits of the “optimal” system, distort price signals, and give rise to incentives that will steer people and capital away from their most productive uses.
To which the new economics basically says … meh. The new economics doesn’t reject efficiency, but neither does it fetishize it. It is one laudable goal among many. It is guided by Appelbaum’s recognition that “efficiency has no special claims as the primary purpose of a marketplace.”
A higher tax rate, minimum wage, or regulation might or might not ding growth — there’s evidence on both sides. But we as a community or a society might decide that because we want workers to earn living wages, the wealthy to pay a fairer share, and businesses not to degrade the environment and regularly blow up financial markets, the benefits of these policies outweigh their costs.
If that strikes you as obvious, all I can tell you is that a lot of at least marginally cool economists are finally catching up with you.
The new economics, explained
It is not a coincidence that the new economics is in ascendency at this moment. Though by some measures, inequality has not grown much in recent years, it remains at levels as high as the late 1920s, which, for the record, didn’t end well. In one of the most disturbing developments emerging from recent research, the inequality of income and wealth is increasingly associated with the inequality of life expectancy.
The assumption that self-interested firms would self-regulate gave rise to repeated rounds of deregulation that gave us what I call the “shampoo economy”: bubble, bust, repeat. The old economics wrongly claimed we couldn’t have persistently low unemployment without spiraling inflation, yet that’s precisely what we’ve enjoyed in recent years.
In other words, the new economics isn’t arising just because we want “better” outcomes from our markets. It’s also arising because a lot of the old stuff has turned out to be just plain wrong. The best way to learn more about this new strain of work is to briefly highlight some examples.
To start with the most obvious, in recent years, inequality has become a subject of legitimate study and attention in the profession. Spearheading this shift have been Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, who brushed away the dire warning by 2004 Nobel laureate Robert Lucas: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”
And they’re not alone. Raj Chetty and company’s highly influential work on mobility sits firmly in this camp. Think tanks like the Economic Policy Institute (which, for the record, predated the researchers named above), the Roosevelt Institute, the Institute for New Economic Thinking, and especially the Center for Equitable Growth put inequality and broadly shared growth at the core of their work, implicitly rejecting the old-economics’ precept that growth can be either efficient or equitable, but not both. Moreover, these economists’ work is now feeding directly into policy proposals, such as Sen. Elizabeth Warren’s wealth tax.
Many who elevate and practice new economics are card-carrying members of the profession’s mainstream. The chair of the Federal Reserve, Jerome Powell, may be a lawyer by training, but he’s also the nation’s chief economist. He and the large staff of economists he oversees have taken a data-driven, critical look at the old monetary policy rulebook. For years, those rules militated against letting unemployment fall to levels where working people might gain a bit of the bargaining power they sorely lacked in slack labor markets. But the rulebook said that to allow this to occur would lead to runaway inflation.
Perhaps the simplest way to show how Powell and company are practicing a new type of economics is to note that the actual unemployment rate has been below the Fed’s own estimate of the so-called “natural rate” (the lowest rate consistent with stable prices) for over two years, and the central bank has been cutting, not raising, their benchmark interest rate. As they’ve done so, Powell has commented on the benefits of this policy stance in providing “second chances” to those “left behind,” rhetoric that suggests a renewed focus on those further down the economic ladder among our chief economic policymakers (Powell’s predecessor, Janet Yellen, made similar claims).
To be clear, they’re not rejecting the old idea that low unemployment can trigger faster inflation. But they’re both being honest about our ignorance of the precise parameters in play in that relationship, and even should inflation rise some, willing to trade at least some of that off for second chances.
Another casualty of the new economics is austerity. Appelbaum provides painful memories from the very recent past of budget austerity: the far-too-early pivots to deficit reduction in the wake of the Great Recession, both here and especially in Europe. In response to such misguided policy, Stephanie Kelton and others in the Modern Monetary Theory (MMT) movement have disseminated a highly influential and far more expansionist way of thinking about fiscal policy and budget constraints.
More mainstream economists who have little sympathy for MMT, including Paul Krugman, Olivier Blanchard, Larry Summers, and Jason Furman, have nonetheless sounded similar notes, arguing for rejecting “deficit reduction” as sound fiscal policy in and of itself, especially when its opportunity costs are inadequate stimulus for weak economies or scrimping on investments in productive public goods. (I’ve long made similar arguments.)
The new economics has also rejected the old principle that assistance to poor people invokes a tradeoff between efficiency and equity — that anti-poverty programs distort the economic behavior and choices of the poor.
There is now a robust research agenda exploring and identifying long-term gains to society from investing in a variety of supports to the poor (especially children), including nutrition, housing, income and education. My own colleagues at the Center on Budget and Policy Priorities deserve credit for this turn, as do many others like Diane Schanzenbach, Hilary Hoynes, and Nathan Hendren.
Finally, the practitioners of new economics have challenged the old notion that interventions in international trade kill the golden goose of “comparative advantage” (the theory behind the benefits of trade).
We’ve argued for much stronger safety nets to help those hurt by trade, currency interventions, trade deals that represent a very different set of stakeholders (workers, consumers, environmentalists), and industrial policies to shape the outcomes of global trade is ways that violate the norms of a status quo long embraced by international economists and politicians from the center-left to the center-right. Some of the folks you want to listen to on this front include Thea Lee, Dani Rodrik, Michael Pettis, Dean Baker, Joe Gagnon, Lori Wallach, Brad Setser, and Rob Scott.
Can new economics drive policy?
This summary just scratches the surface of a new economics that rejects the supremacy of unfettered markets (and I could’ve named many more names — apologies to those I’ve left out). Exciting work in this spirit is well underway on antitrust, patent rules, minimum wages, union power, the environment, and even the fundamental measurement of growth itself. In every case, the research is grounded in Appelbaum’s admonition about communities deciding what they want from markets.
Is this new strain of thinking as ascendant as I claim? Or could it be overwhelmed by the potent and toxic combination of economic orthodoxy and deep-pocketed, anti-government, conservative politics?
I’m confident that it will last. First, much of the work and people noted above are firmly ensconced in academia, implying that the profession has become increasingly ideologically diverse. In fact, some of the names cited above are Bates medal winners, awarded to younger economists judged to have made the “most significant contribution to economic thought and knowledge.” In other words, many of these practitioners are embedded in the mainstream.
Far more important, from my perspective, is seeing these ideas show up in the thinking of policy makers, including many of the Democrats running for office (as with Saez and Zucman’s help with Warren’s wealth tax). Many of the people and think tanks named above are offering informal guidance to various campaigns on inequality, labor markets, and trade. (Disclosure: I was chief economist for Vice President Biden, though I don’t advice his campaign in an official capacity.)
While we won’t know it until we see it, there’s a good chance that the next president will staff her economics team with non-usual suspects who are more than willing to shape market outcomes on behalf of the majority on the wrong side of the inequality divide.
Any form of social analysis that aims to be useful to society must evolve in ways that enhance social welfare, equity, racial and gender justice, and environmental sustainability. For too long, much of economics failed that test — yet its interaction with the ruling class elevated it to a powerful perch. As Appelbaum documents, the pervasive damage of this interaction has cleared a path for a growing number of economists who are busy knocking the old school off its privileged perch.
To which I say: It’s about time.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities and was the chief economic adviser to Vice President Joe Biden from 2009 to 2011.
Author: Jared Bernstein