My friend in Arizona sends me clippings of the latest conservative commentary on the economy and economic policy.
I truly appreciate this, since it me keeps me up with the volume of it all. I got the latest packet just before Labor Day. It included Stephen Moore’s Wall Street Journal piece, “Why Americans Hate Economics.”
I can’t really relate to the hating of Economics, since as a student I fell in love with the subject. I saw it as a study of why things are the way they are. What caused the rise (and now the fall) of unions? Can unions raise wages? What determines the comparative prices of goods and services? What determines the overall price level? What is money and what role does it play. What causes unemployment? What causes recessions, and worse depressions? What determines the level and distribution of incomes?
These, and many more issues, are the stuff of Economics. The study has gone on for hundreds of years, before and since Adam Smith and The Wealth of Nations and through Thomas Malthus, David Ricardo, Alfred Marshall, John Maynard Keynes, John R. Hicks, Friedrich Hayek, Milton Freidman, Paul Samuelson, Robert Solow and many more, up to and including the 2010 Nobel Prize winners in Economics, Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides.
Almost everyone has an opinion on any number of economic phenomena. We are workers, careerists, buyers, savers, users of money and credit. So naturally we have an opinion. It’s common sense. Except in most cases it isn’t.
Take the case when unemployment is high, interest rates are near zero, inflation is almost nonexistent, concern over debt is high and confidence in the economy is low. Common sense is that we should save more and reduce debt. But when all or most of us try to save more, things don’t get better because what most determines what we save and even invest is the level of our incomes. So savings and investment don’t increase much at all. They may even fall.
The Moore article seems to support an approach to economic issues based on “common sense,” rather than on serious analysis. He raises straw men to justify an attack on Economics as a subject of study.
One straw man Moore raises is the view of economists on unemployment benefits. Most professional economists don’t refute the notion that unemployment benefits can have modest effects on the duration of unemployment when the unemployment rate is low and jobs are readily available. There are empirical studies by economists that provide evidence of this effect. But the consensus of professional economists would be that with unemployment over nine percent, any such affect is small, maybe even non existent, especially when accounting for a likely stimulus effect of supporting spending by those receiving benefits.
And a consensus among professional economists would be to refute the notion that a rise in the minimum wage can create jobs. However, they might argue that the level of the minimum wage in the United States is so low as to have, at most, a very minimal effect on unemployment. I have seen no serious proposals by economists that we should raise the level of the minimum wage now.
Overwhelming majorities of professional economists never supported paying farmers to burn crops, not plant and destroy live stock. In fact, economists have been among the most persistent in opposition to misplaced farm policy.
Macroeconomics is not a dismissal of the rules of economics, but rather an acknowledgement that sometimes markets don’t equate supply to demand smoothly, sometimes there are sudden shocks to economies, sometimes we have recessions, sometimes we have bubbles, sometimes it takes an awful long time for markets and especially the economy as a whole to right itself, and sometimes they do so only after there has been much misery and a waste of resources that could have been put to productive use.
Keynesians don’t refute the notion that the economic problem in regard to human wants and desires is scarcity and the need to get the most of our resources; they don’t believe the problem is over production, as Moore claims. In fact, Keynesians advocate government stimulus policy in recessions so that we can put unemployed resources to work sooner than what would occur by waiting for the economy to bottom out and to right itself.
And the last straw man of all is Moore’s example of “Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production.” Mr. Moore, could you please tell us which modern, professional economists are advocating a communist style command economy?