Economists versus the people
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  Economists versus the people
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Author Topic: Economists versus the people  (Read 855 times)
Benjamin Frank
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« on: December 26, 2020, 12:41:10 AM »

I've been reading Bob Woodward's book The Agenda about Bill Clinton's first 18 months as President focusing on his economic policies.  (Bob Woodward in 1992 wrote a four part series for the Washington Post on George H W Bush's economic policies and this book was a follow up to that series.)

I've been reading over the section of a meeting with President elect Bill Clinton and his economics cabinet nominees in January of 1992.  The discussion at the meeting focused on the policies they would seek to implement which basically involved trying to figure out how much to reduce the deficit by by 2016.  During the campaign Bill Clinton, in response to Ross Perot, promised to cut the deficit in half during his first term.

Clinton and his advisors felt especially blindsided at this meeting as it had just been reported that the budget deficit for 1992 was going to be $50 billion higher than had previously been estimated.

Those arguing against large decreases in the deficit argued they would hurt people and that the cuts in government spending would reduce GDP growth, possibly putting the United States back into a recession.  Those who argued for large cuts to the deficit argued that the spending cuts would lead to lower interest rates, especially long term interests rates, and this would spur greater economic growth.  The counter argument was that, at best, there would be a time lag between the spending cuts and the increase in spending and investment from lower interest rates, and that, at worst, interest rates would not come down.

With the benefit of hindsight, it seems pretty clear those who argued for the large cuts in the deficit were more correct than those who argued against.

This got me to thinking that in the last 30 years or so throughout the 'advanced economies' there have been several cases where economists have made abstract claims of future benefits, while much of the public, at least initially, is more worried about tangible, concrete costs.

The above example is one, the other two I thought of right away:
1.Free trade. Economists make abstract arguments about comparative advantage and specialization, while many people are concerned about concrete harms against specific industries as a result of the increased foreign competition.

As economists here argue: the gains are diffuse while the losses are concentrated.

2.Legislated job protections that make it difficult to lay off workers.  This was an issue in Germany and is a seemingly permanent issue in France.  Economists make a logical but ultimately abstract argument that the more difficult it is for employers to lay off workers, the less likely it is for employers to hire people in the first place. 

To many people though, the idea that making it easier for employers to lay off workers will ultimately lead to increases in employment that will ultimately increase job security sounds like nonsense and many workers think: I'd rather have my present job protected than believe in some idea of more jobs through less job security.
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Kingpoleon
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« Reply #1 on: December 28, 2020, 10:07:17 PM »

The Keynesian model of public spending, where taxes are cut and spending hiked during recession, while spending is cut and taxes are raised otherwise, has held up pretty well. Very few economists, even from the Chicago School, dispute this generalization.

As far as free trade is concerned, gains are rarely less concrete than losses. The only concern I have heard that makes sense is the importance of a diverse economy. In theory, America’s loss of economic diversity as the percentage of unskilled labor declines should make our economy less stable. I have previously questioned this, because economic diversification is almost always measured based on industry rather than types of labor. Now, if it is shown that a decrease in unskilled labor alters the diversity of industry, then I will concede the point. I have not seen such a decrease conclusively given.
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True Federalist (진정한 연방 주의자)
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« Reply #2 on: December 29, 2020, 10:52:05 PM »

The Keynesian model of public spending, where taxes are cut and spending hiked during recession, while spending is cut and taxes are raised otherwise, has held up pretty well. Very few economists, even from the Chicago School, dispute this generalization.

Except that politically, it's a lot easier to cut taxes and hike spending than to raise taxes and lower spending.

That's one reason unemployment taxes and benefits have been one of the most effective Keynesian programs ever implemented in this country. They can automatically revise taxes and spending to provide the desired countercyclical effects without requiring new laws to be passed.
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Benjamin Frank
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« Reply #3 on: December 31, 2020, 12:11:52 AM »
« Edited: December 31, 2020, 03:10:16 AM by Frank »

The Keynesian model of public spending, where taxes are cut and spending hiked during recession, while spending is cut and taxes are raised otherwise, has held up pretty well. Very few economists, even from the Chicago School, dispute this generalization.

As far as free trade is concerned, gains are rarely less concrete than losses. The only concern I have heard that makes sense is the importance of a diverse economy. In theory, America’s loss of economic diversity as the percentage of unskilled labor declines should make our economy less stable. I have previously questioned this, because economic diversification is almost always measured based on industry rather than types of labor. Now, if it is shown that a decrease in unskilled labor alters the diversity of industry, then I will concede the point. I have not seen such a decrease conclusively given.

1.The Keynesian model of public spending failed in practice because it was not implemented, debts weren't eliminated when their was economic growth.  This led to the situation where, in the 1970s-1990s where cutting spending could help the economy because it lowered fears of inflation which led to lower long term interest rates.  This had not been the case previously and is not the case now where globalization seems to have reduced inflation and inflationary concerns thus allowing for (much greater) deficit spending.

George H W Bush's cuts to the size of deficits in the 1990 agreement with Congress were $500 billion over 5 years and Clinton's 1993 budget was a similar $500 billion over 5 years.  Had George H W Bush gone big with a $1 trillion cut in deficits (through both spending cuts and tax increases,) the inflation rate almost certainly would have dropped, long term interest rates would have dropped, and the economy likely would have boomed under George H W Bush as they did under Clinton. Whether that would have been felt fully enough for the 1992 election is another matter.

2.I'm sure the actual gains from free trade are as concrete as the losses are.  The issue is that the benefits of any newly implemented free trade deal are much more diffuse and uncertain than the losses.  When NAFTA was signed for instance, everybody knew (and were correct) that it would devastate the textile industry in North Carolina especially.  Whatever gains would come from increasing trade with Mexico were easier to argue against because they were hypothetical or would be more spread out, either across the country or over time.

This isn't my idea.  If you want to see it from a more authoritative source or want further explanation: https://www.investopedia.com/articles/economics/08/north-american-free-trade-agreement.asp

"NAFTA displays the classic free-trade quandary: Diffuse benefits with concentrated costs. While the economy as a whole may have seen a slight boost, certain sectors and communities experienced profound disruption. A town in the Southeast loses hundreds of jobs when a textile mill closes, but hundreds of thousands of people find their clothes marginally cheaper"

I said 'concrete' and not 'concentrated' because I was referring to the knowledge of industries that would be devastated as a result of NAFTA that even the supporters of NAFTA acknowledged before it passed would be devastated.

This is the concept called in economics 'loss aversion.'  Economists understand the concept but don't really have any way to combat it.

This is why I said that economists make abstract arguments for something while the public has concrete worries about it.

It seems even you didn't get my abstract arguments about how cutting the deficit in the 1990s could lead to an improved economy through lower long term interest rates.

Don't worry about it.  Bill Clinton's consultants and communications team (Paul Begala, James Carville, Mandy Grunwald) didn't understand it either.  George Stephanopoulos might have, but he might have just been humming a few bars as well.
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Benjamin Frank
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« Reply #4 on: December 31, 2020, 03:26:06 AM »

If anybody is interested in the conclusion of the Clinton 1993 budget based on the book. In the end the planned passed 218-217 in the House and 51-50 in the Senate.  It was mostly based on a legislative strategy of winning over reluctant House and Senate members but there was also a broader public communications strategy that was complemented with a consistent private communications strategy.

The basis of this was from James Carville who told Clinton and all the communications people and the economics people "If you tell me this is the right thing to do because my kids will be better off, fine. Even if the gasoline tax will cost people $49 a year, if you can show that people will pay less on their house, then goddamnit, we can do this.

My daddy used to say when we were kids, whatever we had was the best.  The best.  We had the best house, the best clothes, we lived in the best town, we lived in the best homes, we had the best school.  I had the best sisters. Louisiana had the best soil to grow things.  That was what my dad used to say.  What we have to start to do with this plan is say that it's the best.  It's the best thing for the economy.  The best thing for jobs.  The best thing for interest rates. And be really full throated about it."

"We have to believe in this.  We'll die if we don't get clarity on it, and I don't want to hear anybody saying you like it, but you wish you had something else. This is the best. Why don't we just go out and say it's the best?"

I've always thought there is a lot of truth to that communications strategy.
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