Voodoo Time Again

Conservatives have it wrong about Hollywood. Of course Tinsel Town is tacky – sudden unimaginable wealth always causes that – but Hollywood is not subverting America with all its tales of sex and violence, or with its scorn of traditional values such as that of the hard-working decent man who plays by the rules, who does the right thing and goes to church each Sunday, because he’s a Jesus Guy, really. It’s true you don’t get much of that, ever, but what sells is the unexpected. All the money out here comes from telling people what they want to hear – that the unlikely might happen. That’s why they call this place the Dream Factory. We sell America the counterintuitive. The unlikely hero wins, or the guy finally gets the girl, or the truly evil person sooner or later gets his, but good – against all odds.

Heck, that’s every Hollywood plot right there. And yes, we all know life’s not like that. In real life it seems like the good guys never really win. The guys who caused the 2008 economic collapse, that pretty much ruined America, got a seven hundred billion dollar taxpayer bailout and are now richer than ever and doing just fine. No distressed homeowner got a dime, and now the talk is of dismantling what is left of our halfhearted social safety net – Medicare and Social Security and food stamps and unemployment insurance and public schools and all the rest – privatizing much of it so these guys can get even richer. The good guys aren’t winning, but we do really want to believe in the counterintuitive, against all odds. You know the standard line from half the screenplays ever written – “Why, that’s so crazy it just might work!” It does – in the movies.

That’s an alternative universe, where the counterintuitive always works just fine, but it’s a trap. You can come to believe that universe is the real one. That danger was clear when we had a president who came from the Dream Factory, the former Hollywood actor Ronald Reagan. Yes, there are all the tales of how, in his last years in office, he used to confuse the second-rate war movies he was in with being in the real war against Hitler and Tojo, which he wasn’t. He made patriotic War Bonds films in Culver City and Burbank. He just didn’t know the difference anymore. It was kind of sad.

That’s a minor matter – no real harm there. The real harm was in the Hollywood mindset, in being immersed in the counterintuitive as a way of thinking. With Reagan the problem was the famous Laffer curve describing how things really work, in a counterintuitive way. It made no sense, but the idea was that lowering if not eliminating taxes, at least many of them, results in a sudden dramatic and then sustained massive increase in tax revenues for the government, because of increased economic activity, as folks have more of their own money to spend. Collect less money and you’ll collect more money. That’s a fact the supply-side guys say no one can ignore.

It’s not a fact – try that and you find yourself two hundred billion dollars short and you’ve blown up the deficit because you have to borrow to make ends meet. That’s what happened the first time this was tried – the deficit exploded under Reagan. And now there’s a general agreement that this might have been one of the all-time worst ideas in economics – see Debunking the Laffer Curve (Politics and Current Affairs Forum) and Tax Cuts Don’t Boost Revenues (Time) and most recently The Laffer Curve Debunked (a multi-part series in the Atlanta Journal Constitution from Jay Bookman). It was always a crazy idea, but back in the eighties someone must have turned to Art Laffer and said, “Why, that’s so crazy it just might work!”

That’s pretty much how they sold it, like a cool line from a Hollywood movie. Ronald Reagan promised an across-the-board reduction in income tax rates and an even larger reduction in capital gains tax rates. When competing with Reagan for the Republican Party presidential nomination for the 1980 election, George H. W. Bush sneered at Reagan’s nifty new supply-side policies, calling them “voodoo economics” – but he gave in. He had to, to win the Republican nomination in 1988, because folks love crazy ideas that just might work. Hollywood has trained them well, but Bush lost in 1992 when, after buying into the counterintuitive – Read My Lips. No New Taxes! – he then raised taxes. He had to. He had known better in the first place, but the counterintuitive is seductive. There would be no second term for him.

His son knew better:

On January 3, 2007, George W. Bush wrote an article claiming “It is also a fact that our tax cuts have fueled robust economic growth and record revenues.” Andrew Samwick, who was Chief Economist on Bush’s Council of Economic Advisers from 2003-2004 responded to the claim:

“You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.”

It was a scam. The Bush tax cuts didn’t raise revenue – they knew all along they couldn’t.

So there you have it. Reagan went for the counterintuitive and blew up the deficit, and then quietly raised a few taxes himself. The first Bush gave it a go, but he had to back down and leave that alternative universe to keep the government from going broke. And the economists working for his son sat around and talked about how the whole thing was pretty much a farce – not one of them believed this cut-taxes-to-raise-revenue crap ever worked.

None of that seemed to matter. This is orthodoxy on the Republican side still, and has now morphed into austerity economics. Cut government spending and the economy will grow by leaps and bounds. Lay off as many firefighters and cops and teachers as possible, don’t repair roads and bridges and schools, much less build any new ones, and take that meat cleaver, sequestration, and have every part of government cut twenty percent of everything, and the economy will soar. Have more than half a million civilian workers in the defense department take one day a week off without pay, removing twenty percent of their purchasing power from the economy, and the economy will thrive. Cut food stamps. Eliminate unemployment benefits. We’ll all be fat and happy. It’s so crazy it just might work.

The trick was to say it wasn’t crazy. Say the deficit is too large, and to pay our debts, or at least the interest on them, we’ll have to borrow more from those who now see us as profligate fools and a bad risk, which will raise interest rates sky-high and stop the economy cold, and cause hyperinflation too, making the dollar worthless. That’s’ what happens when the government just prints money to cover things, like Bernanke does with his quantitative easing thing, buying eighty-five billion in government bonds each week with funny-money.

We just can’t spend more now – except that our deficit has been large and interest rates have been at record lows for five years now, and there’s been no inflation. We spent and borrowed for quite some time, increasing the debt for a few years, and none of that bad stuff happened. Europe and the UK went with full austerity, making life miserable for their people, and their economies collapsed even further – and now no one wants to buy their bonds at any price, because they see economies shutting down, not growing. Their interest rates actually spiked, which wasn’t supposed to happen, and now they’re all backing away from full austerity. You want as much economic activity as possible – lots of buying and selling back and forth, even if the government has to do much of that in hard times, even borrowing to do so, temporarily increasing the debt. You don’t want as little economic activity as possible. Austerity doesn’t cause prosperity. It kills it.

The Europeans are waking up to this, and Paul Krugman sums it all up pretty well:

It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case – that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks – was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.

And now the results are in: Keynesians have been completely right, Austerians utterly wrong – at vast human cost.

John Maynard Keynes was a smart guy – observe the facts, markets don’t always work to perfection all on their own, and deficit spending can be observed to be useful when the markets have crashed, once again, as they always do. He was not the kind of guy who likes the counterintuitive. Sometimes something is so crazy that it can never possibly work – it’s just flat-out crazy. Life isn’t a Hollywood movie. Yes, he was boring, but they do call economics the Dismal Science after all.

That may be the problem. To make economics less dismal those who we have elected to watch over things for us may have decided it was too boring, and spiced it up with nonsense, helped by compliant economists who feed them likely nonsense. In Salon, Robert Atkinson and Michael Lind argue just that:

Forget the dumbed-down garbage most economists spew. Their myths are causing tragic results for everyday Americans.

That’s the thesis. Those who whisper in politicians’ ears are a self-serving lot who, first of all, insist that economics is a science, which it isn’t:

In Econ 101, there is no uncertainty, only the obvious truths embedded in supply and demand curves. As noted economist Lionel Robbins wrote, “Economics is the science which studies human behavior as a relationship between given ends and scarce means, which have alternative uses.” If economics is actually a science, then policymakers can feel more comfortable following the advice of economists. But if economics is really a science – which implies only one answer to a particular question – why do 40 percent of surveyed economists agree that raising the minimum wage would make it harder for people to get jobs while 40 percent disagree? It’s because as Larry Lindsey, former head of President Bush’s National Economic Council, admitted, “the continuing argument [among economists] is a product of philosophical disagreements about human nature and the role of government and cannot be fully resolved by economists no matter how sound their data.”

In short, they’re making it up as they go along, and secondly, they have some odd premises:

Economists have one overarching principle that shapes their advice: maximize “efficiency.” As economist and venture investor William Janeway notes, “Efficiency is the virtue of economics.” But the goal of economic policy should not be to maximize static efficiency (the “right” allocation of widgets), but to create inefficiency – in the sense of disruptive innovation that makes widgets worthless. For it is the development of new widgets and better ways to make them (e.g., innovation), rather than efficiently allocating existing widgets, that drives prosperity. As noted “innovation” economist Joseph Schumpeter pointed out: “A system which is efficient in the static sense at every point in time can be inferior to a system which is never efficient in this sense, because the reason for its static inefficiency can be the driver for its long-term performance.”

So much for efficiency, and forget markets too:

In the world of Econ 101, “the economy” is usually treated as a synonym for “the market.” But an enormous amount of economic activity takes place outside of competitive markets dominated by for-profit, private firms.

In the industrial nations of the OECD, government spending at all levels on average accounted for 46 percent before the Great Recession. Even in capitalist countries, the government is usually the largest employer, and the largest consumer of goods and services in areas like defense, education and infrastructure. Other non-market sectors responsible for goods and services production include the household (your chores are economic activity too, even if Econ 101 ignores them) and nonprofits like religious institutions, colleges and universities, charities and think tanks like ours. Markets, then, account for around half of a modern nation’s economic activity – maybe less, if uncounted household production is as big a part of the real economy as some have claimed.

If, even in capitalist countries, the government accounts for almost half all economic activity, maybe you don’t want to shut it down, and there’s this gem too:

If the economy is a market, prices are what allow goods and services to be efficiently allocated. In Econ 101, because prices are set in “free markets,” the price of something must be a reflection of its real value. This principle – known as the efficient market hypothesis – was the reason why, when in the run-up to the Great Recession real house prices increased 40 percent (a more than seven-fold increase from decades prior), virtually no economist sounded the alarm, precisely because those higher prices must have reflected higher value. This is why Ben Bernanke stated in 2005 that rising home prices “largely reflect strong economic fundamentals” and Fed chairman Alan Greenspan assured us that, “It doesn’t appear likely that a national housing bubble, which could pop and send prices tumbling, will develop.” Had economists not been in the grip of the efficient market hypothesis, they would have realized that something was seriously amiss and helped rein in lending to reduce the bubble and subsequent collapse.

Ah, that was the problem. And note also that not all profitable activities are good for the economy:

Most politicians and pundits ignore the distinction between productive activities (e.g., making useful appliances or lifesaving vaccines) and pure rents (profiting from real estate appreciation, stock manipulation or the accident of owning mineral deposits that become more valuable). If the greatest fortunes are to be made in financial arbitrage, gambling in real estate or exploiting crony-capitalist political connections, the argument that private profit-seeking maximizes economic welfare and the public good is undermined.

Take THAT, Adam Smith! 

This, however, hits closer to home:

According to Econ 101, high wages are bad for an economy and low wages are a blessing. James Dorn of the libertarian Cato Institute declares that higher wages, by causing less demand for workers, mean that “unemployment will increase … No legislator has ever overturned the law of demand.” High-wage countries, we are told, price themselves out of a supposed global labor market. And in the non-traded domestic service sector in which most Americans work, a higher minimum wage, Econ 101 claims, would lead to permanent higher unemployment.

We’ve all heard that a lot. Unions ruined America. They demanded better wages, and actual benefits, and safe working conditions, or they’d go on strike. Each time they won America became less competitive in the world, which Atkinson and Lind see as an absurd oversimplification:

When it comes to traded goods and services, this ignores the effects of relative currency values being the major determinant of prices of exports and imports. It also ignores the fact that high-wage workers who are highly productive, thanks to their machines and skills, can produce more cheaply than poorly paid workers with inferior technologies and skills. According to the Asian Development Bank, most of the high-value-added components of iPhones, which are assembled in China, actually come from high-wage nations like Germany, Japan, South Korea and the U.S. Michael E. Porter and Jan Rivkin state flatly in the Harvard Business Review: “Low American wages do not boost competitiveness,” which they define to mean that “companies operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for the average American …” The countries that beat the U.S. in the latest competitiveness rankings by the World Economic Forum are all high-wage nations: Switzerland, Singapore, Finland, Sweden, the Netherlands and Germany.

There’s quite a bit more of this sort of thing, a fight against the nifty counterintuitive, but it comes down to politicians not knowing a damned thing about economics, being advised by those who are making it up as they go along, but calling it a science.

That makes this sort of thing just about what you would expect:

A conservative mogul worth $43 billion says he knows the secret to helping poor people. According to Charles Koch, the U.S. needs to get rid of the minimum wage, which he counts as a major obstacle to economic growth.

On Wednesday, the Charles Koch Foundation launched a $200,000 media campaign in Wichita, Kansas, with a hint of expanding it elsewhere. It is the Kochs’ biggest media buy since they promised to do more to “persuade politicians” after suffering losses in the 2012 election.

In this interview with the Wichita Eagle he said that the minimum wage is what keeps people poor, somehow:

We want to do a better job of raising up the disadvantaged and the poorest in this country, rather than saying ‘Oh, we’re just fine now.’ We’re not saying that at all. What we’re saying is, we need to analyze all these additional policies, these subsidies, this cronyism, this avalanche of regulations, all these things that are creating a culture of dependency. And like permitting, to start a business, in many cities, to drive a taxicab, to become a hairdresser. Anything that people with limited capital can do to raise themselves up, they keep throwing obstacles in their way. And so we’ve got to clear those out. Or the minimum wage. Or anything that reduces the mobility of labor.

It’s unclear just what he’s talking about, but it is voodoo economics again. Deregulate everything, have no rules, and pay poor people less for their work, guarantee nothing, and they’ll prosper. Everyone will prosper, because of mobility of some sort. It’s unclear what he means by mobility, but it’s so crazy it just might work, except Ed Kilgore doesn’t think so:

Technically, downward mobility is still mobility, you see. When you shake the money tree, somebody’s got to fall out.

Libby Spencer adds this:

I imagine the next ad will explain why a living wage is holding our economic growth down because giving the working class more money to spend is never going to increase buyer demand in a consumer-based economy.

Reagan’s voodoo economics live on. The Republicans actually learned a lesson from Hollywood of all places. People love the line when someone says that’s so crazy it just might work, and the hero saves the day. The counterintuitive is always cool. And there’s a sucker born every minute. That’s what makes people rich.

About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
This entry was posted in Austerity Economics, Minimum Wage, Voodoo Economics and tagged , , , , , , , , , , , , . Bookmark the permalink.

1 Response to Voodoo Time Again

  1. Russell Sadler says:

    Great post, Alan.

    Thanks for reminding us that Charlie Koch is one of the finest 18th-century minds practicing economics today.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s