The Financial Times abuses the AS/AD model
Here’s a FT editorial on macro policy options:
Ms Lagarde, perhaps inhibited by her German hosts, was less forthright than the IMF has been of late in calling for fiscal stimulus. She avoided direct criticism of countries whose excessive austerity has held back global growth, and chose instead to focus on the scope for structural reforms. But it is worth noting that the measures she pinpointed — including a higher federal minimum wage in the US and active labour market policies in the eurozone — are ones that would give an immediate boost to demand, as well as supply.
So now we’ve reached the point where not only do higher minimum wages not cost jobs, they actually create more jobs. And remember that the FT is easily one of the top 5 business publications in the world. Combine this with the recent flood of articles that free trade might actually be bad, and you are left with a profession that is literally destroying itself. People used to mock economists by saying that it wasn’t a science, that it didn’t know anything. Economists would reply that they knew a few things. For instance, they knew that free trade is good and that price floors create surpluses. Now they’ve even abandoned those EC101 ideas, and admitted that their critics are correct. The field has trashed its own reputation. Economists are implicitly admitting that their profession is an empty shell, completely devoid of knowledge.
An even greater irony is that many of the leading arsonists also mock people who don’t believe their “fiscal multiplier” theories, which have always been far more controversial than free trade. Yeah, after being told by economists that they were wrong about free trade and price controls for the past 200 years, we’re supposed to believe them when the tell us that Greece can become more prosperous by borrowing more money. Where is our modern day Mencken?
PS. I’m in a bad mood because it’s tax week. I just saw an article pointing out that the government’s income limits on Roth IRAs do not apply to people who do not have tax deductible IRAs. Apparently you just set up a non-deductible IRA, and then a day later convert the entire sum into your Roth. How weird is that? Are the Congressmen who write our tax laws really that stupid, or just in hock to the financial services industry?
PPS. I have a new post of the world’s most secretive tax haven, over at Econlog.
PPPS. Don’t miss the biggest regular season game in NBA history, tonight.
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10. April 2016 at 08:45
Surely the FT “logic” is not that higher minimum wages would create more jobs, but instead: it won’t change jobs at all (contra EC101), but wages will go up (esp. for low-income workers with higher MPC), and therefore there will necessarily be more spending in the economy (and hence demand will rise).
Yeah, yeah, the argument is wrong. But I can see how, if you believe the higher minimum wage is a free lunch, then you also naturally conclude that it boosts demand. (And if you don’t think it’s a free lunch, then the entire logic for doing it in the first place completely falls apart.)
10. April 2016 at 08:58
I’ve seen the backdoor IRA stuff. It does seem like it’s a bit more trouble than it’s worth
10. April 2016 at 09:11
Don, But what’s the point of more “demand”, if it doesn’t create more jobs?
John, I spoke with someone who did it, and it seemed simple. But given the complexity of our tax code, I imagine you are right. Almost everyday it seems to get more and more insane. There were times doing Turbotax where I wanted to pick up my iMac and just throw in on the floor.
10. April 2016 at 10:02
My theory is that economists are incentivized to be contrarians because it allows them to become more popular and get more clicks(see Paul Krugman). If economists simply said free trade is good and minimum wages don’t create jobs they wouldn’t get any attention. There also is probably a growing demand to justify anti-free trade and pro-minimum wage arguments because of the rise of Bernie Sanders(and to some extent Donald Trump)…
10. April 2016 at 10:15
-Sumner, you’re hurting my stomach by quoting this tripe. I’m afraid my IQ has been lowered by one fifth of a point.
“Combine this with the recent flood of articles that free trade might actually be bad, and you are left with a profession that is literally destroying itself.”
-The whole left wing of the economics profession is turning into the junior Senator from Vermont. Vermont was one of two states to never vote for FDR!
10. April 2016 at 10:22
Sumner, I won’t be unfair and say that the above is your own fault, but I will say that the entire economic foundation, the epistemology, that you have chosen for yourself, is the very same that has resulted in, indeed encouraged, economic “knowledge” to bend and sway in accordance with political, popular, mainstream whims that you now complain about.
See, when the winds sway towards neoliberalism, it is not because mainstream economists have actually proved that labor market freedom and free trade allow people to make their lives better off. Empiricism, the methodology carried over from physics and chemistry, prohibits any apodictic conclusions from being made. Ironically you yourself have claimed many times that there is no such thing as absolute truth, so you cannot even claim to “know” those “few things” above!
Empiricism is the most popular method because it implies and allows for social engineering. Economists cannot claim to “know” that governments imposing and/or raising the minimum wage cannot raise employment. Such a theory must be “tested”. And even after it is tested, and a particular conclusion is borne out of that particular test, then empiricism still does not allow for any claims to new apodictic knowledge for all time to come. For it will always be possible that the reason the expected result was or was not observed, is because of other variables that may or may not have upsetted the expected result.
In other words, the very method that you encourage, advocate, and use to mock the a priorists, the method that you continue to claim is “useful” is actually the method that has encouraged and allowed the rise in writings that attack labor market freedom and free trade. You have no defense against it. The people who believe it, can say that it is possible that raising the minimum wage and attacking free trade could make people’s lives better off. They are calling for governments to do more “social engineering”! To try out more “tests” that previous tests never conclusively showed that minimum wage reduces employment nor that free trade reduces standards of living of the average person.
Now you can wallow in your own filth, and complain that your colleagues are stupid or becoming crazy people who are politically rabble rousing for ever greater degrees of police statism. You thought you could depend on the utterly groundless method of empiricism, of popularity and persuasion through rhetoric and mocking contests. But those methods only seem to work when there is a positive correlation between popularity and actual economic knowledge. See the pattern here?
Those who live by the sword, die by the sword. I hope you’re happy.
10. April 2016 at 12:45
“the world’s most secretive tax haven, over at Econlog”
I did not realize Econlog has a tax haven, in fact the world’s most secretive (that’s probably why I didn’t know it). Now that’s libertarianism in action!
10. April 2016 at 14:48
Is it fair to criticize economists for the stupidity of non-economists? Christine Lagarde is a lawyer. Here is her bio:
http://www.imf.org/external/np/omd/bios/cl.htm
I also doubt that the FT editorial writer is an economist.
10. April 2016 at 15:38
Scott,
As a former stockbroker and now registered IA, I’ve been well aware of that loophole in the law that leads to so many IRA-to-Roth conversions.
I can’t say whether that’s a gift to the industry I’m in, but I can tell you that FINRA is a cartel that tries to only serve the interests of its leaders and of its member firms. It’s safe to say you might cry if you were aware of the rules that are supposed to be followed, which not only limit competition, but specifically favor bad money managers over good ones. For example, it’s literally illegal for money managers to only charge a fee if their investment recommendations are profitable.
10. April 2016 at 15:50
@ Scott Freelander: please explain that last sentence… What is not legal about charging a fee for investment management?
10. April 2016 at 16:32
Ditto Scott on taxes. Gadzooks, the tax code is an abomination.
A year from now Scott will say the same thing and I will assent.
10. April 2016 at 16:35
Add on: it appears to be the policy of various groups to try to suffocate the economy, sometimes through tight money, or higher taxes, artificial floors or ceilings on prices, or restrictions on supply as seen in property zoning and the criminalization of push-cart vending.
The FT has joined the crowd!
10. April 2016 at 17:54
I don’t agree with the FT’s argument, but I think the push against orthodoxy on the minimum wage has come from empirical results that don’t line up with the EC101 theories. It’s worth pointing out that the EC101 D-S model that predicts surpluses for price floors also assumes that workers are homogenous and all earn the same wage. In that scenario, sure, a minimum wage would cause job losses. In the real world, the connection is less clear.
I think the anti-free trade trend is being driven primarily by our experience with China, which seems to be an outlier in that, empirically, it may have hurt the US. For some reason people are taking that experience and assuming that means NAFTA was a bad idea too, which doesn’t hold up empirically.
10. April 2016 at 18:10
Scott
You said that now not have we reach a point where min wage don’t cost jobs now they create jobs. Then you move on to say that recent articles that free trade might be bad to conclude economics is destroying itself.
Economics isn’t destroying itself but rather acknowledging life is more complicated than saying “free trade good!” “price floors bad!” things are more nuanced than you admit.
Notice that paragraph you show us doesn’t say how much Lagarde thinks the min wage should be raised. I think the most informed proponents of an increase to min wage are against 15 an hour. (Krueger is even against it)
But things are more nuanced. Econ 101 price floors fail to capture a reduction in turnover saving companies quite a bit money, more motivated and productive employees. And there’s an argument that the min wage and eitc are complements not substitutes.
Acknowledging the aspects that aren’t captured in econ 101 models that are significant adds credibility to the profession not the risk of implosion
10. April 2016 at 18:19
Scott,
Economists, politicians and journalists have all sacrificed their integrity in order to further their interests of the political gang. No wonder Trump and Sanders are popular.
To the point… anybody who says a minimum wage is a good idea is either a moron or a liar.
10. April 2016 at 18:27
Richard, Plenty of economists say the same things.
Justin, You said:
“I think the anti-free trade trend is being driven primarily by our experience with China, which seems to be an outlier in that, empirically, it may have hurt the US.”
I’ve never seen a single economic study that claimed China trade hurt the US. On what do you base that claim?
James, You said:
“Economics isn’t destroying itself but rather acknowledging life is more complicated than saying “free trade good!” “price floors bad!” things are more nuanced than you admit.”
But that means economics is worthless. If we don’t know those things, then please provide an example of something we do know. Anything you say will be just as debatable as “free trade is good”.
Surely economists must know SOMETHING? ANYTHING?
10. April 2016 at 18:35
@ssumner
-Tyler’s Third Law.
10. April 2016 at 18:39
“Where is our modern day Mencken?”
His name is Don Boudreaux.
10. April 2016 at 18:48
Scott
No it just means economics is more rigorous than simple slogans. Let me step back. The slogans themselves are useful. If everyone knew about How price floors show deadweight and and how free trade makes economies more efficient then the public wouldn’t be do susceptible to trumps anti trade rhetoric with China and 15 dollar nation wage. They would think about the costs and therefore make a more informed decision. Simple slogans are an efficient way to get that info to the masses.
But at the same time economics should say well things aren’t that simple. Raise the minimum wage to say 10 bucks an hour and its easy to show the deadweight loss. But what the reduction in turnover? Increase in Productivity? How the raise can be complimentary to the eitc rather than being a substitute? How the benefits of free trade have largely been won thus a dose of protectionism won’t end the world.
By admitting that the world is more complicated that econ 101 we ourselves more credible and will most likely get through to people when we say “ok 11 dollars isn’t so bad but please not 15”
10. April 2016 at 18:48
“Anything you say will be just as debatable as “free trade is good”.”
This is why economists (or any social scientists?) don’t try and reduce complex modelling to one universally applicable law concerning two variables anymore, because models are multivariate and the effects of a change in one variable are usually ambiguous as it depends on what’s happening to other variables. For this reason, modern economic insight is usually very context dependent and data driven, rather being an assembly high priests who teach divine laws of economics that are supposed to apply at all times. This is a GOOD thing, anything less would be snake oil.
10. April 2016 at 19:00
The problem with the low FEDERAL minimum wage supplemented by EITC, SNAP, Medicaid, and section 8 is that corporations like Walmart figured out how to game the system around 2000. So Walmart loves these programs because not only is their workforce subsidized by taxpayers but once those workers are off work they spend their welfare at the store–that is what we call a “win win”!!
10. April 2016 at 20:14
Isn’t tonight’s game kind of meaningless? It doesn’t decide playoff position or anything. I watched or listened to every game of that 72-10 Bulls season, I don’t remember anyone caring all that much. I mean, it was nice they won 72, Phil Jackson had a bulletin board note about “keeping losses in single digits this season” we all had a good laugh over, but mostly we worried about the playoffs.
That said I really like this Warriors team, finally a reason to watch again. Curry is just unbelievable.
A lot of people have asked if this team is better, I think it’s unanswerable because even sports nutrition and training has changed so much, let alone the game itself. This team is certainly one for the ages, though. My God, nearly 400 3s? And Klay is not that far behind. This just blows my mind: Klay’s season is already #4 all time — behind three Steph Curry seasons, one of which he might beat.
http://www.basketball-reference.com/leaders/fg3_season.html
10. April 2016 at 21:03
Tall Dave, as a young Bulls fan in ’95-’96, the only thing I remember anyone really caring about was getting back to the finals after that playoff loss to the Shaq/Penny Hardaway Orlando team the year before, right after Jordan’s return. I think it’s a bigger deal for the Warriors just because they’re already the defending champions.
That 3-point list is crazy. And unlike some of the other names on that list (Antoine Walker), Curry puts up those numbers while still shooting well over 40%. Amazing.
10. April 2016 at 21:20
I spent 5 minutes doing my taxes, including sending them in to the government. You can do everything online. It’s easy in Sweden.
11. April 2016 at 05:55
Jon, Good choice.
James, There’s a big difference between saying free trade is good, but not as good as we thought, and saying it’s bad.
Gene, So you are saying we should abandon all programs that help the poor? The same argument could be used against progressive income taxes, indeed the EITC is a sort of progressive income tax.
Your argument also implies that every single article that has ever been written by progressives on tax progressivity is fundamentally wrong, as tax incidence is mismeasured. Come to think of it they are all wrong, so maybe you are on to something.
Talldave, You said:
“Isn’t tonight’s game kind of meaningless?”
A team trying to become the first team to be undefeated at home, against a team trying to become the first team to win 73? And a preview of a likely playoff matchup? (But keep an eye on OKC)
Yes, Curry is amazing. The rookie Booker looks like another Klay/Curry. The three all had a father who played in the NBA — I guess the key is to marry a woman who is good at some sport involving “aim”, or at least that’s my theory. Of course there are many other NBA players whose father were in the league, but great shooters seem overrepresented.
Peter, Sweden is smart, sort of utilitarian. America is stupid, sort of masochist.
11. April 2016 at 07:05
Scott — It’s interesting statistically, but players usually pooh-pooh the importance of these records — even when playoff position is on the line, because that Game 7 usually doesn’t matter.
I’ve always thought Roth IRAs were a bit oversold, and I’m not sure this backdoor really changes much. Self-employed professionals can put $53K into a solo 401k and avoid as much as $26K in taxes — if we have a low-income year it might make sense to roll some of that into a Roth and pay the tax while we’re in a low tax bracket, but then we wouldn’t be subject to the Roth income limits in that year anyway.
11. April 2016 at 10:03
FWIW, the year President Obama was elected, my wife and I rolled a ridiculous (for us) amount of our IRAs into Roths that, as Scott points out, we wouldn’t have been qualified to set up in the first place. (I figured that, barring a substantial personal setback or suprising national growth, I’d never see that low of a tax rate again).
Yes, it’s a total loophole, but it’s the kind of loophole that Scott normally supports, in that it allows some people to move towards an outcome Scott prefers – tax exempt savings. And yes, it’s a kind of accidental brain dead half step in that direction, but still.
We used one other loophole-ish point that year: that if you withhold 110% of last year’s tax bill, you don’t get penalized. Of course, I had to explain why writing a giant check in April meant we were *smart*, but my wife got on board. 🙂
11. April 2016 at 12:49
Gene as Scott already pointed out this left-wing myth that EITC are a form of welfare or subsidy for corporations is just stupid as it could be applied to any program that puts more money in the pockets of those on low incomes. We often hear “The government shouldn’t be subsidizing poverty wages!” Well what’s the solution? “force them to pay higher wages!” But when you accept that the government can’t actually force anyone to pay higher wages you have to understand why EITC are a perfectly sensible policy.
James, britonomist I’m going to have to agree with Scott on this one. We’ve known trade is a net gain for both sides since Adam Smith. If we’re now going to say we don’t know this then the field is worthless. Thankfully we do know this.
Not to mention protectionism is pants on your head levels of stupid. I saw one article (think it may have been in The Economist) that talked of how China was going to ramp up it’s “assault” on our economies by flooding us with cheap coal aswell and cheap steel. I’d need to lose more than a few brain cells before I would consider selling us lots of commodities at a much cheaper price an “assault”.
Also no one thinks a little bit of protectionism would “end the world”. Most people can just see it for what it is; nothing more than making one group pay (either through subsidies or higher prices) to suit the interests of one special interest group (exporters). The kind of policy the left are usually against. Except, seemingly, when it’s an industry they find more palatable ideologically.
11. April 2016 at 14:55
“are ones that would give an immediate boost to demand, as well as supply”
Well shit, why didn’t someone think of this before?
11. April 2016 at 18:02
Alexander, I am not discussing theory I am discussing an ongoing dynamic in our economy. Welfare and SS disability began expanding after the early 2000s recession. I think the reason is pretty obvious in the context of an economy based on consumer spending and increasing trade deficits with China. So the American economy depends on consumers having disposable income and Americans spending that money on consumer goods. Walmart and its employees are behaving rationally when they maximize welfare in relation to their hours worked.
11. April 2016 at 18:02
Major Freedom:
Can you explain what you mean when you say “those who live by the sword, die by the sword?”
Do you mean that Scott would remain free of blame if others conducted bad empirical studies, because he had never conducted any empirical studies himself?
Do you mean that other economists would not have conducted empirical studies if Scott had not?
11. April 2016 at 18:27
Talldave, I’m already maxing out my 401k possibilities, so any Roth above and beyond that is a bonus. If my wife and I had each done $6000/year since 2010, we’d be a lot better off.
This was the first time ever a 65 win team played a 70 win team. Thus arguably the best pair of teams in history (although SA was short handed.)
J Mann, Yes, the underlying program is good, but I’ll do a post pointing out the cost of this complexity.
As far as giant checks, you would be surprised how big a check we write every year. The “penalty” is absurdly low, it’s almost like an interest free loan from the Treasury. The money goes into stocks which earn us $1000s, and we pay $50 or $100 (I forget) in penalties. When people brag to me about their tax “refund” I wonder to myself “why don’t you just tattoo ‘I’m a moron’ on your forehead”? (But I don’t say that.) 🙂
Thanks Alexander, In fairness, The Economist has been pretty consistent in its support for free trade.
11. April 2016 at 18:31
Carl, neither.
In this case it means the method by which Sumner has used to promote his own views, contains an inner contradiction, and is now being used to attack his views. There is no rational grounds for either side to conclusively demonstrate one side is right and the other is wrong.
Never conducted any empirical studies? It is not necessary that formal empirical studies be published in a journal per se. It is only necessary that the empiricist method is regarded as the way to understand economic phenomena. All of this blog’s posts that include charts with X and Y historical variables, correlations, etc, that are used to justify the market monetarist theory either directly or by way of critiquing other theories, are all grounded on the empiricist method. None of them have apodictically proved anything. Yesterday he attacks other’s views, today others are attacking his views, and the opposing views are not violating the standards of empiricism. They require beliefs to be based on the political or other wimsies of the day.
11. April 2016 at 19:10
Sumner’s views about higher wages and demand are not the essence of Market Monetarism. I think that it sort of ruins Market Monetarism in the eyes of non economists. Clearly putting more money in the hands of people who would spend it is stimulative. This is why I don’t trust Scott even though MM has merit.
12. April 2016 at 01:26
this will cheer you up …
http://www.investing.com/news/economic-indicators/australian-businesses-report-best-conditions-in-eight-years:-nab-394789
those lucky people, tanked the currency 30% as commodity prices collapsed, and come up smelling of roses
perhaps you should retire to Oz rather than california?
12. April 2016 at 02:56
“I wonder to myself “why don’t you just tattoo ‘I’m a moron’ on your forehead”? (But I don’t say that.)”
Nice to know that you at least think it. It’s stuff like that which makes me raise my eyebrow when people say “Rational Expectation Theory”.
12. April 2016 at 07:36
Gary, Please tell me that you are a Keynesian. I want you on their team, not mine.
James, I saw that too, and was thinking of doing a post. I’d like to retire to Australia, but it’s not my decision. I’m out-voted. 🙂
12. April 2016 at 12:46
Gary please pick up an undergraduate economics textbook and read it. I think you would get a lot from it. Putting more money in the hands of people who will spend it may be stimulative but that’s not really what a minimum wage is. It’s a price floor. It’s simply a ban on workers selling their labour below a government mandated price.
However a policy that does put more money in the hands of the lower earners (a negative income tax or a government garaunteed income) would not be a terrible policy.
12. April 2016 at 12:54
A bit off topic but we in the UK have had a little chuckle at an ex Channel 4 journalist turned pop economist called Paul Mason. An ex-trotskyist of course, who went viral at the time of the financial crisis for his apoplectic reaction to the nationalisation of the banks. Now screaming for the government to nationalise Port Talbot and other Indian owned British steel mills (rumoured to be losing a million a day) in the name of saving the industry. Seems if you wear a hard hat and get your hands dirty your jobs worth saving but curiously if you wear a collar and it’s not. Shows the hypocrisy of the left.
12. April 2016 at 12:55
*Should have been collar and tie
12. April 2016 at 19:41
Don, don’t you have a government job? So did I. Shouldn’t we be careful to not say as you did that “the higher minimum wage is a free lunch…”
I am for government jobs, but government people should not be saying a higher minimum wage, low by historic standards, is somehow a free lunch.
Scott, sorry for being late to read your post here and respond. I don’t think helping the poor necessarily means I think fiscal stimulus is always successful or if we can survive the hangover when it stops. But, helping the poor is simply the right thing to do. Does it cause massive increases in the money supply? I don’t know. I guess you would say it does not.
12. April 2016 at 20:27
Major Freedom:
You can’t conclusively demonstrate the correctness of your theories through your Scholastic methods either. How do you think you would convince that FT writer? How could you prove that the market supply and demand model is the right one to apply and not the monopsony model without resorting to empiricism?
13. April 2016 at 05:24
Gary, Why even ask questions if you cannot understand the answers?
13. April 2016 at 05:37
I have come a long way in a short time, Scott.