Rethinking Economics : Planet Money Jared Bernstein has a shortlist of economic ideas that he thinks his colleagues have been getting wrong for decades.
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Rethinking Economics

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Rethinking Economics

Rethinking Economics

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CARDIFF GARCIA, HOST:

Hey, everyone. It's Stacey and Cardiff. This is THE INDICATOR FROM PLANET MONEY. Today on the show, we are joined by our old friend, the economist Jared Bernstein, for a reassessment - you could call it a checkup - of what we know about the economy and economics.

STACEY VANEK SMITH, HOST:

So there are some ideas, Jared says, that economists and policymakers have gotten wrong for decades. But new evidence and, even more importantly, actual things that are happening in the real world are now challenging those old ideas.

GARCIA: And, certainly, not every economist and not every policymaker got these ideas wrong. And in some cases, the wrong ideas were just oversimplified versions of what economics was saying.

VANEK SMITH: Nonetheless, these are ideas that have been prevalent enough that a lot of people came to believe them and to speak them as truths. And now people are having to rethink them.

GARCIA: And so joining us on the line from our Washington, D.C., studios is Jared Bernstein. Jared, are you ready to throw some shade on your profession?

JARED BERNSTEIN: Yes, I am, with the caveats that you just so very nicely laid out that not every economist walking around maintains these ideas to this day, but they've done, really, very serious damage for a lot of years.

VANEK SMITH: All right. Well, after the break, Jared gives us four ideas from a recent article that he wrote on vox.com that he says economists and policymakers have been getting wrong. And he tells us what they should believe instead.

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GARCIA: OK, four ideas that economists and policymakers have been getting wrong for a long time. Jared, are you ready for, like, this speed round?

BERNSTEIN: Let's go. Ring the bell.

VANEK SMITH: Speed round of wrongness.

GARCIA: Exactly.

OK. So idea No. 1 that's wrong - going below the natural rate of unemployment could spark an inflationary spiral. And, Jared, for our listeners, I think this one requires a quick explanation. So this is the idea that if the unemployment rate goes down below a certain point, it means that workers are scarce, so companies have to start competing for those workers, and so they start raising wages in order to attract new workers and to keep the workers that they have. And when they raise wages, they also end up raising the prices of the goods and services they sell to offset the impact of those higher wages, and that is inflationary. And also, higher wages means people have more money to spend, and that, too, is inflationary. So if the unemployment rate goes below a certain point, that could lead to quickly accelerating inflation.

You're saying that maybe that idea needs to be rethought.

BERNSTEIN: Yeah. And importantly, it's not just me saying it; it's the chair of the Federal Reserve, Jerome Powell, saying it. But I'm kind of prone to think at this point that there's nothing all that natural about the so-called natural rate of unemployment and that it's really beyond our ability to accurately pinpoint it.

And the reason for that is actually fairly straightforward to explain. The relationship between unemployment and inflation has been weakening for years, and it was that precise relationship that allowed us as economists to back out this estimate of a natural rate. So as long as that correlation between unemployment and inflation is kind of bumping around zero, it's just beyond our capacity to estimate this natural rate with any sort of policy-relevant reliability.

GARCIA: OK. Jared, idea No. 2 that people have been getting wrong for a while is that everybody wins with globalization. Why is it wrong?

BERNSTEIN: The problem with the way globalization has been presented is that the process produces winners and losers, and the losers tend to be, in our case, blue-collar workers who are thrown into competition with workers from other countries who tend to have much lower compensation. When this expanded globalization agenda was being sold to the American people, that part of the equation got lost, and economists kept selling these, like, trade deals with NAFTA and the TPP as win-win for everybody, even though that's not really what the theory says at all.

So this is kind of an interesting case because here's a case where the economics were actually, I think, pretty accurate but where the kind of selling job became, you know, quite distorted. And these costs, to this day, I think, are falling on our economy not just in the industrialized parts of the country, but in our politics, which have become very distorted around these issues.

VANEK SMITH: Is there a solution, in this case, to make globalization less harmful to groups of workers? Because it is true that in the past, entire industries have just moved overseas, and the people who had the skills and worked in those industries, like textiles, have been completely displaced. I mean, is there a solution for them, or is it just...

BERNSTEIN: There is.

VANEK SMITH: ...One of those things that's, like, a loss?

BERNSTEIN: There's just - no, there's definitely a solution, and I devoted some space in my piece to that. We could have serious employment replacement programs that really went to these parts of the country and...

VANEK SMITH: Haven't those, like, been not that successful in the past?

BERNSTEIN: Because they haven't been serious. I put that word in there for a reason. We've had this thing called Trade Adjustment Assistance. Now, the workers who've lost their jobs - trades call that burial insurance because it's just a...

VANEK SMITH: Jeez.

BERNSTEIN: It's just an afterthought. It's not a real thing. There could be a much more robust safety net kind of assistance, so some kind of an income replacement. I would dig pretty deeply into direct job creation, helping people find new jobs. That would be in different sectors. And I'd invest pretty seriously in making our manufacturers more competitive abroad.

GARCIA: OK. Misguided idea No. 3, Jared, is deep budget deficits will crowd out private investment. And the thinking here is that sometimes the government needs to borrow a lot of money, either because it wants to spend that money on its projects or because it wants to lower tax rates and, therefore, will collect less money. And when the government needs to borrow all that money, it does so by issuing more bonds.

But guess what. Private sector companies also need to borrow money by issuing bonds to fund their projects, like investing in research and equipment and facilities. And so now you have the private sector competing with the public sector, the government, for the same money.

VANEK SMITH: The giant bowl of money.

GARCIA: Exactly. It's chasing those bonds, and so it's crowded out. The private sector, according to this idea, gets crowded out. Jared, why is that wrong?

BERNSTEIN: The incorrect notion here is that the private sector and the public sector are competing for loanable funds such that the interest rate will be driven up. And if that were the case, we'd see the large budget deficits of the type we're running right now be associated with high and rising interest rates instead of low and falling interest rates.

VANEK SMITH: Is it just that there's - the investment money is coming from different places?

BERNSTEIN: That's a big part of it. A big part of it is capital inflows from other countries and this view that holding American Treasurys is a really good, safe thing to do in an uncertain world. So this supply of what I was calling loanable funds before is much larger and growing in ways that don't really comport with the theory. And therefore, we can run large budget deficits and not have much pressure at all on interest rates.

GARCIA: Misguided idea No. 4 - a higher minimum wage will only hurt workers. Jared, the thinking here is pretty simple, which is that if the government forces companies to pay a higher minimum wage to their workers, some companies will be incentivized to simply hire fewer workers, or they'll lay off their existing workers, and other companies might just not be able to afford those workers and will go out of business. You're saying that is a misguided idea. What's wrong with it?

BERNSTEIN: What's wrong with it is that it just simply hasn't matched empirical observations for 20, 30 years. A lot of folks who oppose minimum wage increases to this day just walk around saying, if you raise the price of something, people will buy less of it.

Well, you got to test all of these assumptions, and there is just a really - and there's just a very deep and, I would say, uniquely high-quality body of economic research that concludes that increases in the minimum wage that we've undertaken so far - it helps a lot of people. It hurts some people, too, but the number of beneficiaries far, far outweighs the number of folks who get hurt by the policy.

GARCIA: Jared, always a pleasure, man. Thanks for being on the show.

BERNSTEIN: My pleasure.

VANEK SMITH: Thank you, Jared.

BERNSTEIN: Thank you.

VANEK SMITH: You can come tell us how economists have been getting it wrong anytime.

(LAUGHTER)

GARCIA: This podcast was produced by Constanza Gallardo, edited by Paddy Hirsch and fact-checked by Emily Lang. THE INDICATOR is a production of NPR.

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