Alan Blinder, a Princeton economist and former vice-chair of the US Federal Reserve, is credited with coming up with what he calls “Murphy’s Law of economic policy.” It goes as follows: “Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.”
That has never felt more true. The rise of populism on the left and right is reviving many policies economists hoped were gone or at least on the way out. But bad economic policy ideas never die, they just get recycled. Here are just a few of the principles accepted by mainstream economists that are being ignored by policy makers:
Economists understand that if you limit the price of a good consumers want, you’ll create shortages. That goes for housing, too. It is not just a theory based on supply-and-demand: Evidence suggests rent controls decreases the stock of rental units, makes them more expensive, and lowers housing quality. Often, it is the lower-income tenants who suffer most because if they aren’t lucky enough to get a rent-stabilized apartment, they can’t afford the inflated rate everyone else has to pay.
But logic and evidence isn’t stopping policy makers and rent control is back in fashion. Oregon has placed limits on landlords’ ability to raise rents each year and New York just passed permanent laws to restrict rent increases and prevent landlords from hiking rents after making improvements. Berlin just passed a five-year rent freeze.
Economists hate tariffs. Ever since David Ricardo came up with the theory of comparative advantage in 1817, economists have promoted trade. Trade can expand the global economy, making everyone richer. Economists don’t like tariffs or currency manipulation because they reduce trade, which makes everyone poorer. Once one country implements tariffs, others retaliate and the result is less trade all around.
It is true the gains from trade have not been equally shared. This is in part because countries like China grew very quickly and flooded global markets with goods produced via cheap labor. The result was a shock to the global economy and some displacement. But as the global economy finds a new equilibrium, tariffs won’t help. They prolong the agony and mostly hurt consumers.
And yet, expert consensus has not dissuaded US president Donald Trump from imposing tariffs on China and threatening to do the same with Mexico.
Economists agree at a certain point too much national debt is a risk. There are, however, times when running a deficit can be good economic policy, especially when it is used to boost growth in a recession and when it finances useful infrastructure projects that promote growth. But running up big debts year after year is risky.
At the American Economic Association’s annual meeting this year, Olivier Blanchard, former chief economist of the IMF, argued that deficit spending can grow an economy when interest rates are low. But, he cautioned, if debts become too large or interest rates rise, debt payments can overwhelm budgets and make it hard to run a deficit when it’s really necessary.
Lately, neither Republicans nor Democrats have been bothered by such details. Republicans are cutting taxes and running up debt, without any thought of how it will be paid for, let alone how they’ll pay for entitlements. Meanwhile progressive Democrats are proposing new entitlements, financed by debt.
A few years ago the New Yorker magazine declared that support for a $15 minimum wage had become a mainstream position. Someone forgot to tell the economics profession. Increasing the minimum wage can have positive effects, if it is not too raised too much and introduced during an economic boom. But even economists who support increasing the minimum wage agree there’s a point where it becomes counter-productive. If it’s too high, it will decrease the demand for labor, either through reduced hours, less hiring, or because employers will invest in labor-saving technology.
Economists quibble about the ideal amount for a minimum wage, but many agree it shouldn’t be too close to the median wage paid by employers in any given city or state. (Some suggest it should be set at 50% of a state’s median wage). The median wage varies considerably across states, from $23 in Massachusetts to $14.70 in Mississippi. In some states, a $15 minimum wage exceeds the median market wage.
But such details have not stopped six Democratic presidential candidates from endorsing a $15 national wage. Nor has it stopped Missouri and Arkansas from instituting a minimum wage that’s 70% or more of their median wage.
The public finance literature has long taken the view that taxing the assets wealth of the wealthy—as opposed to their income or spending— is inefficient. Of all the different kinds of taxes, it causes the most harmful distortions by discouraging saving and investment. It is better to tax consumption.
One might argue that for the very rich, who have way more money than they need, taxing their wealth is unlikely to change their behavior. That may be true, but the history of wealth taxes suggests rich people are very good at hiding their money, by moving it across borders for example, which makes them hard to tax. Many wealthy families also own private companies which are difficult to value. The lack of enthusiasm for wealth taxes among economists, and the problems implementing them, is why most European countries have given up on them.
But that has not stopped Elizabeth Warren, a US senator and Democratic presidential candidate, from proposing a wealth tax to fund her ambitious social program. In this case she has some support in the economic profession. Emmanuel Saez and Gabriel Zucman, both of the University of California, Berkeley, are advocates of Warren’s proposal. But other mainstream economists, like former Treasury secretary Larry Summers, as well most of the literature on public finance, suggest it won’t raise the revenue Warren is counting on and would prefer a consumption tax or higher income taxes.
The Laffer curve—an economics model named after its inventor, Arthur Laffer—assumes at a certain point taxes can be raised so high that they stifle economic activity and thereby reduce tax revenue. The converse to the theory is that governments can raise revenue by cutting taxes, because the increased economic activity would yield more taxable revenue.
It is true there exists a point where taxes are so high they discourage work. But no credible economist believes the current level of taxation in the US—just under 40% on high earners—is at that point. Even conservative economists argued the latest round of tax cuts needed to be offset by new forms of tax revenue or cuts in spending in order to avoid increasing the debt.
But this evidence did not feature in Trump’s 2017 tax bill, which cut taxes with the hope the resulting growth would result in more revenue. It didn’t and the debt increased instead.
Harry Truman famously asked for a “one-handed economist” because economists (responsible ones anyway) rarely offer a straightforward advice, and instead offer opinions on one hand, and then on the other hand. In economics, it really does depend. One policy will work during a recession, but not in a boom. Some policies work well in small doses but not in large ones. And the circumstances that make one policy work are not always clear. For example, whether economists think interest rates should be cut or lowered depends on whether the economy has more capacity to increase demand-driven growth and lower unemployment. Because it’s impossible to know for sure, economists can reasonably disagree on the right course of action. But there are certain things economists (at least ones in the mainstream) agree on.
Unfortunately, no one is listening to them.