Peter Morici: When economists become demagogues

Peter Morici: When economists become demagogues

Since the financial crisis, economists have been frustrated by their lack of influence in Washington.

From the profession, President Barack Obama recruited leftist ideologues. They concluded, for example, that boosting the minimum wage would increase the demand for semiskilled workers and raising the demand for health-care services would lower prices. The principle economist among the architects of the Affordable Care Act was happy to cynically dupe voters by hiding facts.

Liberal as universities may be, those views are hardly supported by what economics professors teach about supply and demand, but President Donald Trump has recruited even fewer dismal scientists to fashion his controversial trade and immigration policies.

Kevin Hassett and Peter Navarro are really the only economists with influence on policy, and they earned their academic chops on tax and management issues, not the World Trade Organization and regional trade agreements, nor migration and labor markets.

More broadly, though, the profession has no one to blame but itself for its lack of influence. For too long now, economists have ignored what standard economics textbooks actually say about free trade and labor mobility.

The theory of comparative advantage demonstrates international trade and specialization — Americans design iPhones, China assembles them — and should more efficiently use capital and labor and raise living standards. However, that conclusion is built on a pyramid of assumptions often not met in the real world — something economists are bound take into account when making policy prescriptions.

Comparative advantage assumes balanced trade and full employment but under the trade deals Trump inherited, America has a huge deficit. Unemployment is at 4%, but the share of adults employed or looking for work is still well below pre-financial crisis levels.

One-in-twenty working-age adults are now receiving Social Security disability pensions, and those are more heavily concentrated in Middle America where factories are shuttered, main streets boarded up, and opioid addiction rampant. Medicaid and food stamps are often effectively offered to adults without children who refuse to look for work.

Simply, Obama used those programs to mop up the workers left unemployed by the free-trade agreements he championed.

According to the theory of comparative advantage, workers displaced by imports are assumed to move to where the new jobs are. However, economists refuse to consider that often means relocating from places like Hershey, Pa., to cities like New York. Without friends and with rents being what they are, a relocating blue-collar worker would have to pitch a tent in Central Park to enjoy housing affordable on the Big Apple’s $13 an hour starting wage.

Comparative advantage assumes all countries and businesses are equally endowed with access to technology and is fairly clumsy in its treatment of the principal source of American advantage—intellectual property. And it is silent on the consequences of Beijing’s requirements that Western firms give away technology to gain access to its market.

Are you starting to feel like Dorothy in the Land of Oz?

The trade deficit with China alone comes to nearly $350 billion a year and falls most heavily on manufacturing and technology-oriented services. Together those bankroll the bulk of business-sponsored R&D.

If we sliced the trade deficit in half, the boost to investment in those activities would increase domestic gross domestic product growth from 3% to 4% or more.

Finally, in the modern theory of comparative advantage, trade and immigration are substitutes, not complements — yet look at what globalization has wrought. Neither the European Union nor the United States can control the flood of immigrants, and many new arrivals are not employable in the skills categories advanced industrialized economies need most.

In low-unemployment Germany, many loiter in railway stations and parks for lack of language skills and in America, more than half are on means-tested programs and pull down the wage of ordinary folks when they do work.

Economists are falling prey to the classic academic trap of investigator bias. They are so invested in their failed free-trade prescriptions and worried about being called racist if they question open borders that all they can do is call Trump ignorant and unfit.

The hard reality is that most of my colleagues simply refuse to address these issues in their condemnations of Trump and themselves are guilty of willful and malicious ignorance and demagoguery.

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