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Monday, July 17, 2006

Do Economists Have Any Answers?

I am asked repeatedly what the solutions are to the problems that occur with globalization and increasing inequality, but the answers I give are not the answers people are looking for. Economists have done a good job documenting and highlighting the problems, but have had far less to say on how to overcome them. As I noted in comments where I first posted the remarks below, the remarks were a bit rushed. But I decided to post them anyway as a challenge to my colleagues to start answering this question. We are asked repeatedly what the answers are to the problems we've identified, growing inequality, wage stagnation, outsourcing of jobs, the changing social contract, you know the list, but we have not given satisfactory policy responses, at least not according to the comments I get.

So, this copy of the comment I threw together is intended to get the conversation started and encourage others to contribute thoughts, not be the final word on the topic:

What should we do about globalization and growing inequality? Making a comparison to the medical profession, it may be that while we can diagnose some conditions clearly, we have no effective cure for them (though there are economists hard at work daily hoping to change that, just as medical researchers are trying to find cures for their set of ills), it requires waiting for the system to "heal" itself over time.

Economists can suggest healthy diets (e.g. monetary and fiscal policy), but that is no guarantee that the economy will not get sick anyway and when it does, we don't always have the cure at hand, though I do think we have, for the most parts, prescriptions to help the economy heal faster. But people want instant cures, a pill to take that makes it better now, not a long difficult road to recovery.

Education, worker retraining, those sorts of things aren't cures, they simply (hopefully) speed the healing process along, and sometimes that can be a much longer process than any of us like.

I know a lot of you like to beat us up because we don't have the answers, and it's useful to motivate us to look all that much harder, but I'm not any more embarrassed for our profession because we can't solve every problem than doctors are who can't cure the common cold. And (this will make some of you mad) they, like us, have to listen to a lot of folk remedies that supposedly work, be told they are idiots, etc. And though every once in awhile the folk remedy is valid, generally the suggestions come from people who really don't understand all facets of the problem. You can't argue with them, they really believe their folk remedies work, so it's best to listen to them attentively, smile and nod, and not engage.

But that's pessimistic. My economics tells me that there will be winners and losers from things like free trade and that the winners will [generally] have enough to compensate the losers and still be better off themselves. So my solution would recognize this reality and, along with all the things we need to do to help the economy heal, it would also redistribute income in a way that produces far more winners and far fewer losers. But I don't think we have the political will to do that yet, the understanding that everyone will still be better off after the redistribution, though the the GOP's change of heart to allow consideration of a vote on the minimum wage is one sign that this is being recognized.

Policies can protect people from losing jobs, but I think that's a recipe for stagnation in the long-run. Policy can help people get new jobs faster, that's where education, retraining, etc. come in, but that hasn't worked as well as we would like (but that's not an excuse to stop trying and my solution involves these things even though so many of you object to such policies). Policy can raise income for lower income groups, that's where minimum wages, negative income taxes, redistribution policy, etc. come in. These help ease the globalization transition by transferring income to affected groups and hence make it easier to accept politically, but it's not clear they make the transition occur any faster.

Finally, we can hope the electoral process results in a change in the use of political power to bring about transfers of income toward higher levels. We have enough trouble dealing with the economics driving such changes, we don't need legislation that makes it even worse.

I think part of the silence is that economists have no instant cure for problems that occur with globalization. We think it's necessary for our long-run health, and we can recommend policies that aid the recovery process, but perhaps our silence is because we've been waiting for some economist working hard to have a "Eureka" moment and announce to all of us a cure is at hand. Until that happens, we will be stuck with less satisfying rehabilitative solutions.

So, smart economists everywhere, what do we tell people when they look to us for answers to the problems that come with globalization and rising inequality? Do we say we can help some, but not all that much and it's a long, hard road to recovery, or do we have a more positive message to deliver? If so, how do we get the message out? Some of you will deny a problem exists and assert this is just a matter of public perception and the workings of a free market rewarding the most productive among us, and you can argue that position, but I think there is evidence of justfiable discord.

One final question, it would also help if we pointed to our policy successes. Where would you tell people to look in the microeconomic and macroeconomic arenas for examples of successful policies recommended by economists? I'll cite a couple that come to mind. Since my main interest is Fed policy, those policies come to mind first. For a recent example, I think our monetary policy response to oil price increases is far superior to our response thirty years ago to the shocks that hit in the 1970s. That's not to say the response has been perfect, but we've learned since the 1970s and policy has improved considerably.

Second, and related to the poor performance of the 1970s, an example of necessary painful policy (though it had an unusually fast healing period) was the monetary policy induced recession of the early 1980s needed to establish the Fed's commitment to fighting inflation. This led the way to the lower inflation rates that we saw in subsequent years and perhaps has a direct relationship to the increased stability of GDP after the mid 1980s.

Third, policies such as Federal Deposit Insurance on bank deposits, bank examination, the implementation of increased capital requirements after the S&L failures, and other measures have stabilized the financial system. There are those who would prefer an unregulated financial sector, but they are in the minority. When I compare the banking system now to, say, the banking system before the Great Depression I count these regulations as a clear successes in terms of stabilizing this important sector.

There are other places to point to as well, and the microeconomic literature may provide an even more extensive set of examples since the set of policies and markets to apply them to is so much larger, but I'll leave those for others to talk about should they choose to respond. And I expect there will be some who disagree that the cases I cited constitute success stories, and that perspective should be heard as well.

    Posted by on Monday, July 17, 2006 at 02:59 PM in Economics, Income Distribution, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (64)

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