Jeff Madrick has a bone to pick with the economics profession, and that’s putting it nicely. Consider the title of his new book: “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.”
The book amounts to a broadside on modern economics and recently was critiqued by 2008 Nobel Prize-winning economist Paul Krugman, whose review appeared in The New York Times.
“Hardly any economists predicted the 2008 crisis – and the handful who did tended to be people who also predicted crises that didn’t happen,” Krugman noted, underscoring a central theme of the book – that the profession has a poor forecasting track record. “More significant, many and arguably most economists were claiming right up to the moment of collapse that nothing like this could even happen.”
Madrick is a longtime writer on economic matters for Harper’s magazine and a former New York Times columnist. He dropped by McClatchy’s Washington Bureau recently to discuss his book. Here are some of his thoughts, edited into a question and answer format.
Q: You question economists’ devotion to the famous “invisible hand,” the notion that in a free market absent of government intervention buyers and sellers find an agreeable price and self-regulate the economy. Why?
A: This book is about how economics has been oversimplified and increasingly they take good ideas, the invisible hand, and oversimplify them, and make them rules of thumb.
Q: You cite raising the minimum wage as an example of that. Economists doggedly insist that because of the invisible hand, raising wages will reduce the demand for workers. Research raises doubts on this. What’s your view?
A: That’s an example of the abuse of a good idea turned into a rule of thumb. My argument is that since the 1970s and certainly since the 1980s, economists have increasingly moved in this direction of making many good ideas and some not-good ideas into rules of thumb as a shortcut for thinking.
Q: You disagree with those who say the invisible hand got the U.S. economy back on track after the financial crisis. You think the stimulus program, while too small, helped reverse the steep economic decline of late 2008 and 2009. Why?
A: (The idea that) economies adjust with no help from the government, that wages, prices go down and people invest, that’s what drove economic thinking in the Great Depression – it’s just not true. The economy does not adjust itself. The economy is not one big invisible hand.
Q: You challenge the mainstream economic view that decades of low inflation since the early 1980s – the so-called Great Moderation – have been a good thing.
A: Democrats and Republican economists agree . . . the economy has been doing great since the early ’80s, since our total income, our total GDP (gross domestic product) didn’t fluctuate that much. Well, over that time, people’s incomes became unequal, incomes stagnated. We had inadequate investment in infrastructure and early education, and we had one economic/financial crisis after another. . . . What are they talking about? They are telling us these times were good?
Q: You also take issue with the Federal Reserve’s inflation targeting, signaling to markets a predictable rate of inflation within a range of 1 to 2 percent. But you think inflation targeting, intended to provide certainty, actually slows wages and prices, and that a higher rate of 3 to 4 percent might stimulate economic activity and lead to full employment. What’s your thinking?
A: Why does the Federal Reserve target inflation at 2 percent? There is no good reason for that. Most people won’t believe that, but read the book and you will find that it really is indeed true. Or why did economists justify huge salaries for CEOs? Because they linked it to the stock price and they argued that . . . the stock price is always right. Holy cow, are you kidding me? But economics went in that direction.
Q: How have economists reacted to your book?
A: I think there is denial out there about how much they agreed that the Great Moderation was proof of success, that low inflation was all you had to worry about . . . that stock prices might not always be right but they were usually right, that you couldn’t really anticipate or pop speculative bubbles. So I think they’ve been defensive, but the attack has been mostly, ‘You’ve exaggerated’ . . . and I don’t think I have.
Q: You find the idea of economics as a science dubious at best.
A: It is certainly not a science – it’s too ambiguous. It’s about people. It’s about how you and I and everyone else interact. If it were a science we wouldn’t get so many conflicting ideas of what we should do, so many conflicting ideas about the way the economy works. For example, is big government an impediment to economic growth or is it a stimulus to economic growth? Economists will look at the same information and come up with opposite answers.
Q: You want readers to come away wary of the way economists think?
A: The danger is when they think it is a science or they pass it off as a science. That they have unambiguous answers, and many of them do that. And one of the purposes of this book is to encourage people to be skeptical of what economists say, not in some cynical sense but because it is not a science.