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IT WASN’T JUST FLAWED FORECASTS, DISHONESTY HAS ALSO HURT
ECONOMISTS  
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Dean Baker
January 10, 2025
CEPR
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_ Economists have seriously failed the public in important areas over
the last three decades. And these failures played a role in fostering
the upward redistribution of income over the last four decades. People
have a right to be angry. _

, CEPR

 

Ben Casselman has an interesting piece
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in the New York Times about how economists have lost standing with
both politicians and the public at large. While he attributes the
profession’s problem to flawed forecasts and arcane language, I
would argue the problems go much deeper.

There has been a major lack of honesty in important areas that have
had a huge impact on people’s lives. The two areas I would highlight
are trade and the bailouts in the financial crisis.

The Trade Coverup

The story with trade runs deep. As Casselman tells us, economists all
like to claim that they are proponents of “free trade.” But there
are two points here that economists tend to give short-shrift or no
shrift.

The first is that trade has losers. That is not left-wing jargon, that
is basic economic theory. Paul Samuelson, arguably the country’s
most influential economist ever, co-authored a famous piece
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trade theory making this point more than eighty years ago.

In this piece, Samuelson made the case that in a country with a large
amount of skilled labor (e.g. college-educated) relative to the rest
of the world, and a small amount of less-skilled labor (non-college
educated), less-skilled workers would be hurt by an opening of trade
with developing countries. In other words, the loss of jobs and the
downward pressure on the wages of manufacturing workers was not an
unfortunate side-effect of recent trade deals, it was the point.

While economists will occasionally acknowledge the fact that there are
losers, they usually imply that this group is a small number of people
who can easily be made whole with a limited amount of adjustment
assistance. In reality, we are talking about millions of workers who
actually lost their jobs and tens of millions more who saw lower
wages.

There are two simple graphs that display this handwaving by economists
beautifully. The first is a graph showing the share of manufacturing
workers in total employment. As can be seen there is a downward trend
in the whole period from 1970, nothing special to see as the trade
deficit exploded in the first decade of this century.

The second graph shows a slightly different picture. It’s total
manufacturing employment since 1970. In this graph we see cyclical ups
and downs but relatively little change from 1970 to 1998. Then from
the middle of 1998 to December of 2007 the economy lost almost 4
million manufacturing jobs, more than 20 percent of total employment.
This is the period where the trade deficit exploded reaching a peak of
almost 6 percent of GDP in 2006. (Note this is before the Great
Recession.)

Economists are less anxious to talk about this graph. When they do,
they will generally say that the job loss was due to productivity
growth and not trade.

This line should get anyone fighting mad. They want us to believe that
productivity growth cost us large numbers of jobs, coincidentally just
when the trade deficit was exploding, but not in the decades before or
the decades after?

It’s fair to acknowledge that there have been benefits from trade.
We can buy all sorts of goods at much lower prices because we import
them from China and other developing countries, but it is just
dishonest to try to deny there has been a huge cost to millions
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not reversible, contrary to what you hear from some prominent
politicians.)

That may sound bad, but it actually gets much worse. While the line is
“free trade,” the reality is quite different. Our doctors get paid
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more than twice as much on average as doctors in other rich countries,
pocketing more than $350 thousand a year. If we got our doctors’ pay
down to the average in places like France and Germany it would save us
more than $100 billion a year in medical expenses ($1000 per family
per year).

This gap in pay persists because our “free traders” apparently had
little interest in promoting free trade in physicians’ services or
the services of other highly paid professionals. The agenda was
selective free trade. Free trade in manufactured goods, which had the
predicted and actual effect of driving down the pay of manufacturing
workers and non-college educated workers more generally, but
preserving the protectionists barriers that sustained the high pay of
highly educated workers.

But wait, it gets worse. A major part of all the trade deals
negotiated in the last four decades was longer and stronger patent and
copyright protections, both for the United States and our trading
partners. Patents and copyrights are government-granted monopolies,
the complete opposite of free trade. How are these restrictions
included in “free trade” agreements?

And there is a huge amount of money at stake. We will pay more than
$650 billion this year for prescription drugs and other pharmaceutical
products. We would likely pay around $150 billion if these items were
sold in a free market without patent monopolies. The difference of
$500 billion comes to around $4,000 per family per year. If we add in
the cost
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of patent and copyright monopolies in other areas it is almost
certainly well over $1 trillion a year.

These monopolies also make some people very rich. Bill Gates has
agreed to be the poster child for this point. Needless to say, most of
the beneficiaries are not among the less-educated.

To be clear, patents and copyrights, like all forms of protectionism,
serve a purpose. They provide an incentive for innovation and creative
work. But they are clearly _not_ free trade and in any case, there are
arguable better and cheaper ways to provide these incentives. But when
we bless these monopolies as free trade, it is hard to even discuss
alternatives.

The Second Great Depression Myth and the Bank Bailouts

After the collapse of the housing bubble the country faced its largest
financial crisis since the Great Depression. Most of the country’s
major banks were looking at bankruptcy. At this point, rather than
letting the free market work its magic, the vast majority of the
country’s leading economists were insisting that the government
needed to bail out the banks. The alternative would be a Second Great
Depression.

This was a lie. There is little doubt that the recession would have
been worse if we allowed the chain of bank collapses to continue, but
how would this condemn us to a Second Great Depression, a decade of
double-digit unemployment?

Having dealt with the first Great Depression, we now know the secret
for getting out of a depression: spend money. If the chain of bank
collapses had continued the vast majority of people would have the
vast majority of their bank accounts kept whole by the FDIC, taking
care of the immediate problem of paying their bills.

To reboot the economy, we just would need a large-scale stimulus
package, think three or four 2009 Obama stimulus packages. This could
take any form. We could spend more on things like health care,
climate, and infrastructure or we could just send everyone $5,000
checks. To make Republicans happy, we could even put Donald Trump’s
name on the checks.

It is reasonable to argue that there would have been political
obstacles to this sort of massive stimulus program. That is certainly
possible, but that is a very different argument than saying the
economics of a major bank collapse condemned us to a Second Great
Depression. Rather this would be a case of economists making
predictions about politics.

It is also worth noting the large potential gains from a collapse of
our major banks. We would have instantly downsized our incredibly
bloated financial system, eliminating a huge amount of waste. This
financial system is also the source of many of the country’s great
fortunes. Again, economists were being dishonest in a way that
benefited the rich.

The Economists’ Missed Calls

I won’t go into great lengths on the big misses of the last two
decades. Failing to see the housing bubble and the wreckage that it
would cause is to my mind a disastrous failure. We had an
unprecedented run-up
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in nationwide housing prices at a time when rents were moving roughly
in step with overall inflation. And the flood of dubious loans was
hardly a secret, the industry was bragging about it.

It also should not have been hard to recognize the bubble was driving
the economy. Residential construction is ordinarily around 3.5 percent
of GDP. It peaked at almost 6.0 percent in 2005. What would replace
2.5 percent of GDP in annual demand ($700 billion in today’s
economy) if the bubble burst. And the bubble was also driving
consumption as people were borrowing against their bubble generated
home equity.

In short, missing the bubble and the consequences of its collapse was
a pretty huge mess-up. And of course, almost no economists faced any
career consequences for this mistake. Everyone got a collective “who
could have known?” amnesty.

The other big miss was failing to recognize how persistent the
pandemic inflation would be. I am more sympathetic to this error,
probably in part because I was a card-carrying member of Team
Transitory.

There is no doubt that inflation was more persistent than I and many
others expected, but there were two major non-economic events that I
at least did not anticipate. I was expecting that the pandemic would
quickly be brought under control as most of this country and the world
got vaccinated. I did not anticipate that there would be two further
major waves (the delta strain and the omicron strain) which would lead
to large-scale shutdowns both in the United States and elsewhere in
the world.

I also didn’t anticipate Russia’s invasion of Ukraine and the
economic disruptions that followed. Would inflation have been more
persistent than I originally expected in the absence of these events?
Perhaps, but I don’t think it’s unreasonable to get at least a
partial amnesty for not having foreseen these disasters.

When It Comes to Economists, the Angry Masses Have a Case

I realize and share the frustration of many economists when the public
fails to understand simple economic principles. For example, I think a
carbon tax, with a rebate for low and moderate-income households, is a
great idea, but I recognize the politics are totally toxic. The
understanding of a progressive marginal income tax is incredibly weak.
Many people cannot conceptualize that raising Elon Musk’s taxes does
not mean raising their taxes.

But economists have seriously failed the public in important areas
over the last three decades. And these failures played a role in
fostering the upward redistribution of income over the last four
decades. People have a right to be angry.

_DEAN BAKER co-founded CEPR in 1999. His areas of research include
housing and macroeconomics, intellectual property, Social Security,
Medicare and European labor markets. He is the author of several
books, including Rigged: How Globalization and the Rules of the
Modern Economy Were Structured to Make the Rich Richer
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commentary on economic reporting. He received his B.A. from Swarthmore
College and his Ph.D. in Economics from the University of Michigan._

_His analyses have appeared in many major publications, including
the Atlantic Monthly, the Washington Post, the London Financial
Times, and the New York Daily News._

_THE CENTER FOR ECONOMIC AND POLICY RESEARCH (CEPR) was established
in 1999 to promote democratic debate on the most important economic
and social issues that affect people’s lives. In order for citizens
to effectively exercise their voices in a democracy, they should be
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that lead to improving quality of life, both for people within the
United States and around the world._

_CEPR was co-founded by economists Dean Baker
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economists JOSEPH STIGLITZ; JANET GORNICK, Professor at the CUNY
Graduate School and Director of the Luxembourg Income Study;
and RICHARD FREEMAN, Professor of Economics at Harvard University._

_IFPTE, Local 70_

_Employees at CEPR are members of the nonprofit professional employees
union IFPTE Local 70. For more information on the union and other
organizations belonging to Local 70, visit NPEU.org
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* economic inequality
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* economists
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* Free Trade
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* inflation
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* taxes
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