Three Cheers for Economic Pessimism

Americans are right to believe their lyin' eyes, labor shortages and productivity, Tax Foundation models, and more...

Public opinion researchers are often perplexed by results in which most Americans have a positive view of their own circumstances but a negative view of the national condition. If, say, 60% think their own finances are in good shape, how can only 25% believe that the economy is doing well? Princeton economist Alan Blinder attempted to tackle this question in the Wall Street Journal last week with a piece titled: The Economy Is Good. Why Don’t People Know It?

To me, it’s puzzling that anyone finds this puzzling. Analysts, including Blinder, try to explain the disconnect with various psychological theories like “negativity bias.” But there’s nothing irrational about assessing personal and national conditions differently. To the contrary, I’d say it’s the entirely natural and moral thing to do. Trying to define national conditions as merely the aggregated sum of individual conditions is the nonsensical approach, albeit one consistent with the reliably wrong model of human flourishing on which economists depend.

What Americans want, and rightly expect, is an economy that works for everyone, not only for themselves, and one that is making progress, with a future that looks better than the past. Of course, no one expects every individual to be thriving at all times. But the goal is for the economy’s basic math to work plausibly well for people in all places, of all different aptitudes and aspirations, in all walks of life. And if even that seems somewhat aspirational, at least that’s the direction in which things should be moving.

If it has become harder for a family to attain middle-class security with one income (it has), if people aged 18 to 34 are more likely to be living at home with their parents than independently with a significant other (they are), if drug overdoses claim lives at a faster pace than alcohol abuse did in Russia during the worst of the post-Soviet years (they do), then we should hardly be surprised when someone whose own finances are healthy nevertheless expresses concern. Indeed, a better question might be what we should call someone who thinks only his own well-being should matter.

A sense of precarity contributes as well. The elite often emphasize “opportunity” and “mobility,” noting that while some people may be down one year, many of them will be up again the next. The flipside, though, is that people up one year may be down the next. And most don’t have the elite’s cushion of both social and financial capital to carry them through. Ask Americans whether they care more about “financial stability” or “upward mobility,” and by 10-to-1 they will choose the former.

Crime provides a helpful analogy: Suppose a survey found that only 10% of respondents had been personally victimized by violent crime in the prior month. What share of respondents would respond with negative sentiments about public safety? According to our perplexed economists, only 10%. Or perhaps less. After all, many recent victims should be thinking about the tremendous opportunity they have not to be victimized next month. In fact, the figure would presumably approach 100%. As it should.

At American Compass, we’ve begun conducting focus groups to supplement our survey data with richer individual perspectives. One consistent result is that, asking people how they envision their ideal economy, literally no one mentions growth or dynamism or mobility. Themes among upper-income, college-educated Americans tend to emphasize a desire for greater income equality and embarrassment that so many jobs do not pay what they themselves could ever consider a living wage. Among lower-income Americans without college degrees, the same answers repeat: stability, security, self-sufficiency.

An interesting analog also presents itself in the context of globalization. One recent American Compass survey asked people whether the embrace of China and globalization had benefited or harmed them personally, their family and friends, their communities, and the nation as a whole. In general, Americans saw globalization as beneficial personally but harmful nationally. A common interpretation of these results would be that Americans have unjustifiably negative views of globalization because they know they have benefited and just assume someone else must have been harmed. But the results are exactly what we should expect if Americans, rather than being grievance-filled xenophobes, understood perfectly well how globalization had benefited them as consumers and also that, from the perspective of national well-being, the concentrated harms in particular communities and industries outweighed the benefits of their cheaper and larger televisions.

I consider all this great cause for hope. What the data are telling us is not that Americans are irrational, but rather that they still feel a much greater sense of solidarity than is generally assumed. It’s remarkably sad that economists, and most of our political class, think solidarity is irrational, but that’s for another day. For now, I’d just note that this seems an enormous political opportunity for some enterprising leader to speak to voters in a register that they might find more compelling than the typical “real wages up this percent, unemployment rate at that.”

The problem need not be here’s what happened to you, the solution not here’s what I’ll do for you. Someone speaking about how harms to some can be harms to all, the aspiration of being a good and great nation rather than just a collection of consumers, and the necessity of shared sacrifice in pursuit of those goals, might appeal quite well to the rightly pessimistic mood.

HEY, HOW ABOUT THAT DEBATE?

I wouldn’t be doing a very good job writing a political newsletter if I didn’t say something about Thursday night’s debacle. My observation is this:

Commentary has focused predictably on the horserace implications of the nation discovering that one of the two candidates for president is unable to discharge the powers and duties of the office. That makes a certain sense, as it is the standard mode of analysis after a debate revelation. He flip-flopped on this, she couldn’t defend against that, how will voters respond?

But discovering that a candidate literally cannot do the job is a revelation of a different kind, particularly when that candidate already holds office, and that office is vested with the executive power of the federal government, including as the commander-in-chief of the Army and Navy of the United States. Unique in our constitutional system, the president has sole decision-making authority within many of the government’s most important functions, and on those issues with the highest stakes and shortest response times. This is not Diane Feinstein hunched in a wheelchair, as one senator out of one hundred, or Ruth Bader Ginsburg not retiring when some supporters wanted her to, affecting the partisan balance of the court. A Wall Street Journal story over the weekend described Biden’s struggles to follow discussions or his own talking points during the recent G-7 summit.

The spinning about Biden’s election chances is the fun and easy part. But the hard question, and the one it’s hard to see how Democrats duck for the next six months, is whether anyone is actually in charge in the White House. Politicos are notoriously bad at thinking beyond the talking points that will get them through their next two-minute cable TV appearance—just look at how many figured they should just insist that Biden is still sharp as a tack, which was obviously not a position they would actually be able to sustain. As the dust settles this week, the question of the presidency, rather than the election, will move front and center.

If American journalism is not too far gone as well—an open question, given the insane effort in recent months to hide from the nation the reality of the president’s condition—this is what every reporter will be asking about, every news organization clamoring to investigate. I’d be very surprised if Biden’s apparatchiks can keep him in office until November; to determine the implications of Thursday’s debate for the election, work backward from there.

Bonus Link: Watch Ronald Reagan’s final press conference in December 1988. Just to remind yourself how an aging president still able to do the job might sound.

POLL WATCHING: Trump trusted more than Biden on democracy among key swing-state voters.

DOES WORKER SCARCITY SPUR INVESTMENT AND PRODUCTIVITY? YES.

At the core of conservative economics is the insight that “worker shortages” are good—indeed, it is only when lacking readily available labor at an affordable price that firms will make the investments in automation and productivity that lead to better jobs, the good kind of economic growth, and a strong global position. So I was delighted to see this short paper from the St. Louis Federal Reserve, finding evidence for exactly this dynamic in recent corporate earnings calls:

“We found that a 1-unit increase in a firm’s labor issues leads to a 28 basis point increase in its investment. To put this investment effect into perspective, our estimate implies that since 2021, the increase in labor issues (due to, for example, tighter labor markets) has spurred approximately an additional $55 billion in investment in the U.S. economy.”

…

“Our novel, firm-level measures of labor issues and automation, combined with data from publicly traded companies, suggest that a historically tight labor market has prompted firms to adopt automation technologies to address labor shortages.”

…

“We conclude that while a tight labor market leads to inflationary pressures in the short term, stronger productivity growth can expand production capacity, thereby softening price pressures in the long run.”

Very interesting! Of course, an analysis of earnings calls is hardly conclusive. But it underscores the importance of considering these cause-and-effect pathways in assessing policies that impose constraints on capital. They can be exactly what the economy needs.

Conversely, note the foolishness at the Economist, which pooh-poohed manufacturing jobs last week because they no longer enjoy a wage premium over service work. But that’s only the case because investment has been anemic and productivity is declining. (Amusingly, in the very same sentence lamenting that the wage premium has disappeared, the paper also suggests manufacturing jobs are “more likely to be automated away.” But of course, if automation were proceeding rapidly in the industry, productivity and wages in the industry would be rising. This opportunity for automation is precisely what makes manufacturing so economically important and gives the jobs so much potential; its absence is the problem.)

Devaluing of and disinvestment from manufacturing has made the jobs worse; an entirely reversible trend. Using these worse jobs as a reason not to worry about the devaluation and disinvestment is precisely backward.

THE WASHINGTON CONSENSUS

I admire the Economic Innovation Group’s work and am pleased to see their launch of The American Worker Project. Indeed, I’ll be contributing an essay to it.

Still, I cannot help chuckling at their attempt to present agreement between the American Enterprise Institute’s Michael Strain and New York Times columnist Paul Krugman as confirming a new “consensus.” That the center-left neoliberal economist and the center-right neoliberal economist have the same view is not only unremarkable, but also irrelevant to the political debates roiling Washington.

There was a time when the space between Strain’s position and Krugman’s did fairly capture the ground on which economic policy debates occurred. The result was the misguided globalization, rising inequality, and erosion of middle-class security, to which others with very different perspectives will have to find solutions.

TAX FOUNDATION KEEPS SETTING MONEY ON FIRE

The Tax Foundation is back with another “analysis” of the economic cost of tariffs, predictably finding that tariffs are bad. As with its analyses of tax cuts (always good for the economy!), what’s important to understand is that they are producing easily quotable headlines to reinforce a particular ideological agenda, not useful information about the actual economic effects of tax policy. That’s because their model assumes that deficits have no effect on the economic figures (GDP, investment, jobs) that they report. Cutting all taxes to 0% is the most “pro-growth” policy. Conversely, any tax revenue that’s collected is assumed to be set on fire for the purpose of the estimates.

With tariffs, the confusion is even worse, because the model not only ignores the possibility that deficits (including trade deficits) matter, but also ignores that raising the relative price of imported products might have any effect on domestic investment anyway. Indeed, they’re not actually modeling a tariff, but “a targeted excise tax on the tradable sector which ultimately fall on U.S. labor or capital and result in lower output.” So when you see reports that the Tax Foundation found tariffs will not help U.S. manufacturing, just replace “tariff” with “entirely wasted tax on U.S. manufacturers.” Makes the finding less impressive.

For more on this, see my Twitter thread from last year, or listen to our full Critics Corner episode of the American Compass podcast with Tax Foundation economist Erica York.

Thanks for reading – back Friday with more links!

Oren