Signs of intelligent life in the economics profession

Last month, Larry Summers ripped into those arguing that more education is the answer to the country’s rampant inequality.

“The core problem is that there aren't enough jobs,” said the former Treasury Secretary under Bill Clinton and top economics adviser to Barack Obama. “If you help some people, you could help them get the jobs, but then someone else won't get the jobs. Unless you're doing things that have things that are affecting the demand for jobs, you're helping people win a race to get a finite number of jobs.”

He made these comments at a conference at the Brookings Institution put on by the Hamilton Project, the economics think tank funded by Summers’ predecessor at the Clinton Treasury, Robert Rubin.

If the significance of these comments is not clear, the most important economic figure of the Democratic Party mainstream was demolishing one of the party’s central themes over the last two decades. Summers was arguing that the problems of the labor force — weak employment opportunities, stagnant wages and rising inequality — were not going to be addressed by increasing the education and skills of the workforce. Rather, the problem was the overall state of the economy.

The standard education story puts the blame for stagnant wages on workers. The key to getting ahead is education. On the contrary, Summers argued at Brookings: The blame for the economic malaise goes to the people who design economic policy. It is their fault that workers aren’t able to secure decent-paying jobs.

Summers was responding to evidence that can’t be reconciled with the education story. As my friends and colleagues Larry Mishel, John Schmitt and Heidi Shierholz have shown, inequality has continued to grow since 2000 even though demand for workers in highly skilled occupations has not increased. Similarly, there has been little change in the wage premium that college-educated workers enjoy relative to less-educated workers, as pay for the typical college grad has barely risen since the turn of the century.

For this reason, anyone who blames stagnating wages on a lack of education is ignoring the data. With the data no longer supporting the theory, at least some mainstream economists have chosen to adjust their views. 

This is not the only issue on which mainstream economists have changed their tune. It is now common to hear Summers and other prominent economists talk about the problem of secular stagnation, the idea that the economy could suffer from a shortage of demand over a sustained period.

This view was routinely ridiculed in the economics profession less than a decade ago. The standard view was that the economy could only suffer from a lack of demand for short periods when it was in a recession, but recessions were self-correcting. This meant that the economy would quickly bounce back to full employment levels of output, so a shortage of demand need not be a concern. The key to producing more was to fix the supply side of the economy. Even the research department of the International Monetary Fund (IMF) now recognizes the problem of inadequate demand, although the IMF economists designing country programs seem to have not yet gotten the message.

Economists are also now much more critical of trade. It has become widely accepted that the patterns of trade over the last three decades have lowered the wages of a large segment of the workforce. And prominent economists such as Joe Stiglitz and Jeffrey Sachs have openly warned about the negative effects of trade agreements like the Trans-Pacific Partnership.

And the luster of an ever bigger financial sector with increasingly complicated financial instruments has also faded. A recent paper from the Bank of International Settlements showed that a bloated financial sector was a drag on growth. And Simon Johnson, a former chief economist at the IMF, has been a tireless critic of too-big-to-fail banks and the policies that support them.

Each of these changes involves an enormous shift in the economic profession from views that were the absolute orthodoxy less than two decades ago. Back in the 1990s, the policy types and political figures who held the views now espoused by Summers, Krugman, Stiglitz and Sachs were not just considered wrong but not serious enough to merit attention. They were know-nothings who didn’t understand modern economics.  

This new thinking in the economics profession is a remarkable break from the past. It should be viewed in the same way as Pope Francis’ effort to reconcile the Catholic Church with the modern world. But just as Francis must do battle with hard-liners, the few economics luminaries who have seen the light must fight against an entrenched orthodoxy in the profession. 

Many elite economists still insist that unemployment due to inadequate demand is not a problem. They continue to press concerns over budget deficits, as though the economy would somehow be better off if we cut annual spending by $500 billion, or 2.7 percent of GDP, to balance the budget. And the Federal Reserve Board stands ready to start raising interest rates, as if inflation is a problem that need concern us any time in the foreseeable future. And most economists still believe that any proposed trade deal is a good thing.

But those of us who want to advance a more sensible economic agenda must recognize the opening that has taken within the profession. There is no longer a mainstream consensus for bad economic policy that redistributes upward. That is real progress.