The Problem of the Liberal Elites Part 4 Conclusion

Most economists supported NAFTA, and then spent years justifying their support with models and econometric studies they claimed showed that it had little effect. They continued to support trade treaties when China entered the World Trade Organization. They supported the KORUS deal and most supported TPP. Meanwhile, manufacturing job losses increased from the allegedly minor losses of NAFTA to astonishingly high levels.
Link. Link. The linked studies don’t count ancillary job losses, including the jobs that never came here because US corporate executives took US generated capital and know-how overseas to build new plants, many with advanced manufacturing capability. The damage done by these trade deals to people and communities is obvious now, especially after Bernie Sanders won the Michigan primary, and an increasing number of economists are talking about it in public.

There is a strong parallel here with the crucial role played by economists in deregulation of the financial sector. This too had widespread support from economists across ideological spectrum.

How did these experts get it so wrong, and wreak such damage on so many people? I think it’s because they have so much confidence in their models, and use their authority as experts to push through policies based on those models. And if I’m right, this is a genuine problem for liberal experts.

We can see the confidence in models in Krugman’s work. In this blog post, Krugman takes up the question of why economists were so late to the study of inequality. He says he agrees with this Bloomberg View column by Justin Fox (which gives a nice history of the issue), but says that Fox missed a critical part of that failure: inequality is “a hard issue to model”.

The other [issue one might model] involves the personal distribution of income and wealth. Why are investment bankers paid so much? Why did the gap between CEOs and the average worker widen so much after 1980?

And here’s the thing: we really don’t know how to model personal income distribution — at best we have some semi-plausible ad hoc stories. Part of why Piketty made such a big splash was that he offered a sketch of a model of wealth inequality that tied it into broader macro numbers — r > g and all that — which gave all of us something systematic to talk about. But he himself concedes that the big rise in inequality so far has come from a surge in the right tail of earnings, which may have had something to do with norms, but in any case isn’t well explained by any model we have right now. Emphasis in original.

Krugman claims to rely on his models. He’s written a number of blog posts explaining his views and defending the process against those who argue that models are worthless if they don’t predict disasters and other bitter criticisms. Here’s an example from earlier this year.

And that really gets at my point, which is not that existing models are always the right guide for policy, but that policy preferences should be disciplined by models. If you don’t believe the implications of the standard model in any area, OK; but then give me a model, or at least a sketch of a model, to justify your instincts.

Conservatives and their economists insist that the vast increase in incomes at the top and the decrease at the bottom are the result of some special skill or lack of skill, or that the “market pays people what they are worth”; but that is just false, as I explain in detail here and here. Fox says that economists should look outside their specialties and consider the possibility of changing social norms, as some sociologists suggest, or changes in laws and political priorities, as some political scientists suggest. I doubt that social norms have changed. Every survey I’ve seen says that people don’t know the actual figures about wealth and income inequality, and wildly underestimate them.

Krugman says Piketty offers the explanation of “r > g and all that”, but what I read in Piketty is his theory that the rich use their economic and political power to get favorable changes in laws, regulations and court rulings, changes that increase wealth and income inequality solely for their benefit, with the losses inflicted on the rest of us. As far as I can tell, raw economic and political power are completely outside the economist field of view, simply because they cannot be modeled. And on top of that, those models don’t even consider fraud and corruption, which play a large role in our version of capitalism.

In his 1993 article in Foreign Affairs, Krugman makes the case that the real basis for NAFTA is foreign policy. It was intended to help Mexico transition to a more Westernized economy, which he thought was a good idea. That is a policy judgment, not an economic judgment. But whatever the government and the economists thought, NAFTA was an experiment in the exercise of raw economic power.

The same thing was true about China and the WTO, and TPP and TISA and US/China deals like BITs. The point of these treaties is to change the nature of existing markets and social structures, to create non-governmental forms of control of trade and property, and to protect and enhance the economic power of some US industries at the expense of the lives of millions of workers. Hiding behind weasel words like Free Trade and the professional reputations of most economists, Congress has ceded US sovereignty to a bunch of rogue corporations acting strictly in the interest of profits and shareholder returns, with neoliberals in both parties supporting Fast Track approval of whatever they want.

Krugman counts himself a lukewarm opponent of TPP, as do other liberal economists, for political and not economic reasons. Even though the damage is done, it’s nice to see this change.

That leads me to the conclusion that liberal elites, especially liberal economists, have a real problem: they have been wrong too often on too many important issues. They were wrong about trade. They were wrong about neoliberal economics in general, the Washington Consensus, and, as Queen Elizabeth II pointed out, they couldn’t even see the Great Crash coming.

After the Great Crash, they searched for explanations, but while some focused on the effect of deregulation, there were still plenty of defenders, including many who denied the relevance of the gradual weakening and then elimination of Glass-Steagall, but none of those explanations touched on fraud and corruption. No liberal economists called for prosecutions. Instead they focused the debate on the nature of their models, claiming that they were unfairly blamed for not predicting the Great Crash. Of course, those were the very models they used to advise policy makers that deregulation would be just fine.

Economists have all used the same introductory textbooks for decades now, teaching the simple tropes of capitalism. That sets the baseline for economic theory for the great mass of citizens who have been taught to think the ideas of Econ 101 as laid out the textbooks of Mankiw or Samuelson and Nordhaus are Gospel. Liberal economists who move away from those ideas are rejected by conservatives.

Now liberals say we trusted you to be right, and you weren’t. And not just that, you were wrong in the worst possible way: you concurred with conservative economists. That costs the liberal elites credibility with liberals and even many centrists.

And progressives, the heirs to FDR, by nature more suspicious of wealth and power, say: we trusted you, but you didn’t even question the goals and motives of the rich and powerful. Why would we ever trust you? We aren’t even sure we’re on the same side.

That presents liberal economists with a real problem. Why would anyone listen to them now?

Index to prior posts in this series.

Notre Dame undergrad (math); JD, Indiana University at Bloomington; 1st Lieutenant, US Army.; private practice in corporate and securities law; Assistant AG in Tennessee for consumer protection and securities; Blue Sky Securities Commissioner, Tennessee; private practice, bankruptcy and corporate law.

I have had a lifelong interest in economics. For most of my career, that interest was practical, focused on the problems in front of me. Lately I have been more interested in economics as a theory, especially its impact on the lives of people like those I met in my bankruptcy practice, and on the politics of money in the US. I also enjoy reading philosophers, starting in college and steadily expanding my reading ever since. I wrote at FireDogLake for a number of years.

Generally, I think the problem facing the US is the dominance of neoliberal discourse. I think it clouds the vision, and limits the kinds of problems that can be identified and solved. For example, the existence and danger of climate change can easily be identified in a scientific discussion. However, the problem does not fit the neoliberal discourse because science insists that the pursuit of individual and corporate self-interest will lead to devastation. In neoliberal discourse, the pursuit of self-interest always leads to Eden.

The neoliberal project has two prongs. One is the police function of crushing dissent and alternative views. The police function is provided by government agencies and private and institutional actors. The counterpart is the economic system , which is operated by government and by private and institutional actors. Some of these actors operate in both spheres. I focus on the second prong.

16 replies
  1. orionATL says:

    “… And progressives, the heirs to FDR,…”

    what an incredibly arrogant statement.

    that arrogance reminds me thst a few years ago thomas jefferson has been claimed by the republican right as one of their own.

    and another incredibly arrogant statement – “That presents liberal economists with a real problem. Why would anyone listen to them now?”.

    my friend i genuinely appreciate your efforts here. they provoke thinking like nothing else published here,

    but i have to say, people, other than disappointed, angry supporters of senator sanders will be listening to paul krugman, aka “liberal economists”, long after anything you have written here is forgotten.

    don’t confuse your passion for good deeds and your anger at those who don’t agree with you with good judgement and politically astute commentary.

    • orionATL says:

      did you support then senator obama in 2008, ed?

      many “progressives” did. were you one of those heirs to fdr back then?

      there is no better commentary on some progressives utter lack of sound political judgement and their willingness to be conned by platform verbage than that they supported barrack obama in 2008 against then-senator clinton.

      did you know, ed, that senator clinton ran to the left of senator obama in 200i? and that paul krugman was a persistent critic of barrack obama then as he has been of sen sanders in 2016?

      here is a reprise from early 2009:

      http://www.newsweek.com/attack-left-paul-krugmans-poison-pen-76063

    • Ed Walker says:

      I think you missed the point of this entire series. This has nothing to do with Sanders or anyone else. It’s an effort to come to grips with the changes in US society over my lifetime, using several old books as a guide. In the first post, I said that lots of people think the Republicans are moving to fascism, and so it might be helpful to look at an early examination of the rise of fascism. I pulled several points I thought were important. One is that the elites failed. There are others.
      .
      The four posts on the failure of liberal elites examine the work of a major liberal intellectual, Krugman, because he has a mountain of accessible work, much of which I have read. He did not predict the problems trade would bring, and neither did anyone else. He assumed that government would somehow deal with the problems that he did foresee, which also turned out wrong. I point to reasons this is so. I hope I mede it clear that it is not as severe as the failure of the conservative elites, who have generally forsaken Enlightenment values. But the fact remains that the liberal economists have not reckoned with their own failures.
      .
      As I see it, those failures have a source: the failure to appreciate the crushing impact of fraud, corruption and power, and one that failed to understand that the rich would use power strictly for their own benefit, and without compunction dump the losses on the vast majority of their fellow citizens. Their mental models do not deal with fraud, corruption and the exercise of raw power. They give advice as though every actor in society was a law-abiding person whose actions will in the long run produce the best possible outcome by operation of the invisible hand of the market, or some other Deus ex Machina.
      .
      Liberals have for a long time held a basically optimistic view, that the current form of capitalism can be made to work for everyone with a few tweaks, without seriously inconveniencing the rich. That fits the circumstances of the successful nicely. I guess we’ll see how it works out.

      • earlofhuntingdon says:

        Well said. As you point out elsewhere, the highest paid CEO’s are not worth their pay; they have just cornered the market on the process by which it is set: control of their often somnambulant boards, control of subordinate board comp committees and HR heads, control over hiring/firing of the legions of outside consultants whose “research and data” help set the ever increasing limits for CEO comp, considerable influence through funding and use of top academics commenting on the subject, ad nauseam. As you also point out elsewhere, related statistics about the “worth” of middle managers and rank & file are incorrect too. Which is another way of saying that claims by CEO’s about their unique, irreplaceable contributions to the businesses they supposedly run are inflated to the point of parody. They reach those conclusions, in part, by excluding or underrating the contributions of the people who really make their businesses run.

  2. bevin says:

    An interesting post. The debate is not so much between economists as between economists and those who question the basic premisses of Political Economy.

    The basis of all public policy ought to be the welfare of the people, which includes their living standards and the environment.
    It is in this sense that FDR, who came to hold this Tory view, is the ancestor of modern ‘progressives.’ One of many ancestors, some who questioned capitalist society from the very beginning and others who came, often after experiencing systemic crises such as the Great War and the Slump, to realise that the economy can be a good servant but is a bad master. And sometimes, as they discovered in the 1930s, a more than bad-an evil monstrous-master.

    I find it hard to believe now but I confess that, in 2008, I was confident that willy nilly Obama would discover, in the FDR tradition, that it would be necessary, if only for political survival, to take radical steps, firstly to put a stop to the foreclosure crisis and secondly to impose severe regulations on the financial industry. To bring the “economy” under control, to ensure that it provided jobs at good wages and to reverse the trend away from equality.

    I was wrong. He did none of these things. The ‘economy’, dominated by the interests of the very wealthy, rules. It dictates public policy in general and re-shapes policies (such as Healthcare and Defence) to suit its narrow interests.

    And the wheel is still in spin. I’m not sure how correct Polanyi’s theory that societies always protect themselves is, but if it doesn’t work that way then civilisational collapse (Rosa Luxemburg’s Barbarism) is the likely alternative. In the present there is no future. And those who want things to carry on will have to be ready to change everything.

    • Bay State Librul says:

      Good points but

      What if Obama had taken those steps and the economy tanked and the market crashed.

      It is always easy to second-guess, but he was faced with tough decisions.

      I will continue to read Krugman, he is engaging and insightful
      .
      The alternative, move to a socialist-type Republic, ignite a revolution, or change to a better
      political climate through term-limits, a six year Presidency, the repeal of Citizens United, and make Elizabeth Warren Secretary of Treasury.
      —-

      • bevin says:

        If the economy had ‘tanked’ and the market had ‘crashed’ we would have been repairing the damage for several years by now.

        Instead there has been no real recovery whilst trillions of fictitious currency have been pumped into the economy and immediately sequestered by the legendary 1%.

        A large part of the international economy is operating on the basis of negative interest rates.

        The reckoning has to come. And by the time that it does my guess is that people will see past the immediate confusion and chaos-the empty ATMs and the $1000 loaves of bread- and welcome the chance to take back control of their lives from the inexplicable and mysterious gyrations of the markets, played by drug addled speculators.

        Surely, the bottom line looks something like this: the average person is deeper in debt, less likely to be employed and more dependent upon economic forces beyond his control, than ever before.

        When an edifice, in whose shadow we live, is about to collapse the obvious course is to dismantle it as quickly and efficiently as we can. Instead we look up at its shuddering structure and tell ourselves that things always work out well.

        Anyone who believes that the constant upswing in sales of guns and ammunition is not a measure of the growing sense of dread, and anticipation of looting, in the economy is, in my view, mistaken.

      • Ed Walker says:

        I read Krugman too, and for the same reasons. He is right about a lot of things, and in particular, most recently, about the best possible response to the Great Crash. I will continue to read his work because he is almost always the clearest exponent of liberal theory, and the most detailed in his reasons for supporting it.
        .
        Perhaps unlike Krugman, my default mode is to assume that things that the rich and powerful want are not good for most of us, and there is no invisible hand to fix it.

        • Jonf says:

          I can certainly agree with your last sentence. But our condition rises above that. We owe some, maybe most, of the fault to ourselves, the people. Just look around at the primaries and the disparate and varied views on how to deal with our country and the world. The world is complex, and it is most unlikely that any economic model can capture its essence. In fact I believe the harder we try the more erroneous the outcome. In any issue facing us there will be multiple suggestions on how to proceed and some will be powerfully held. Progressives are but a small group out of society. Fortunately, we live in a democracy and there is always the chance we can promote change. For me the task is how to best allocate our resources for the public purpose. That said, I enjoyed your article.

          • orionATL says:

            “…” We owe some, maybe most, of the fault to ourselves, the people. Just look around at the primaries and the disparate and varied views on how to deal with our country and the world…”

            just look around the united states at the number of governorships and legislative super-
            majorities the republican party has. much of this has been carefully scripted and financed by the koch brothers political octopus including ALEC, the state policy network, the reason society, charter school fronts, etc. now THAT is a contemporary octopus ed walker should be genuinely concerned about.

            majorities of american voters have fallen for this “values” politics in these states. for that reason, i am substantially unsympathetic with their economic plight. voters who think the republican party has any concern for their well-being, especially their economic well-being, are responsible for the consequences of their vote.

            these voters include a large number of white, small town, rural voters. i don’t know why it should be true, but for the most part sen. sanders does best in white, small town, rural, states. i think the democratic party has something to learn from that.

            – careful party organization first and above all.

            – then political education about voters’ best interests as the main topic of conversation.

  3. orionATL says:

    another moral issue not considered – whitebread loves senator sanders.

    utah, white and non-latino or hispanic = 80% sanders =78%

    idaho, white and non-latino or hispanic = 83% sanders =80%

    arizona, white and non-latino or hispanic = 56% clinton = 58%

  4. Francine Fein says:

    I’m reading a most interesting book: “Deer Hunting with Jesus: Dispatches from America’s Class War” by Joe Bageant.

    The description from review: “… Bageant’s report on what he learned by coming home. …After thirty years spent scratching together a middle-class life out of a “dirt-poor” childhood, Joe Bageant moved back to his hometown of Winchester, Virginia, where he realized that his family and neighbors were the very people who carried George W. Bush to victory…He writes of his childhood friends who work at factory jobs that are constantly on the verge of being outsourced; the mortgage and credit card rackets that saddle the working poor with debt, i.e., “white trashonomics”; the ubiquitous gun culture—and why the left doesn’t get it; …. What it adds up to, he asserts, is an unacknowledged class war. By turns brutal, tender, incendiary, and seriously funny, this book is a call to arms for fellow progressives with little real understanding of “the great beery, NASCAR-loving, church-going, gun-owning America that has never set foot in a Starbucks.”

  5. orionATL says:

    re ed walker at #7

    [… Ed Walker on March 23, 2016 at 11:24 am In reply to orionATL

    I think you missed the point of this entire series. This has nothing to do with Sanders or anyone else. It’s an effort to come to grips with the changes in US society over my lifetime, using several old books as a guide. In the first post, I said that lots of people think the Republicans are moving to fascism, and so it might be helpful to look at an early examination of the rise of fascism. I pulled several points I thought were important. One is that the elites failed. There are others…]

    lawyers never stop being evasive, even when they give up law.

    i have not “… missed the point of this entire series”.

    i have not been criticizing “this entire series” here.

    i have been criticizing one thing – the quality and competence of your 4-essay attack on paul krugman, who is both a sharp critique of your political candidate, sen sanders, and a very distinguished economist supporter of his opponent, secretary clinton.

    apparently you would have the world believe that these essays just happened to appear in the very midst of the current contentious democratic primary campaign wherecsen sanders’ entire approach is on jobs lost and unfairness.

    i am confifent no neutral observer could possibly fail to observe the connection between your political colors and the sudden “fortuitous” appearance of this criticism at the emptywheel website.

    here is how you began this 4-part set of essays:

    [… The Problem of the Liberal Elites Part 1

    Published March 14, 2016 | By Ed Walker

    … The problem is more complex with liberals, and it will take several posts of reasonable length to get into it. To make things concrete, I’m going to begin with the liberal approach to trade… :

    1….

    2….

    3. The failure of economic theory to incorporate the impact of raw economic power, including fraud and corruption.

    The text for this post is a 1993 article in Foreign Policy by Paul Krugman titled The Uncomfortable Truth about NAFTA: It’s the Foreign Policy Stupid.

    Krugman begins by insulting the anti-NAFTA people.

    ‘… It is as hopeless to try to argue with many of NAFTA’s opponents as it would have been to try to convince William Jennings Bryan’s followers that free silver was not the answer to farmers’ problems.

    Indeed, the parallel is quite close. The populism of the 1890s represented a desperate attempt to defend agricultural America against deep economic forces that were changing it into an industrial nation. The choice of a monetary standard had very little to do with the real problems of the farm sector; a burst of inflation might have given some highly indebted farmers a brief respite, but it would have done nothing to reverse or even materially slow the industrializing trend… ‘

    Well, as I remember my high school history and related reading, that’s just wrong. My sophomore history teacher… encouraged us to read the muckrakers, and I chose Frank Norris’ The Octopus and The Pit. They tell an entirely different story, one that revolves around fraudulent financial schemes of a railroad company and traders in the pits of the Chicago Mercantile Exchange. Things haven’t changed much….]

    – your fond mememories of your high school readings of novels about the late 1800’s and early 1900’s are not evidence for any deficiency in economic thinking.

    – you didn’t just “begin with the liberal approach to trade, you began and ended it.

    your whole opening paragraph was a clear setup for a 4-essay long attack on paul krugman for what he wrote in 1993 as the nafta legislation was being considered.

    the etiology of your 4-essays attacking krugman was, i am confident, an emptywheel post taking great offense at krugman’s criticism of the economics of some of senator sanders’ platform.

    that soon evolved from complaints about economic wonks economic criticising sanders, to complaints about “elites” who, one guessed did not wholeheartedly support sen. sanders.

    next came your attack on krugman cleverly concealed as a concern with “liberal elites”.

    the problem with that cleverness is we have not seen the plural promised. we have only seen a criticism of one liberal, paul krugman, who does not support some of sen sanders’ policies.

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