I never bought the argument from my economics classes that raising the minimum wage leads to job loss. Sure, if the minimum wage was imposed on one company, that one company would be worse off. But, the minimum wage is enforced on all domestic companies at once. Customers don't just stop buying goods that they need from local companies, particularly if they have more money in their pockets since their wages just went up.

The thought that inflation would go up is countered by the fact that we now buy our goods from foreign countries that don't necessarily have a minimum wage themselves. The cost of goods aren't going up, not when someone overseas is getting paid a quarter an hour. Sure, they might have to work more since we have more money to spend, so their salary MAY go up - to thirty cents an hour. That kind of difference is not likely to cause a price difference from the product already on the self.

Poor people tend to spend all the money they earn. They don't hide it under the mattress like the wealthy do. Putting more money into the hands of more people makes the economy expand for everyone.

Economists strike me as generally a libertarian bunch. As such, they've let their values creep into their conclusions. In that sense, they see what they want to see. They've been blinded by their own politics.

How about this:

6) Economic is not a science.

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Good comments there. What we are learning now is that the private sector is inherently more corrupt, more bloated with morons and more full of lying scumbags than is the government. The absolute scandals in Iraq with Blackwater, KBR and Halliburton, in education, and in almost every area shows the inherent truth that government actors are more honest, better workers and more efficient than the bloated, corrupt, inefficient and criminally liable private sector.

Seems to me what's hard to 'predict' is human behavior, yet it's always predicted as a part of any economic theory. (I must be missing something.)

Marx, Engels, whoever predicted that if man had cradle to grave security, he would be blissfully happy and a world under communism would be a Utopia. Wrong.

Adam Smith believed that innate in all men was a sense of 'compassion' which would come into play when the super rich - under laissez-faire capitalism there would be super rich - became aware of the abject poverty others were suffering, they would automatically share their largesse with same. Whoops.

I've always thought economists longed to be part of the science department - they will be when human behavior becomes a science.

If your capital markets are efficient, or even if they're not, there's a natural upper limit to the accuracy of publicly-disclosed macroeconomic forecasts. If my forecasts were reliable enough that I could consistently make money by taking the market positions that my forecasts suggested, I'd call my broker, not a press conference. If I announced them, everyone would rush in and my profit opportunity would be spoiled. I wouldn't even reap my due reputation, because all that arbitrage would knock my forecast off the mark.

The real question is, "do there exist hyperforecasters who can predict economic conditions well enough to prosper by acting upon them in secret?" My guess is, Yes.

I'd give you a gold star for this article, but I'm afraid the negative results of such a reward will discourage you from more efforts like this in the future!

People like Mankiw are an interesting case. I don't think he so much changed his views to get a job in the administration as that his views have changed over time as he has become more famous and powerful. He has become more authoritarian and a supporter of the powerful and the status quo. On his blog he deletes comments from those he strongly disagrees with. This is a sign of the "right wing authoritarian" personality type described by psychologist Robert Altemeyer.

For those interested here's a link to Altemeyer's free, online book describing this type of person:

The Authoritarians

And as is hinted at above, psychology plays a big, but under acknowledged, part in economic thought.

--- Policies not Politics
Daily Landscape

Excellent points and questions, professor.

I think the reason we don't self-correct enough is an intersection of problem 1 in the post (vested interests have their bejeweled thumbs on the scale), and yes, the impacts are very hard to tease out the data.

This latter problem is a function of insufficient data--many moving parts make it difficult to isolate incentive effects--and the actual impacts are much smaller than the theory would suggest. 

So it's like pulling invisible needles out of a haystack.

EG, textbook theory suggests large job loss responses to minimum wage increases or sizeable labor supply reactions to tax changes.  But we see neither. 

Yet, read any oped page and you'll soon stumble on some warning that tax increases, regardless of their magnitude, will lay the economy low, or tax cuts will lead to stellar growth rates.

I would expect that the vested interest influence dominates. The economists most likely to be quoted in the press work for investment banks or advocacy organizations (notably the National Realtors Collective, or whatever it's called) and are incited to mislead the public into misallocating its resources.

The press fails to apply analysis and only seeks false balance, so we hear that economists believe these wrong, crazy things that of course don't come to pass (remember the NAFTA 'debate'?) and we think they're flawed. They're really just against us.

Adherence to Adam Smith's concepts is a religious issue. There is no Marxist Utopia any more or less than there is a truly free market, and any mention "free market" or "utopia" should be a red exclamation point that any assertion following is speculative.

Not an economist, but I'd been given to understand that America is unique in its hubris to name the subject here 'Economics,' thereby obscuring the political underpinning of the version of economics being taught, as if political theory didn't enter into it.

The reality of socialist economics, or liberal (in the European sense) economics, etc., ie., politically-informed economics, is unknown to American students. The result is that most 'American Liberal' economics run counter to the classical theories in economics, which are 'American conservative' and therefore inherently antithetical to the economics most Americans actually endorse.

For instance, I do not think that most accounting 'externalities' should be ignored or, at best, corrected by the use of tax money. These include various pollutions, much poverty, most of our immigration 'problem,' as well as the epidemic of un-insurance for health. These are caused in large part by successful off-loading of the cost of process improvement or waste clean-up, of the cost of competitive wages for, or to attract, American workers, etc.

Yet American economics, exemplified by GAAP standards and American law, allow these externalities, which you and I pay for in so many ways, and which provide much of the profit and ridiculous compensation levels of the current corporate dukedoms in the US.

Legislation could require theses costs to be borne at more appropriate locations in the production/provision process. The technology to identify these costs already exists, and is largely in place in most manufacturing and service companies.

Economics is always political, and to imply that it is empirical in any but the most sterile experiments is laughable.

Speaking of laughable: A man walks into the library of the Economics department.
"Do you have any books with a happy ending?"

I agree with the thrust of your comments and note that "political economy," a hybrid discipline that is much more closely linked to reality than what is today called "neo-classical economics" doesn't get much respect in academia.

For one, political economy elevates the role of power dynamics as a critical determinant of economic outcomes. 

XopherMV: Customers don't just stop buying goods that they need from local companies, particularly if they have more money in their pockets since their wages just went up.

The thought that inflation would go up is countered by the fact that we now buy our goods from foreign countries that don't necessarily have a minimum wage themselves.

Robert Brown: These two statements are contradictory. If foreign goods are less expensive, consumers will indeed stop buying those goods from local companies.

What? That's not contradictory. Are consumers going to buy their groceries, clothes, electronics, and fast food overseas? No. They're going to go to their local store and buy them there. Any increase to the minimum wage won't effect that.

Local manufacturers may feel a pinch if they haven't already outsourced their production. The price of American-label, foreign-made goods won't go up much, if at all, as a result of the minimum wage increase - there's too much competition overseas. The main difference will be that Americans can afford more of those goods, with the bulk of the profits from increased demand going to American companies rather than the foreign manufacturers. If prices go up it will be because American companies want to raise their prices, not because they have to.

Exactly. Add on top the fact that the public sector isn't paying tens to hundreds of millions each year to CEOs and their executive teams. No one on the public dime comes close to that, which would be considered wasteful spending in their sector.

Add on top the fact that the public sector isn't paying out profit to millions of shareholders or buying back millions of shares of company stock.

Add on top the fact that the public sector can obtain huge economies of scale for virtually everything they do.

When government runs well, it can be an amazing thing. Look at Medicare compared to the HMOs. We would actually save money if we all went with Medicare, a government system.

6) Economic is not a science.

since scientists aren't omniscient, this one probably doesn't matter.

To boldly go...

I agree completely that economics suffers from physics envy. As you and others have pointed out, economic theories are rarely used to make real world predictions, and those predictions are frequently well off the mark. Unlike physics, chemistry, biology, and other sciences, the economists don't look at their failures and go back to the drawing board.

If you follow science you realize that theories are disproved all the time. Wasn't there a theory that the genetic code carried all the information for developing a new individual? That ignores issues of cross generation gene activation. The genome is not enough. Wasn't there a theory that evolution described a tree of life, but inheritance at the single cell level allows cross species genetic transfers. Wasn't there a theory that refractive indices had to be positive? Now they are creating pseudo-materials with negative indices. Wasn't there a theory that all matter interacts with light the way familiar matter does? Now astronomers using gravitational lensing to find dark matter that doesn't. Wasn't there a theory that electron pairing limits the maximum superconducting temperature? That went by the boards in the 80s.

The trashcan is a scientist's best friend. It's high time economists started learning how to use one.

Actually, long term weather forecasts are much better than they were 10 or 20 years ago, and the weatherman does a much better job of forecasting than I can. Of course, they have spent years building, testing and throwing out models. The people having trouble are the river flow forecasters. I just read an article in which they realized that river flow forecasts haven't improved in 20 years, and unlike economists, the river forecasters feel that they need to do something about the problem. Economists don't even realize that they HAVE a problem.

So rich people should be encouraged to buy private jets instead of building factories?

Bravo csp. A couple of days out meteorologists are very accurate. Economists can't find their fannies with their own hands for those reasons cited by so many above.

So often economists are so incompetent as to be laughable. Over the years one of the funniest guys was Greenspan.

The really scary part of the disfunctional 'discipline' is that it seems to be getting worse.

Anti-union ideologues bound to simplistic market models assume that injecting market competition into public schools will yield great results. * * * School voucher programs haven’t worked either, because the problem isn’t the lack of market competition, it’s the inequities in the economy leading to educational deficits that kids bring to school with them.

The irony, of course, is that this statement is a good example of number 5: Bias and distortion. (1) It accuses anyone who supports school vouchers of being "anti-union ideologues" -- of whom there are some, to be sure, but that surely doesn't describe everyone who thinks that inner-city parents should be given more of a chance to escape failing schools.

(2) It says that voucher programs "haven't worked" -- although this could be true only under a very unusual standard of success. Even the one-sided sample of scholars in your link basically agree that vouchers have either no effect on achievement or a very small positive effect. Other scholars disagree (Hoxby, Peterson, Howell, Greene, Wolf). In any event, a better view is that if a program delivers the same academic results for 50-60% of the average per-pupil spending, that's a pretty good deal. Moreover, the claim of no effect also ignores the evidence from Colombia, where Angrist et al. found that a voucher program distributed by lottery to 125,000 children increased academic performance by a fifth of a standard deviation.

(3) I'm not sure what you mean by "the problem" here -- i.e., "the problem . . . [is] the inequities in the economy leading to educational deficits that kids bring to school with them." If you're talking about the achievement gap, it's very simplistic just to blame economic inequities here. Unfortunately, an achievement gap remains even if one controls for all manner of socioeconomic variables. As one researcher puts it, “neither socioeconomic differences, nor differences in measurable school characteristics, are sufficient to explain why African American students learn less over time than white students with similar initial levels of achievement.” Michael J. Puma, “The ‘Prospects’ Study of Educational Growth and Opportunity: Implications for Policy and Practice,” paper presented at Annual Meeting of American Educational Research Association (April 1999), at p. 11.

Similar findings: Pedro Carneiro, James J. Heckman, and Dimitriy V. Masterov, “Labor market discrimination and racial differences in premarket factors,” Journal of Law and Economics 48 (2005), p. 10 ("The common finding across these studies is that the black-white gap in test scores is large and that it persists even after one controls for family background variables. Children of different racial and ethnic groups grow up in strikingly different environments. Even after accounting for these environmental factors in a correlational sense, substantial test score gaps remain."); Roy Wilkins Center for Human Relations and Social Justice, University of Minnesota, “Analysis of the 1996 Minnesota Basic Standards Test Data,” (March 1997), at p. 24 (“Thus, even accounting for early childhood development, individual, school and neighborhood poverty, racial concentration of schools and school, program, and individual characteristics, there still remains a nontrivial racial disparity that cannot be accounted for by the included variables.”); Nancy A. Gonzales, Ana Mari Cauce, Ruth J. Friedman, and Craig A. Mason, “Family, Peer, and Neighborhood Influences on Academic Achievement Among African-American Adolescents: One-Year Prospective Effects,” American Journal of Community Psychology 24 No. 3 (1996), p. 380 (noting that “family income, parent education level, and the number of parental figures in the home” were not “predictive of adolescent school performance,” which “was surprising given the wide range of family incomes and education levels of the families in the study, which should have maximized the power to detect such effects.”).

I of course didn't mean that everyone who favors vouchers should be described that way.  If I say 'ducks swim,' would you accuse me of saying every swimmer is a duck?

My point was that some, and I think Hoxby fits in here, have applied economic principles of the type I inveigh against above, without considering opposing evidence, as discussed in the link.

But you're right, it's a contentious area of research and I should have noted that. 

That said, the point stands: there is a strong ideology that believes injecting market competition into public schools will improve student outcomes, and I don't think the evidence supports the claim.

To be more specific (and here I'm tapping the work of economist Larry Mishel):

On vouchers, sure, not all past voucher advocates are anti-union or ideologues. But those still pushing this as the solution, as many House members seem to be doing, are ideologues.

The underlying claim is that competition rather than bureaucracy will lead to school improvement. And, that ‘governance’ is one of the keys to unlocking student achievement growth. We can quibble about whether vouchers have a small positive, small negative or no effect at all (much like the min wg).

What I think is inarguable is that vouchers are no solution for all the problems that were said to motivate their use—transforming the education of those students who use the vouchers as well as those who did not and closing the racial achievement gaps.

Go reread the indictments of public education that framed the advocacy for vouchers and tell me that they’ve delivered on solving those problems, or even making substantial progress.  Ditto for charter schools. Both issues have been a major distraction in education debates for nearly twenty years.

Yes, “Unfortunately, an achievement gap remains even if one controls for all manner of socioeconomic variables.” But race and income gaps in education are present when students show up in kindergarten (see: http://www.epi.org/content.cfm/books_starting_gate ), which is why there’s such a focus on early childhood education and pre-k these days. Gaps in education tend to grow in the summers when there’s no school and some evidence they actually close during the school year.

Yes, family background does not explain everything, but social class and related factors explain far more than the particulars of schools. EPI’s book, written by Richard Rothstein, “Class and Schools” (http://www.epi.org/content.cfm/books_class_and_schools ) has had a monumental impact on the education debate and is one of the most valuable books I ever read.

This argument does NOT mean we shouldn’t do whatever is possible, and more, to ensure great schooling for low-income and minority students. There are many moral and economic reasons to do so and we should have a great sense of urgency in addressing these problems. However, we also need to: address the experiences of these children before they get to formal schooling: provide after-school programs and summer programs; and reduce poverty; provide health care and assure stable housing. If we just stick with ‘school reform’ we’re only kidding ourselves that we can eliminate race and income achievement gaps.

What I think is inarguable is that vouchers are no solution for all the problems that were said to motivate their use—transforming the education of those students who use the vouchers as well as those who did not and closing the racial achievement gaps.

I'd agree that the stronger case for school vouchers is equity. At the same time, if Angrist's evidence from Colombia is replicable in a larger scale program here in the United States, a fifth of a standard deviation would go a long way towards reducing the achievement gap. The gap is about .8 to 1.0 standard deviations, and it's rare to hear of any type of reform that is supposed to have an effect greater than .2 standard deviation (that's the effect reported by Krueger and Whitmore from the Tennessee STAR experiment, for example). But of course, any school reform finding might be tainted by a Hawthorne effect; you never know.

I think you seem to agree, however, that the achievement gap has many different causes, right? In which case, just as it's unreasonable for anyone to claim that vouchers are going to cure everything, it's unreasonable for anyone to claim that expanded preschool or health care or whatnot would cure everything. Conversely, why don't we just all agree that everything that has no negative effect should be on the table -- including vouchers and everything else that you mention.

For my own part, I suspect that home environments prior to school (and during summers, as you point out; I assume you're referring to the Entwisle/Alexander research) have an enormous effect. That is consistent with what Hart and Risley found (and, on a more anecdotal basis, several other researchers as well). It's also consistent with my own experience. The problem is that no one knows how to fix this.

One larger effect was found in Geoffrey L. Cohen, Julio Garcia, Nancy Apfel, and Allison Master, “Reducing the racial achievement gap: A social-psychological intervention,” Science 313 (2006): 1307-1310. Here's a description of the study. In a randomized field experiment, they gave black and white students an essay assignment, in which they were presented with a list of values (such as relationships, art, athletics, etc.), and then wrote a paragraph describing which value was most important to them. The essay took about 15 minutes. A substantial majority of the black students who wrote about their most important value ended having a GPA that was 0.25 points higher, thus closing the racial achievement gap by about 40%.

Now that's huge. But it also seems way too good to be true -- a one-time 15-minute writing assignment at the beginning of one semester has that great of an effect?

So we agree and you are just quibbling about what the balance between capital investment and consumption should be exactly. I don't know what it should be, and I submit that you don't either. Most people who claim they do have other agendas, I suspect.

I would add a sixth point: Classical economics is fundamentally incompatible with universal suffrage.

During the decades that Smith, Ricardo et al were developing the basics of the theory workers were by and large disenfranchised from the vote and so in important senses did not have to be taken into account. In such an environment focusing on Efficiency (growing the Pie) while ignoring the Equity (Pie Slices) makes perfect sense, the problems of the working poor could be deferred to the sphere of Charity.

Which largely explains why much of the political unrest in 19th Century Britain revolved around Suffrage, the Pie Keepers being fully aware of what would happen if the Pie Boys at large got ahold of the Slicer. And of course in the end it happened, universal manhood suffrage and later suffrage for women were proximate causes of future Labour governments in the UK and the New Deal in the US.

The response of the Classicists, now labeled the Orthodox was to assert that Efficient Markets free of the burdens of regulation would deliver Equitable solutions anyway, we just had to give them the chance. Because they understand that in a Democracy a certain amount of pragmatism will always raise its head "What is in it for me?" is not only a legitimate economic demand, it is at the basis of every economic transaction. And they realize that they really don't have any theoretical defense against a demand for Economic Equity, and their practical defense "Rising Tides" is breaking down in the face of evidence.

So to some degree they are panicking, to the point of making Chicago Style Econ 101 a voting test Whos afraid of Democracy. by Chris Hayes. "If the plebes don't understand that minimum wage has negative effects, lets take away their right to vote" so saith Bryan Caplan of GMU.

So it is unfair to say that Classicists/Orthodox actually get anything wrong, if Norquist/Rove/Cheney could get their dream of Permanent Majority and return to the Gilded Age of McKinley then much of their theory gets validated. For the people who would matter.

I don't know what the definition of "fair" is but, yes, even though I don't know if we are at the optimum balance of expenditures on capital vs. consumer goods, I would err on the side of encouraging expenditures on capital goods given that I think we will need more capital expenditure in order to find ways to be more competetive in the future.

Your economic theories are obviously colored by your hatred of "rich" people, not an uncommon emotion. sometimes one must set ones emotions aside in the interest of the best long term good.

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You know one of the old-fashioned tenets of economic conserrvatism ist hat the government should strive to be neutral in all its actions in the economy. As recently as the 1986 tax reform this was a guiding principle on the Right.
And in my opinion this is one rightwing idea I can buy into: income should be taxed at the same rates, no matter what it's source. The market can figure out the proper balance between capital income and labor income all on its own. We don't need the govermment trying to goose the econonmy one direction or the other. If there's money to be made on an investment, people will make that investment; they don't need to be bribed to do so.

I know this thread is dead, and I'm just going back through my old comments, but to claim that all science is empirical is to miss out on the purely theoretical worlds of physics, biology, chemistry, geology, and many others, where many important breakthroughs have been made.

Science doesn't have to be 100% empirical, but it has to have a substantial dose of it. Even the most theoretical papers in the sciences usually have elements of empiricism in them.

My problem with economics is that I rarely see any empiricism. I just want more. A lot more.

Both the free market and the Marxist Utopia (should that be quoted?) are ideals. Ideals do not exist in real life, and the push to make the world work more like an ideal is called "idealism." Religions are forms of idealism. Economic theories are predicated on faith that if the laws and people are just so, then we all reap the rewards of the theory. As someone once said, "In theory, practice is closer to theory than it is in practice."

But then again, I've long decided that Capitalism is a religion.