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BK Blog Post
Posted by Jared Bernstein.
From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
Sorry, nothing prurient. Just a quick observation and reading/listening assignments for serious OTE’ers on some material that I will return to shortly with the necessary time and attention.
Over the past few days, in three separate (though intimately connected) debates in which I take part, I’ve come across writers emphasizing the critical importance of getting the economic models right. I too cannot over-emphasize the importance of this.
I know: “all models are wrong.” They’re distillations of reality that we cast in order simplify complex phenomena. But that’s the point–the second half of the quote is “…but some models are useful.” When they’re useful, it’s because the filter out the noise such that we can glean an important truth–or, given that this is econ, not physics, an important tendency–that should inform our diagnostic and prescriptive work.
On trade, Harold Meyerson points us away from Ricardian comparative advantage and towards more nuanced models of international competition associated with Samuelson and Ohlin, both of whom consider distributional outcomes of trade driven by differences in factor endowments (e.g. how trade with lower-wage countries can affect workers in higher wage countries).
On the minimum wage, Till von Wachter and Jeff Wenger explain why neo-classical models of the labor market fail to explain the empirical evidence around minimum wage increases, specifically the inaccuracy of the simple prediction that large numbers of workers affected by the mandated increase will lose their jobs. They cite “efficiency wage” models, where increased productivity generated by the wage increase becomes its own absorption mechanism, and “search” models, wherein the higher wage reduces “frictions,” such as turnover and vacancies.
Finally, I’m deeply ensconced in the absolutely masterful new book by British scholar Anthony Atkinson, Inequality: What Can be Done? I don’t have it in front of me, but early on in the book, as well as in this excellent lecture, Atkinson stresses, and I’m paraphrasing, “you know, there’s more than one economic model…” Much like my own models, his include the critical components of bargaining power, political power, as well as their roles in shaping not merely inequality, but more fundamentally, the way other dominant economic forces, like globalization and technological change, play out in the real world.
If you’re not up to reading the above, please at least give the Atkinson lecture a listen. I did so while jogging–learn while you burn!
Bottom line, like it or not, the models through which we interpret the economy matter a great deal, and more often than not, powerful people employ the wrong one.