Common mistakes of right-wing and market-oriented economists?

by on March 9, 2011 at 7:26 am in Economics, Political Science | Permalink

This is a companion piece to my post on left-wing economists; see the caveats in that post.  Not everyone commits these, nor are the associated conclusions necessarily false, nor am I postulating any equivalence of mistakes across the two groups.  I am simply serving up two lists.  Here goes:

1. There is excess fear of inflation and hyperinflation in the current economic environment.  Further there is often an excess estimate of the costs of inflation in the two to five percent range.

2. We know much less about the causes and drivers of economic growth than we like to admit, and when pushed on this issue we fall back to citing relatively simple cases with extreme differences, such as East vs. West Germany.

3. Lower taxes don't spur economic development as much as it is often claimed, at least not below the "fifty percent or less of gdp" range.

4. There are many climate change issues of relevance here, not mostly economics, but it seems remiss not to mention them.

5. I'm all for Health Savings Accounts, but unless done on a Singaporean scale, and with lots of forced savings, they're not a health care plan to significantly benefit most Americans.  There is less of a coherent health care plan, coming from this side, than one might like to think. 

6. There is already considerable health care cost control embedded in the ACA, most of all for Medicare, and this is not admitted with sufficient frequency.

7. When it comes to the historical determinants of the Industrial Revolution, the Great Divergence, and the like, the importance of state-building in that process is often neglected.

8. The story of steady and significant economic progress for most Americans is accepted too readily.

9. The role of market failure in the recent financial crisis is underestimated.  It is also believed that we can somehow commit to a policy of no future bailouts.  Promoting that myth will make future bailouts more likely.

10. Relying on liability law, whether or not it is a good idea, is not intrinsically more pro-market, more libertarian, or less interventionist.

There are more, but those are what to come to mind right away.  If you wish, you can interpret this list as saying more about me than about the doctrines I am referring to.  Again, you can very often Google back to find more detailed discussions of these individual points.

Daniel Kuehn March 9, 2011 at 3:44 am

Another important one that I would add is uncritically accepting the assumption of crowding out, and not even considering the prospect of crowding in.

There's a more philosophical corollary to this, which is that the right-leaners often see government and market as antagonistic or government and liberty to be opposed. This sort of assumption leads them to think that the left-leaning economists are trading off government for the market. It leads people to write blog titles like "right-wing and market-oriented economists" but not "left-wing and market-oriented economists", as if markets were only something that right-leaning economists embraced!

To a large extent this criticism may be limited to left-leaning economists. Paul Krugman and Brad DeLong are leaps and bounds more market oriented than the average left-leaner in the wider population and the average right winger. They're only not "market-oriented" relative to right-leaning economists if you implicitly assume that their advocacy of certain government policies implies a disparagement of the market. The market is a tool, and you use the right tool for the right job. I wouldn't simply assume that right-leaners are "market oriented" if they go around using the wrong tool for the wrong job.

Daniel Kuehn March 9, 2011 at 4:14 am

To extend the "you use the right tool for the right job" point – when a little kid runs around with a hammer, banging on screws and nails indiscriminately, do we sit back and say "Wow – that kid has a profound respect for hammer. He's very hammer-oriented". Of course not! It's not the kid's fault of course if he doesn't know any better – but he's unknowingly being disrespectful towards the hammer.

Mere invocation of markets does not make one "market-oriented", I'm sorry to say.

dearieme March 9, 2011 at 4:20 am

"labor unions as racist, corrupt, protectionist, and obstructions to positive change": you've overlooked "sexist".

Eivind March 9, 2011 at 4:32 am

For symmetry, I think that since you included the nordic countries on the opposite article, you should here too. It's possible some right-wing and market-oriented economists acknowledge the Nordic countries, it appears to me that *most* of them certainly are guilty of omitting Scandinavia from their worldview.

If the basic idea is a variant of "capitalist = good, socialist=bad", then explaining Denmark, or Norway, or Sweden, or (to some degree) Finland, becomes challenging. Yet any comprehensive economic theory -must- match the real world, and all these exist in the real world.

rjs March 9, 2011 at 5:38 am

how about the common mistakes of tyler cohen?

Rahul March 9, 2011 at 5:46 am

How about "The common mistakes of Paul Krugman"

Andrew Edwards March 9, 2011 at 5:56 am

j.r., since an efficient market rarely prices itself to sell to all customers, then we would need to be fine with some people being priced out of, let's say, cancer treatment. Markets do, and should, do that.

We don't seem to be comfortable with that as a society (and I'd say we shouldn't be), and so you need a health care plan.

Dan Weber March 9, 2011 at 6:10 am

15. Boards of directors often look out for their own interests more than those of shareholders. Even though the costs are borne by shareholders instead of the public, this still corrupts rights and efficiency.

JA March 9, 2011 at 6:38 am

I enjoy posts like this one. Though I think Tyler is making the left-wing mistake of not taking public choice theories into account when he thinks ACA has significant cost controls.

dave March 9, 2011 at 6:44 am

1. I think the fear is mainly that once you get to 2-5% inflation its very easy to go over, and governments love inflation.

Second, the way inflation enters the system today mainly benefits banks, not individuals. You could send everyone a check if you wanted to increase inflation, and it would be much friendlier to the man on the street then giving some IBs the money first.

Also, on a personal level people don't have a lot of protection against inflation for their savings. Gold and foreign currency are punitively taxed. TIPS are garbage. It just feels like an assault on your savings.

9. I think we can do a lot to prevent future bailouts and we should be less in a rush to do them. Moreover, we should be going back now and amending the bailouts in extremely harsh manners. Where are the clawbacks? Why aren't people in jail? Why are organizations and companies we know wouldn't have made it being winded down?

Bernard Yomtov March 9, 2011 at 7:09 am

I would add:

Assuming too easily that differences in income or weath reflect differences in productivity and the like, and ignoring the huge role of privilege, power, and advantage derived from family connections and the like.

In general this is part of a tendency to overestimate the ability of simple market models to describe real world economic outcomes, and to underestimate the effect of factors not included in those models.

Also, what Daniel Kuehn said.

*** March 9, 2011 at 7:59 am

@Andrew Edwards
12. Corporate profits in an entire sector that are consistently above the cost of capital are in general an indication of economic inefficiency.

Nonsense! If this was true then capital financing would be a bad idea.

mulp March 9, 2011 at 8:05 am

The biggest omission to the list is the failure to admit the great power of government as central planner in creating the greatest economic advances, primarily by way of driving technology development.

This is hardly a US centric argument related to the New Deal, but is a clear recognition of the role of the government central planning in economic development. The great civilizations we point to in history were all the result of government central planning to create economic growth to meet a government objective. A reference to the origins of democracy in Greek history is a consequence of the power of government to create wealth through government central planning. We see the Egyptian history through the wealth created by government central planning that left us "the great wonders of the world." The Roman Republic and Empire are significant today because of their accomplishments as a consequence of government central planning, and a great deal of the public infrastructure of those governments still stands, and in some cases is still used in almost the form they created two thousand years ago.

The Americas clearly provide great natural resources for economic growth, but without government central planners driving development in the Americas, resource poor regions far outstripped the Americas – British Islanders and Iberians became disproportionately wealthy from government central planning that gave them the means to take over almost all of the Americas and reshape it totally, all within a few hundred years, doing far more than the individual actions of tens of millions of small groups of individuals over thousands of years.

The Reagan economy was a much driven by Reagan central planning as that of FDR and Eisenhower and LBJ. We have massive wasteful government spending from the Reagan era that can be justified only by the economic development in many "red" States, and with lots of money spread around everywhere. Reagan's Star Wars spending is welfare spending to generate economic development, and that spending continues today and is off the table as far as conservative Republicans are concerned because it generates too much economic growth for Republicans.

And that gets to the central driving force of government central planning: military power as a means to grow the economy through expanding access to resource and trade.

All the advances in time keeping were government central planning efforts in support of military power. The standardization of such things as screws, nuts, and bolts was a result of government central planning for the wars waged by the US, UK, and France. The advances in semiconductors in the US was driven by and funded by government central planners who were waging the cold war. The aerospace industry in the US, Europe, and Asia are a consequence of government central planners determined to have air power superiority for war.

When comparing East vs West Germany, you are comparing the consequences of two central planning regimes; for the West, the US first plundered Germany, then sought to develop it, and turned power over to a government that was going to focus on economic growth in support of US cold war policies. In the East, Russian central planners were running the German economy to generate maximum rents to Moscow, and to serve Moscow's military objectives.

2. We know much less about the causes and drivers of economic growth than we like to admit, and when pushed on this issue we fall back to citing relatively simple cases with extreme differences, such as East vs. West Germany.

I see this as a matter of refusing to admit what the evidence of history clearly shows us because it runs counter to right-wing idolatry of tax cuts, deregulation, etc.

CR March 21, 2011 at 9:51 am

@mulp-Regarding your defense of the power and efficiency of government planning, it’s obviously true that central planning can get historically monumental projects accomplished, but the “wonders of the world,” they often leave behind are generally built with slave labor to benefit the ruling class. The pyramids are a perfect example of something that took an immense amount of resources, and while they’re impressive from an engineering standpoint, I’d say they highlight the failure of central planners because they essentially wasted all the manpower, time, and resources to something that didn’t make the lives of the vast majority of Egyptians better off. If anything, they stand as a testament to the waste of large government programs. Let’s not forget, all of those great empires who left behind monuments to the power of central planning ultimately failed.

Yancey Ward March 9, 2011 at 8:49 am

Oops. I see JA has already noted the same thing.

Dan Weber March 9, 2011 at 9:29 am

I would agree that right-wing economists tend to underestimate the value of luck. I've had people seriously argue that Bill Gates was entirely self-made and if you dropped him into a different time and place he would be just as rich.

(Now, I think the left-wing economist will over-estimate the luck component, or try to justify high taxes with "they just got lucky," but that's not on-topic in this post.)

Jim B. March 9, 2011 at 11:23 am

This post was far less interesting than it could have been. Good try, though.

Greg Ransom March 9, 2011 at 11:55 am

This list is suspect — meaningless — until you name names and cite sources.

MHG March 17, 2011 at 12:30 am

lol you had no similar objections to the other list, which was the same in this regard. in fact you proposed adding to it, with no cites.

lxm March 9, 2011 at 1:53 pm

I would add:

An ordinate love of all things corporate.

MNP March 9, 2011 at 2:43 pm

This last and the other certainly does say a lot about you.

Dan March 9, 2011 at 3:59 pm

Is Tyler looking for a spot at the Fed or the Treasury?

Bmore Skeptical March 9, 2011 at 7:50 pm

I think #1 on the left list belongs here too. Every article about public employee unions talks about how the union money in elections buys public employees a good deal. Then the right leaning folks deny that corporate money has any meaning. The economists are just like everybody else on this one, they start from their beliefs and pick the evidence that fits.

Tom March 9, 2011 at 9:55 pm

The BIGGEST mistake by right-wing economists is UNDER-estimating the effect of tax rates on economic development, because they don't understand the impact which asymmetric pre-tax returns on capital have on expected after-tax returns.

The second biggest mistake is believing that the recent financial failure was anything other than a regulatory failure.

The third biggest mistake is not advocating in favor of a progressive consumption tax to replace all existing taxes on capital and income.

andy March 10, 2011 at 12:06 am

Andrew, I think you have to do better. You said:

13. The market is the product of government action, such as enforcing the rule of law and some basic regulations about fair play.

I would say that this sentence is incompatibile with black market being a market – it obviously exists despite governement action…

Ann March 10, 2011 at 3:56 am

The biggest mistake both right-wing and left-wing economists make is thinking they actually understand business as very few have actually had a job outside of academia. And no, your column at the local newspaper does not count.

Ted March 15, 2011 at 3:26 am

Ann, considering the abysmal financial and market failure that just transpired, it’s apparent not enough businesspeople understand economic history, and are thus doomed to repeat bubbled boom and bust cycles. Given how imbalanced and lopsided economic growth has been for the rest of us not in the top 1/2 of 1%, the continued diefication of new money business peeps is sad and sadistic to witness. Guess such useless dogma dies when old farts do.

mbt March 18, 2011 at 6:10 am

role of market failure in the recent financial crisis is underestimated. It is also believed that we can somehow commit to a policy of no future bailouts. Promoting that myth will make future bailouts more likely.

10. Relying on liability law, whether

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