Despite the fact that I often hate the results of them, I greatly admire heterodox economists. It is really important to have people who push against the grain of what everyone else “knows.” Usually, everyone else thinks they know things because they are more or less right. But not always. And sometimes heterodox economists have important results that everyone just chooses to ignore. Alan Greenspan showed that unemployment could go way down without causing inflation, yet most economists continue to believe that an unemployment rate much below 5.5% will bring back the 1970s. This tends to be the way of it. When a new idea comes around that helps working people, the economics profession is very skeptical.
The problem with hererodox economists is that when they come up with an idea that is completely wrong, but which justifies what the power elite want to do, it is accepted as Hoyle in much of the policy establishment. There were two big examples of this recently. First there was Alberto Alesina’s work that purported to show that cutting government spending in a recession was consistent with economic growth: expansionary austerity. And then there was Reinhart and Rogoff’s idea economic that growth stalled out after government debt reached 90% of GDP. Neither of these theories was ever compelling, but it told conservatives what they wanted to hear, “The budget must be balanced!”
The great Mike Konczal at Next New Deal brought my attention to another heterodox paper from a group at National Bureau of Economic Research (NBER) that already has conservatives all tittering. He discussed it in, Did Ending Unemployment Insurance Extensions Really Create 1.8 Million Jobs? The idea is that cutting off unemployment insurance to 1.3 million people suddenly made 1.8 million people employed. It isn’t impossible in theoretical terms; it could be that there is a kind of multiplier effect: when one person gets a job, he’s able to spend more and that works its way through the economy.
One of the problems with the paper is that it uses a model that is “an empirical disaster.” This is very typical of Chicago school type models. Decades ago, they decided that it wasn’t necessary for their economic models to actually mimic or predict the real economy. And there is something to be said for this. One can learn things from models that aren’t predictive. Just the same, because of this, pretty much all the policy models are New Keynesian. And one has to wonder why economists would make claims about the real economy when using models they know don’t model reality.
There are many other problems with the NBER paper — read Konczal’s article for all the details. I’m more interested in (and worried about) the fact that this will be used by conservatives to claim that the only reason we ever have unemployment is because we are so nice to the unemployed. (Insert Paul Ryan hammock remark here!) Somehow, the 25% unemployment rate in 1930 — before these was UI — doesn’t seem to matter to these people. We end up with these horrible false equivalence arguments: “Some economists (99%) say that unemployment insurance raises the unemployment by a couple of tenths of a percentage point, and other economists (1%) say that unemployment insurance raises the unemployment by over a percentage point. Who can say?!”
This is a fundamental problem with economics and public policy. And this was the only valid criticism of Seven Bad Ideas. Many people, most notably Brad DeLong, noted that the bad ideas listed in the book weren’t really what economists believe. But the bad ideas are everywhere in economic policy debate. And heterodox papers like this new one from NBER only intensify this problem.
