Larry Summers: genius economist, failure at Psychology 101
by New Deal democrat
Larry Summers: genius economist, failure at Psychology 101
One of my recurring themes is how macroeconomic theory, no matter how elegant mathematically, consistently errs because it fails to take into account basic psychology — i.e., how the human animal actually works.
A big component of this failure is that humans, like other primates and apparently like just about every other social species, are hard-wired to inflict punishment on “winners” from inequitable distributions, even at cost to themselves. For a hilarious example of this, see what happens when an experimenter rewards one monkey with a cucumber while feeding another a delicious grape.
One such failure to take into account elementary psychology was on display in an article a few days ago, wherein Larry Summers, in the course of lambasting the rubes for trying to undermine global trade, concluded:
A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
To which the appropriate response is something like: “Well, you f*****g genius, how many decades have you had to study the problem??? What have you ever proposed?”
Since the real answer to that question is “nothing,” we know that you actually don’t care. And there, the genius economist runs headlong into freshman level psychology.
Because, even if his defense of globalization is accurate, what the suffering middle/working classes have done is to serve notice that Summers’ cherished economic progress will be destroyed until the benefits are equitably shared. There will be no “maintaining openness” until “help[ing] workers at home” is accomplished first.
In other words, the masses are saying, “Do we have your attention now?!?” Reading Summers in this article and Brad DeLong in virtually every article in the last several months, I would say, “yes, we do.”
See, that animal behavior works!
cross posted with Bonddad blog
I am not sure I agree. I think the issue is different.
Since at least the early 1980s, many Blue Collar workers have been aware that the US was cutting trade deals with trade competitors that weren’t quite reciprocal. They were assured it was OK, though. Milton Friedman went so far as to assure them that Japan, like the Taiwanese before them, were the real suckers. After all, they were sending us stuff, and we were sending them pieces of paper. Since then they’ve seen South Korea do the same, and now China. But China is huge… so if the economists got it wrong (and they did), the effect (both cumulative over the decades, as well as just of China in particular) has become too large to ignore. Throw in NAFTA and a host of other little deals that are similarly disadvantageous and the situation can feel ugly if you’re one of those whose job was affected or never came into existence.
Meanwhile, these same blue collar workers were told that bottomless unskilled immigration was going to make the economy grow. These new laborers were most certainly going to do similar jobs for less money. Nope, not going to happen. But it happened. Again… for decades. And now the cost of moving oneself from one place to another has become extremely cheap.
My guess is that had the trade deals and immigration worked as described (i.e., were we all residents of Fantasyland and not America) things would be OK. Sure, Blue Collar would see others gaining faster than they were gaining. But, they’d still have steady, well paying jobs, and be able to provide for their families. They’d still be better off than their parents before them, and have the expectation that their children will be better off still. That’s what most people want in life. And that’s what they were promised. And that’s what hasn’t been delivered.
The Democrats made it worse. It’s abandoned its principles (being for small business and blue collar workers). Now, its the party of calling its former constituents racist for wanting to earn a living. And Democrats wonder why these same people vote for a guy who, whether he means it or not, at least is willing to tell them he wants to get them a job.
And now… automation is coming… Here comes the last nail in the coffin.
Appropriate that you included “Fantasyland”. It seems to be included in all of your posts and comments.
Not that there are not actual facts in your writings, but the fantasy part comes in when you start adding little “extras” that support(you think) your case.
“Meanwhile, these same blue collar workers were told that bottomless unskilled immigration was going to make the economy grow”.
Seriously dude, you gotta stop this.
I am not sure that it is human psychology as opposed to American psychology. Because we are a diverse country with people of all colors and religious beliefs (including none at all) it is easier to scapegoat others for our own failings–being lazy, unskilled, uneducated, spendthrifts etc. “I am unemployed or underemployed or underpaid, because of trade deals or immigrants or corrupt politicians or black people getting welfare etc” not because I slept through most of my high school classes, did not want to waste my time going to technical school or college after high school, managed to lose a decent job because I kept going out at night which meant I showed up late and hung over most days, and did not want to pick cucumbers because the work was too hard, did not pay enough, or “was beneath me” nevermind that I do not want illegal immigrants doing that work either.(End result domestic cucumbers rot in fields and we “export” those jobs too). There is somebody out there wiser than me who circulated the parable of the cow. A Dutch, German and American farmer each woke up one morning to find that their cow had died. Each prayed to their respective Gods asking why and asking for help. In each case God answered the farmers’s entreaties and asked what they wanted Her to do. The Dutch farmer said he wanted a new cow and his prayer was answered. The German farmer said he wanted a new cow but thought he should get a second cow for his trouble and his prayer was answered. When God asked the American farmer what he wanted he said “Kill my neighbor’s cow” Of course not all Americans feel this way or we would have had our version of the French Revolution years ago, but there is a strain, particularly among lower skilled white men, who feel they are entitled and resent women, people of color, the well educated and “foreigners” getting ahead and our current President has channeled that resentment along with alt reality facts supported by folks like Kimel (who really should know better) right into the oval office. I have a hard time believing this is going to end well for the least skilled and educated among us, but then I never thought a racist, xenophobic, misogynist could become president either.
“finding ways to help workers at home who are displaced by technical progress”
The money is there for making $10 an hour jobs into $20 an hour jobs — most jobs. Some jobs like McDonald’s have to pay less than — sometimes seems more people behind the counter than in front (33% labor costs; most business does come through driver-thru). Could super efficient Walmart pay more — $25 an hour (7% labor costs)?
Only one way to find out in each case: collective bargaining. Labor unions much better than minimum wage testing what the consumer market will pay (no five year wait to eek out a couple or few dollars more than 1968), potential whole economy blanketing once it gets IN THE CULTURE, problems like just-in-time scheduling automatically put to rest fast.
IN THE CULTURE. That seems to my union obsessed self to be the big hurdle. Go through progressive economics blogs all day (like I sometimes do) and you’ll see scant mention of unions …
… least of all any push for German level as the be all and end all of reforming and reshaping American civilization.
Meantime the money is there: the 45% can squeeze the consumers of the 54% for a raise from 10% to 20% of overall income (back to 1980 for the 45%); the 54% can squeeze (tax?) that 10% share of overall income back from the top 1%. CEOs and quarterbacks will work as hard for $2 million a year as the do for $20 million (welcome back to reality). It’ll be done if labor union density is high enough.
Blue Collar white Midwest? How about black and brown Midwest (think Chicago’s West and South sides)? 100,000 out of my guesstimate 200,000 Chicago gang-age, minority males are in drug dealing street gangs (that’s those market share shootings you keep hearing about). Neither blue nor black nor tan are particularly interested in your up-to-date kitchen or that second minivan in the driveway.
But what they do want (decent life of some sort) cannot be purchased with $10 an hour jobs. It can be with $20 an hour job or jobs (plural).
Manufacturing employment loss 4% of overall jobs (2% trade related) since 2000. Over 50% of country earning less than $20 an hour. That is where the center of gravity of all our problems lies. (Nota bene: minimum wage was $11 an hour in 1968 — at half today’s per capita income — the money is there somewhere.)
PSYCHOLOGY? If everybody else is not talking about it, we cannot talk about it. It’s totally theoretical. Balderdash. Start talking about massive re-unionization — make it happen.
Hint about how below. (More hints in link.)
Do this or do nothing.
America can feel perfectly free to rebuild labor union density one state at a time — making union busting a felony. Republicans will have no place to hide.
Suppose the 1935 Congress passed the NLRA(a) intending to leave any criminal sanctions for obstructing union organizing to the states. Might have been because NLRB(b) conducted union elections take place local by local (not nationwide) and Congress could have opined states would deal more efficiently with home conditions — or whatever. What extra words might Congress have needed to add to today’s actual bill? Actually, today’s identical NLRA wording would have sufficed perfectly.
Note well: it is not the organizer’s job loss to be punished; it the interference with employees’ bargaining effectiveness — working them for less.
For more musings: http://ontodayspage.blogspot.com/2016/12/wet-backs-and-narrow-backs-irish.html
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NYT’s Nate Cohn: Trump won by trading places with Obama.
“Just as Mr. Obama’s team caricatured Mr. Romney, Mr. Trump caricatured Mrs. Clinton as a tool of Wall Street” … “[Mr. Obama] would have won Michigan, Ohio and Wisconsin each time even if Detroit, Cleveland and Milwaukee had been severed from their states and cast adrift into the Great Lakes.”
Trade (unions) back.
Almost forgot to include the Alpha side of the Omega of high union density: centralized bargaining (a.k.a., sector wide labor agreements) — as the antidote for increasingly stingy domestic outsourcing as described in this NYT’s piece:
Shaky Jobs, Sluggish Wages: Reasons Are at Home
Eduardo Porter, ECONOMIC SCENE, FEB. 28, 2017
“[President Trump] might spend less time on the workers putting together air-conditioning units in Indiana and more — a lot more — on the maids and janitors who clean Trump golf resorts and hotels.
“This is not to accuse the president of being hypocritical by skewering companies that move production overseas while, say, selling Trump merchandise made in Bangladesh, or loudly championing the cause of the working man while refusing to recognize the rights of workers at his branded properties.
“Rather, it is to argue that by obsessing over how the manufacturing jobs of the 1970s were lost to globalization, Mr. Trump is missing a more critical workplace transformation: the vast outsourcing of many tasks — including running the cafeteria, building maintenance and security — to low-margin, low-wage subcontractors within the United States.”
Globalization, schmobilization: the gravitational center of our problems and their solutions are right here at home.
The only problem with state level is most states are now run by republicans, except those on the coasts. One could do an experiment of banning union busting in Ca for example, versus it not being banned in Tx. Of course it would be hard to disentangle all the other differences to see how much difference the anti union busting makes. Today it is going the other way with more and more states going right to work. In some states the unions could try an initiative on the subject which would result in a very expensive campaign such as you would have in Ca (actually if the legislature passed such a bill a referendum would happen as the signatures could be gathered)
Don’t be put off just because the majority of states are Republican today. The people in them are more likely to be in union favor than their politicians (may not be saying much often). It should be (should be) a natural blue collar issue. Why shouldn’t people want to be free to join a union if they just feel like it — without having to run an impassable gauntlet? Should be pretty easy to argue.
It’s just a matter of freedom.
Since it is the only way out of almost all our troubles — give us the political power and union bureaucracie) to go after rip-off pharma, for profit college scams, etc. — there’s no question we have to do something to start the national conversation.
At least start the conversation. If something is actually happening out there in the culture, then, maybe our progressive econ types will finally start to consider it.
Unions most natural thing in the world — ask European countries — no alien ideology (a chicken in every pot 🙂 ) here.
PS. Illinois, the very pro-union state I live in, could be a good place to start. Liberal (voter at least) Minnesota near by.
PPS. Voters always revert to mean after as presidential election. Throw in Trump and (who knows what will happen next — President Pence?) the Dems may have a real chance of re-taking the national legislature anyway.
You have summed it up nicely.
The Democratic party needs to pull their head out, abandon corporations, and actually work to deserve the vote of the majority of American workers.Otherwise they could become an ex party, defunct, extinct.
This last election should have proved to them that they can not be all things to all the people.
I think that the issue is more serious than it first appears here. The displacement of the blue collar worker is something that the accadmeic have been good at ignoring, theory says that the loser should be compensated — this never happens.
However, more serious is the risk to white collar jobs: accountants, clerks and doctors, investment bankers etc. A few weeks ago a friend demonstrated his new software he had built — a tech nerd who was an investment banker at MS. In 5 minutes, his software was not optimized he produced a nearly perfect M&A document between two random companies I had chosen. No typo, bios were the big shortfall but not that bad (it took the information from Facebook, Linkedin etc).
Already a large percentage of traders have been replaced by computers — prime example are F/X desk and FI desks — over the past 10 years they are a shadow of their former selves.
What is needed is an understanding of what the post work world will look like! Because, them robots are coming for your jobs!
The thing is that the entire project of Economics is quite consciously Newtonian reasoning despite the fact that psychology, and indeed every field of science which involves living organisms, is Darwinian.
Thus the absurd result where even “behavioral” economists end up as:
Jane Goodall to the chimps: “You’re doing it wrong!”
Where “it” is “being a chimp.”
Note that if anything the trend is against unions in the US with 6 states adding right to work laws in the last year or so. Part of this is a union is inherently a communitarian organization, and many oppose any communitarian organizations. History teaches that outside of government worker unions are suffering big time. One thing the unions don’t want is to give workers a referendum on being represented by their current union every 10 years or so. (A no vote would lead to a second vote on no union or a different union). Also at least since 1980 there has been a divide between the view of union leaders and the rank and file.