Economics
In the year 2020, under the tutelage of the novel coronavirus, we learned that many things we assumed could be ignored because we thought they were solid “givens” are really shaky and fluid. Perhaps most shocking was the kink in the armor of American exceptionalism. Because of the nation’s wealth and large pool of talent, Americans believe in American triumphalism. We are the nation that stepped in to put an end to World War I, and then did it once more to win World War II in Europe and Asia. We put men on the moon and returned them safely. We gave the world most of its greatest commercial technologies from television to movies to the telephone, and some of human’s greatest health breakthroughs from the safe storage of blood plasma to the polio vaccine.
Yet during the COVID-19 pandemic, the United States hasn’t done any better than other countries in terms of disease incidence and death rates. We performed no better, and in some cases much worse, than our European counterparts, and not as well as some low-income nations, such as Sierra Leone and Ghana. More was wrong than we could fathom.
Many of the beliefs underlying this triumphalism must now be questioned. I will focus on where economics failed us. Modern economics is a social science that greatly rests on a host of assumptions, ones no economist ever writes down because they are solid givens. Disruptions of order (business or political) are hard for economists to model, because economic models assume that businesses are protected by strong rules of law and can freely contract. But the pandemic forced a drastic change in economic order, almost overnight. For example, through market forces, stores such as Sears and Montgomery Ward had over many years made the transformation from mail-order catalogs to brick-and-mortar anchors for suburban malls. But as COVID spread (a decidedly nonmarket force), malls and stores and restaurants, where people congregate, suddenly became too risky for public health as social distancing regulations kicked in, instantly giving further advantages to businesses built on models of socially distanced mail orders.
Economists have no way to accommodate such nonmarket forces into their thinking about the economy. Their instinct is to treat everything as if it’s a market-driven change. It’s as if paleontologists, having recognized that a meteor killed off all the dinosaurs, decided to ignore it because it merely sped up what would have happened anyway.
The rapid loss of jobs in the retail sector was mirrored across a range of service industries, laying bare another weakness of most macroeconomic models: they do not include inequality, or at best do so very crudely. Economic modelers appear to believe that inequality does not really affect the performance of the macroeconomy. In the macroeconomic world, inequality is only a microeconomic outcome where people who have more skills, or are more productive, are rewarded more than those who are less skilled. In fact, for most economists, income inequality is good, because it means the markets are working in signaling rising returns to skill, which can only encourage people to get more skills, which will make the economy more productive.
Economists also breeze past their own notions of freedom to contract. Economists are trained that the labor market presents to workers a trade-off between the value of leisure and the value of wages to buy things. They do not seriously consider or model that for many workers, leisure is not really an option. To economists, the famous Johnny Paycheck song “Take This Job and Shove It” cannot really resonate with the way many workers feel, because economists believe workers always have the freedom to choose leisure over work, and so are always free to tell their bosses to “shove it.” This belief makes economists slow to recognize the meaning of “living paycheck to paycheck,” or to understand the implications of households having no liquidity.
Lacking the understanding of the weak bargaining position of millions of workers to freely contract their labor, economists instead interpret low wages as low skills. Indeed, economists’ use of the word “unskilled” to describe the low-wage workforce is actually an epithet: unskilled workers “deserve” low wages; they have no distinguishable skills and are therefore interchangeable, and if they suffer any unemployment from the friction of switching jobs, that can be ignored as the “natural rate” of unemployment, which cannot be lowered without igniting accelerating inflation. Moreover, if the unskilled cannot find jobs, their resulting unemployment is structural—just the machinations of “creative destruction” that replaces less productive humans with more productive technologies. Better still, unemployment then becomes an incentive for low-wage workers to get trained and join the high-wage workforce. That’s how economists understand unemployment. They choose not to interpret the fact that the temporary loss of millions of private-sector service worker jobs was in fact a trade-off to benefit society by lowering the spread of the disease—and therefore worthy of compensation for lost income.
Service workers have largely been, in the United States, slaves or recent immigrants, and mostly women: they cook, they serve our food, they clean, they groom people, they make beds, they take care of children and older adults—in short “they” serve “us.” Modern economics was founded in the late nineteenth and early twentieth centuries by people who deeply believed in eugenics, and viewed the races of service workers as inferior races. These foundational beliefs still infect the discipline, even if the beliefs themselves appear to have dissipated. Economics as a discipline thus serves to rationalize—to make rationale, via givens and models—the disdain of economists for service workers that has its origins in racism.
Perhaps this helps to explain why, despite lots of recent research showing that raising the minimum wage (which dominates the wage setting mechanism in service-sector jobs) would be good, so many economists insist that raising the wage would be counterproductive. Economists equate value with money—cheap things have little value and thus cannot be essential. To them, a rising minimum wage simply interrupts the market-clearing mechanism that pays workers a lower wage where supply and demand meet, so the number of service workers hired would fall. So despite the pandemic forcing many people to appreciate the skill with which their favorite restaurant meals were prepared or their children were tended, economists continue to wave off that workforce as unskilled. Paying “low skill” workers more would only encourage people to be lazy about acquiring skills; so, economists cannot admit into their theories or models the centrality of these workers’ jobs or industries.
Furthermore, while we have all seen the high level of US inequality laid bare, we need to deeply focus on how and why we accepted the depth of this inequality in the first place. For market signals to work in economics, it is the relative prices of things that matter. The market will still function if the lowest-wage worker made a decent living, as long as the highest-paid worker still earned thousands of times more, a price signal that makes people want to acquire more rewarded skills. So there is something more deeply wrong in the persistence of the economists’ assumptions of freedom to contract in the face of millions of people being paid wages that keep their lives so precarious.
While we have all seen the high level of US inequality laid bare, we need to deeply focus on how and why we accepted the depth of this inequality in the first place.
More to the point, we have moved from a sick moral judgment about “deserving poor” to one of “deserving workers.” Although this judgment once held that people who were not working didn’t deserve society’s help, now it holds that some are no longer deserving of society’s help because they are not skilled. What unskilled workers hear is, you do not deserve help because it would only encourage people to be lazy about acquiring skills; so, we cannot admit the centrality of your job or industry. This is what coal miners understand when listening to environmentalists explain why their jobs must go, and manufacturing workers when hearing a similar message from “free traders.”
In contrast, consider that when Wall Street tied itself in knots during the Great Recession of 2008, being too clever by too much, devising derivatives (financial instruments that were bets on the repayment of debts) and convincing itself that no risk was too great for the market to handle, and then being shown what a stupid idea that was, the nation instantly dumped billions of dollars on a very tiny share of American workers to preserve their “vital” industry. To be sure, the efficient flow of money is vital to an economy, much as the heart’s movement of blood is vital to the body. But the stomach, kidney, and intestines are equally vital organs, and their failure will also kill you. So too are the services that move our day along—vital to our economy and our welfare, even if they are the legacy of tasks of slaves or immigrant women.
Through February, US leisure and hospitality industries employed as many workers as the manufacturing sector, although their total wage bill was 40% less. When COVID led to a sharp decline in the purchase of personal services—from restaurants, hotels, nail salons, day care—the economy shrank by the greatest amount in the post-Great Depression era. So, this was not inconsequential. Nor was the toll on the workers who make those services available to us.
The initial public policy response to the pandemic was amazing. Congress acted quickly to create an aid structure. But the package had to address an ugly reality. Our unemployment insurance program is not designed to help low-wage workers, and in fact fewer than 10% of unemployed workers in some parts of the service industry get unemployment insurance benefits in normal economic conditions. The initial relief packages passed by Congress tried to address the lack of household liquidity faced by too many Americans, to replace a higher share of lost wages than our unemployment insurance system normally covers. This was absolutely necessary, especially for Black and Latino communities, who suffered such a high share of the unemployment. Lack of wealth in those communities means it takes more economic stimulus to get those households to spend in the face of economic downturns, simply because they try hard to build up precautionary savings as they know they may face prolonged unemployment and eventual impoverishment.
But economic theory isn’t concerned with such details because macroeconomists ignore inequality and its implications. Their theory justifies unemployment benefits because the payouts offset decreased consumption due to loss of income (for what economists model as a kind of undifferentiated median household), and so these benefits protect the rest of the economy from a collapse in aggregate demand. But there was a resounding outcry from economists arguing first that the extra $600 added to weekly unemployment checks would discourage work—because it was excessive compared to a model of the median household. And when that was resoundingly proven untrue, they argued that the extra payments were unfair to those who continued to work.
Then, in a very disturbing way, the political consensus around helping the economy and saving American workers fell apart. When it started to be evident that the pandemic and its economic fallout had huge racially disparate effects, the discussion seemed to shift from being about why such a large share of COVID cases were Black, to being about how Black workers had higher comorbidities than other people. Lost from view were the data clearly pointing to Black workers being in more dangerous positions for catching the virus, whether working in Amazon warehouses or hospitals.
It wasn’t just in cities. Rural deaths spiked because the nation failed to protect our meatpacking workers, who are predominantly Black and Latino, and meatpacking plants are mostly located in rural areas where health insurance is weak and hospital resources weaker. While other nations quickly adopted new safety guidelines to protect workers who could not telework, the US Department of Labor’s Occupational Safety and Health Administration refused to issue new emergency regulations incorporating the best science on preventing the spread of disease, as it had done to fight the H1N1 flu virus in 2009.
Thus, America, meant to be the shining light on the hill for human dignity, instead stood out as unwilling to protect the human rights of its own workers.
Economists have been silent as the nation let market forces concentrate its health care delivery system. Of all the givens that hide the ideologies and biases of macroeconomics, the most malignant is the belief that efficiency must trump all other values. And so we’ve allowed our medical system to increasingly organize around economic efficiency, and we’ve allowed our labor markets to substitute efficiency for human dignity, and we see the consequences in the radically uneven distribution of the human tragedies of COVID.
Economists are not just silent, but they are lost, too, because they accept so much as given. Their new technology lets them use big data to uncover causal links that used to escape analysis. But in a world of infinite complexity and choices, this newfound prowess to discern causal factors ironically delivers an ever-diminishing menu of things that they feel they know—even as their authority depends on their technical skills. So the marginal value of economic knowledge for informing policy choices, in the face of all that economists do not know but the rest of us easily see, approaches zero.
Let us hope the time will come when we truly understand how much we got wrong, and the consequences. Hopefully, it will bring introspection on deeper issues about our assumptions and why we hold them, even when they are clearly shaky. Maybe we might hope for some humility since, after all, this is the second huge mistake economists have made in the past dozen or so years. Economists take so many things for granted—political rules and order, gradual change in the labor market, the freedom to contract, the overriding importance of efficiency—that are now revealed to be convenient assumptions for assuring that public resources continue to align with incomes, not with people. Perhaps other disciplines will also look for their faults.