Ugly Theories Killed by Inconvenient Facts

I was looking for some info on income inequality, and ran into this article on Vox about empirically disproven economic theories. A part of the conclusion I will set here, but please give it a read.

Pegging the “natural rate” too high, ignoring the harm from exposure to international competition, austere budget policy, low and stagnant minimum wages — all of these misunderstood economic relationships have one thing in common.

In every case, the costs fall on the vulnerable: people who depend on full employment to get ahead; blue-collar production workers and communities built around factories; families who suffer from austerity-induced weak recoveries and under-funded safety nets, and who depend on a living wage to make ends meet. These groups are the casualties of faulty economics.

In contrast, the benefits in every case accrue to the wealthy: highly educated workers largely insulated from slack labor markets, executives of outsourcing corporations, the beneficiaries of revenue-losing tax cuts that allegedly require austere budgets, and employers of low-wage workers.

In this regard, there is a clear connection between each one of these mistakes and the rise of economic inequality.

I cannot overemphasize the importance of recognizing who benefits and who loses from these economic mistakes, because that difference is why these mistakes persist. Every one of the wrong assumptions described here benefits conservative causes, from reducing the bargaining clout of wage earners, to strengthening the hand of outsourcers and offshorers, to lowering the labor costs of low-wage employers. These economic assumptions are thus complementary to the conservative agenda and that, in and of themselves, makes them far more enduring than they should be based on the facts.

The article doesn’t note another concession made by the Fed chair, one that relates to deficits and how those did not have the expected effects on the economy, despite that being the third economic theory the article notes has passed its sell-by date. That’s just a quibble.

All too often, drastically consequential decisions are made on the basis of faulty assumptions that various concepts in economics are settled fact, and no one has bothered to actually try them against what we actually see happen. As the article notes, even when people do look, they can mistake coincidence for causation, when a longer data series reveals that a change in a supposedly causal attribute leads to … no effect. The lesson I’m taking from this is when someone trots out a supposedly winning economic argument on the basis of long-held belief, my response should be, “And where has that been tested against the data?”