In the previous post I lamented the free trade movement's nifty trick of arguing theory rather than policy:
They've transformed debates over specific legislation (NAFTA, CAFTA) into debates over abstract theory. So the economists line up against protectionism, the pundits explain the pitfalls of restricting trade, and nobody actually reads or analyzes the likely outcomes of the particular trade changes proposed by the bill. It's a neat way to pass legislation, but not quite optimal. Congress passes bills, not models.
Brink Lindsey brought this to mind in his quite smart, but slightly off-point, reply to my recent writings on the inequitable distribution of growth. Rather than argue over how the pie is being distributed, or how incomes can be boosted, or what our society will look like if wage stagnation sustains itself, he wants to argue over whether there's "something wrong with labor markets." In other words, am I on the right side of the economic consensus on labor markets, or the wrong one? But that's the wrong question: Just because the labor market is working right doesn't mean it's working well.
As Lindsey would tell you, there's plenty wrong with labor markets. The minimum wage, for one. Government regulation, for another. Unions also. And frankly, he's right: labor markets work a lot better when they're unfettered by goo-goo interventions. But such smoothly-functioning markets aren't good for our economy or our society. Vastly inequitable distribution isn't good for our economy or our society. And yes, something is rather awry in the labor markets when the top one percent is so rapidly and vastly outpacing the top 10 percent. Can someone explain to me what the market is seeing in that slice of the income distribution that so sets them apart from the minor Master of the Universe right below them? And why that judgment is desirable or beneficial or efficient?
This focus on discrete bits of economic theory can work out very poorly in the end. Back during the NAFTA fight, Undersecretary of Commerce Jeffrey Garten predicted 6%-12% growth for Mexico during the next decade. His estimates, while a smidge optimistic, were basically in line with the economic consensus because they were basically in line with the economic models. So what happened? The real growth number was 3.6 percent, about half Garten's low end prediction. Wages went up 15 percent, and accelerating inequality assures that median wages went up by far less than that. In other words, the model's prediction failed (which is different, to be clear, than saying that NAFTA was "bad"). Mexico's trade policy may be better, but their society hasn't much improved. And that, in the end, should be the metric. It's one I'd like to hear Lindsey say a bit more about.
