Monday, July 14, 2008

Economist Makes Correct but Insensitive Remark... and it Makes News

I found a link to this Amity Shales editorial on Division of Labor. Anyway, let me preface this by saying it is highly unlikely that I would ever vote for McCain, and only Hillary's darkest wishes would bring that into consideration. Hell maybe I'll go for Barr. Who knows?

Still... Amity's got it right. Most of what Mr. Gramm had to say last week was correct. At the same time, what he said was collossally stupid. It was kind of a John Kerry "study hard or you'll get sent to Iraq" moment. True, but politically fatal.

Phil Gramm: "Mental Recession... Nation of Whiners"

Some people paint this as a battle between "campaing econ" and "real"
economics, but I think it's a little broader than that. No one seems to
be calling the media or pander-happy politicians out on the fact that
they have been exaggerating this so-called recession for months. Let me
rephrase: WE ARE NOT CURRENTLY IN A RECESSION. That doesn't mean that there will not BE a recession, it just hasn't arrived yet. This is the first regard in which Mr. Gramm is correct. The other is in the fact that the US economy has enormous potential, especially if it puts its ingenuity to work towards innovating clean alternative fuels to take us through the next century.

But here's where Mr. Gramm was wrong and where he was collossally stupid: He underestimated the pain that's been caused by some of the real disruptions in the housing market, and in job losses, and he really underestimated the inequities that have cropped up over the last 8 years between the rich and the poor. While aggregate and per capita income has generally risen over the last 1, 2, 8 years, the MEDIAN income has fallen. That means that the lower 50+ percent of the population has measurably less than it did 8 years back, while the rich have benefited quite a bit.

The distributional consequences of economic policies (which may be symptoms of other "frictions" in the economy that slow efficient resource allocation) are not just banalities of "campaign econ." They actually have long-term consequences or the sustainability of economic liberalization. If you need an extreme example, go visit Russia, or Brazil, or Argentina. That is what we face with trade policy now. Ramming trade policy down the throats of a reluctant middle class might be a bad idea if it means that there will be backlash against it that leaves our doors slammed shut more tightly than they had been before. Furthermore, the fact that some people lose needs to be appropriately addressed by governments that make reforms that change the "social contract" workers midway through their careers may have entered into when they began working. That, in a nutshell is what some economists and some candidates are advocating.

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