Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
The Problem with “Middle-Out” Economics
Last week, I appeared on the PBS Newshour, the video of which appearance was linked to in one of Troy’s recent posts. On the broadcast, my views were contrasted with those of venture capitalist Nick Hanauer, who argues for a “middle-out economics,” the term for a school of thought that claims working people deserve to be privileged more than they are by conventional market exchanges.
Because the broadcast did not exactly allow Hanauer’s arguments and my own to fully engage with each other, I’ve provided my response to Hanauer in this week’s installment of my column for Defining Ideas from the Hoover Institution. My conclusion: the arguments of middle-out proponents present very substantial practical difficulties.
As I write in the column:
The decision by Hanauer to stress his so-called middle-out position carries with it dangerous policy implications, which are evident in how he treats both labor and taxation policy.
One supposed implication of Hanauer’s consumer-driven account is that efforts to pump out aggregate demand depend on boosting up income for the middle class by devices targeted to that end. This policy goes back as far as the 1930s when one of the rationales for mandatory collective bargaining under the National Labor Relations Act stemmed from the supposed belief, as its statutory findings announced that “the inequality of bargaining power” between employers and employees “depresses the purchasing power of wage earners,” for which the higher wages wrought by concerted union action was the appropriate policy response.
Yet the NLRB miscarried for multiple reasons. First, its pro-union policies only address the union members, not overall consumer demand. If unions get more through industrial action, other workers could easily get less, so that no confident claim can be made about the aggregate effects of unionization. In addition, the shift in market arrangements increases bargaining costs and results in monopoly dislocations, including strikes, lockouts, and other interruptions in production, that offset any supposed gains from more aggregate consumption. Rather than rig markets, the better approach is to secure open competition in all markets, so that wages are bid up as productivity increases, wholly without government intervention.
Hanauer does not grasp these fundamentals. He repeats a common mistake when he writes: “But there is this upper limit on what we can spend. I drive a very nice car, but it’s only one car. I don’t own 1,000, even though I earn 1,000 times the median wage.” True enough. But the point only shows that he has a diminishing marginal utility for one form of consumption, which means that his consumption expenditures will switch to fine wines and private jets, while his unspent wealth is used to fund investments in new businesses or charitable operations. Think of it this way: people who earn huge amounts, but take very little out by way of consumption are doing a public service. Others gain from the increased supply of capital.
Read the whole thing and decide for yourself: what do you think of the merits of “middle-out” economics?
Published in General
This is Paul Krugman / JM Keynes, without the charm. It’s the theory that government must artificially make up any shortfall in demand by pumping money. As history shows, this can only work (if at all) as a short-term bridge but not a long-term solution. Instead, the more resources we devote to the bridge, the less resources we can devote to the solution. And what we’ve seen is that any short-term bridge becomes permanent, competing against the long-term solution.
If government gives a handout to the little guy, the big guy responds by raising prices, which means the money goes to the big guy anyway. What’s worse is that sooner or later, the government can’t/won’t supply the handout anymore, leaving the little guy with higher prices but no way to pay for them.
An economy requires strategic thinking. Mere tax confiscation is a plan without a strategy. Unless you address the problem that caused the recession/depression in the first place, all short term strategies are likely to be worse in the long run. That’s why free markets are better … markets bring strategy along with them.
I think you mischaracterize Hanauer’s argument. I would not be surprised at all if he agreed with your views on the perfidy of labor unions; I thought his primary arguments were in favor of an increased minimum wage and abolishment of the carried interest rule. I don’t think either of those arguments are outside the ambit of rational policy – in fact, I think the Republican Party would do itself a world of good if we combined a promise of a substantial increase in the minimum wage to come after effective border security and mandatory E-Verify. I’ve read all the libertarian arguments against as minimum wage and come to the conclusion that they would be accurate in a utopian world of equal bargaining power and rational actors negotiating a consenting adults. But out of the crooked timber of humanity no straight thing has ever been built. I think the pluses of a minimum wage hike would outweigh the negatives for the reasons Hanauer argues.
Isn’t “middle-out economics” one of those phrases that’s heavily subject to bias?
For example, those of us who believe in the traditional middle-class growth strategy of “scarce labor, abundant capital” might agree with Professor Epstein (as I do) that upper-class saving behavior is beneficial.
One of my greatest fears is that the GOP will do exactly that, and history will assign credit to Obama while branding the Republican party as neo-Nazis for securing the border. We might know that wages went up because of a tighter labor market, but most other Americans would not.
Obama is not an ideologue on border security. If he truly believed he could get a minimum wage deal, he might very well try to package it with a hawkish set of immigration reforms. The gain among white voters would more than offset the (small) loss among Hispanics.
Thought I would right to the source. This NY Times article by Hanauer and Liu is the closest I got, and it begins with a description of the existing situation needing remedy:
Well, with straw men like that, who needs arguments?
I could refute his/their/its characterization of market economics, but I won’t get it done in 200 words.
I can get it done in two words, however.
Hanauer’s article is not an economics approach, but a political one; used wine in an old pot. The labels are designed to invoke different responses from different constituencies. Machinebrain bad, Gardenbrain good (seriously, read the miserable article “Gardenbrain”).
This is awash in so many lefty tropes it’s hard to know where to start. I only made it three paragraphs in before having more than enough to choke on. This is designed to be welcoming to one sort of reader and hostile to another. The cutesy coining of words, the green orgainc imagery contrasted with the inhuman and likely polluting mechanical impression are not accidents.
There may be something of value in the article; I’ll never know.
Admire the Juche-like defense against refutation: if people cannot stomach the twaddle, and people agree, based on the 110 dB road horn of tone and mischaracterization, to support or reject the points, the conclusion, the article, the author and very likely the paper itself — well then nobody refutes it.
Which is why I agree whole-heartedly with Doc Epstein. I’m not going to read this stuff, but I believe that he has, and he’s absolutely right.
What needs to be done is to radically reduce the regulatory barriers to economic growth. Repealing, or at least neutering, Obamacare is an obvious place to start. Reining in the EPA, particularly in the energy and agricultural sectors of the economy, is another. If gasoline were $2.00/gal., or even $2.50/gal., it would be a major stimulus to the economy. Consumers would have more money to spend, products would cost less. Increased demand would spur increased production, which would increase demand for labor, resulting in more, and better paying jobs, which would increase demand further, creating a virtuous cycle of economic growth.
@BallDiamondBall, it’s funny how they tie tax cuts into it, but only upper-class ones, completely ignoring the fact that middle-class cuts were responsible for the vast majority of the revenue loss.
Frankly, I’m perfectly happy that Bush cut taxes. It set the stage for the spending cuts of recent years.
I confess, I’ve been trying to make sense of the argument. It’s awful. The NYT article by Liu and Hanauer is either the speech of a cynic talking down to morons, or the praise of a supplicant admiring his god. What it is not is economics. This stuff is weaponized flower power, and I understand Epstein’s discomfort at being framed poorly as an idiot “Machinebrain”. Epstein was invited to serve as the strawman from the article.