Demagoguery and Economic Consensus

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Last week, the GEM Project Blog considered the policymaking importance of consensus among macro theorists. It focused on insights from Robert Lucas in 1980 on the role of the economics mainstream in providing boundaries for political debate on the economy. This post probes some contemporary implications of the same topic, looking at a reckless aspect of the 2016 presidential campaign that was recently denounced by Michael Bloomberg. From his commencement address at the University of Michigan: “In this year’s presidential election, we’ve seen more demagoguery from both parties than I can remember in my lifetime.”

A demagogue obtains power by means of impassioned appeals to emotions, prejudices, and ignorance, subverting the substance and process of democratic governance. Bloomberg condemned candidates who, in place of offering workable solutions for important problems, focus on blaming “easy targets who breed resentment”. Lies replace facts. Bullying becomes commonplace. Consequences are ignored.

The surge of demagoguery at the highest levels of U.S. politics is alarming. Bloomberg blamed the breakdown of the political center: “the rise in extreme partisanship and intolerance for other views. Neither party has a monopoly on good ideas; each demonizes the other unfairly and dishonestly.” He wants a return to rewarding politicians “who reach across the aisle in search of compromise”.

Bloomberg identified today’s easy targets to include Mexicans, Muslims, Wall Street, and the wealthy. Inflammatory policies include building a wall to seal off the southern border, banning an entire religion from entering the U.S., fractured and incoherent disruptions to global order, trade restrictions that will somehow bring back lost manufacturing jobs, and breaking up the biggest banks in order to atone for past, and prevent future, taxpayer bailouts. Those actions will not increase security, will not reduce unemployment, will not raise living standards, will not prevent another Great Recession, and will not protect taxpayers.

Take one example. The impassioned railing over taxpayer losses from bailing out the banks to be broken up is pure demagoguery. The losses never happened. They are a politically convenient lie – an appeal to emotions, prejudices, and ignorance that diverts attention from real causes of and solutions to the Great Recession and its huge economic loss. It is true that taxpayers were stuck with substantial bailout costs but not by any of the biggest banks. The bailouts of General Motors and the unbelievably reckless insurance giant AIG cost tens of billions of dollars that will never be repaid. Among the banks, some relatively small institutions defaulted on relatively small TARP loans. Furthermore, in this age of demagoguery, it is ignored that the existence of the biggest banks did not cause the immense losses associated with the Great Recession nor is it demonstrated how breaking them up would prevent future episodes of extreme instability. The GEM Project’s careful analysis of 2008-09 macrodynamics has identified a different, much more plausible set of causal forces, in which the big banks play little role. (Chapters 6 and 10)

More generally, I am especially discouraged by a deeply harmful exercise in modern demagoguery not cited by Bloomberg. This fraud is practiced by politicians who simply do not care that their economic proposals are incoherent, not coming close to adding up.  Think about it. These demagogues know that their plans would add many, many trillions of dollars to the national debt, creating crisis conditions in financial markets. But they also know that telling the truth about paying for their proposals would cost them many supporters. The demagogues’ dishonesty, exploiting the ignorance of the electorate on not easily accessible economics, is at the core of their pursuit of political advantage. Experts who point out the false promises are insulted, belittled, and dismissed, essential tactics of the demagogue. Serious objections are never seriously engaged. Unlike Bloomberg, I will name names. The demagoguery of Donald Trump and Bernie Sanders must be loudly branded as the fundamental danger that it is.

Last week’s blog featured Lucas’s insightful analysis on the capacity of effective economist consensus to limit what demagogues can get away with in public debate. His 1980 essay is foundational to the GEM Project’s mission to propagate coherent macro theory that informs, consistent with the evidence on how highly specialized economies work, mainstream thinking. What a budding demagogue can get away with in debating jobs, living standards, stability, trade, and fiscal/monetary policies has been considerably widened by the modern absence of a policy-relevant macro consensus.

Early Keynesians produced a macro consensus that provided boundaries for political debate. During the first half of the postwar period, there was agreement on a lot of policymaking that provided ammunition to effectively call out candidates who resorted to hand-waving economic magic. Don’t get me wrong. I am not arguing that that today’s mainstream theorists are mistaken in rejecting the micro-macro incoherence of the early Keynesians. The arbitrary separation had run its course and had to be discarded. Their mistake is inadequate ambition, reflected in the abandonment of the early Keynesian attempt to provide limits on political debate based on what is known about how the economy actually works. We need to recommit to constructing a new consensus rooted in coherent, stabilization-relevant macroeconomics necessarily featuring nominal wage rigidity that demonstrates cyclical downward inflexibility and chronic, substantial labor rents. The GEM Project shows that such consensus requires rejection of the longstanding assumption that rational exchange is wholly confined to the marketplace. We all know that assumption is wrong and rejection makes sense. Let’s get on with it.

Blog Type: Policy/Topical Saint Joseph, Michigan


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