11 Big Myths About the Economy That Are Destroying America
Continued from previous page
Myth 7: Low wages are good for the economy.
According to Econ 101, high wages are bad for an economy and low wages are a blessing. James Dorn of the libertarian Cato Institute declares that higher wages, by causing less demand for workers, mean that “unemployment will increase … No legislator has ever overturned the law of demand.” High-wage countries, we are told, price themselves out of a supposed global labor market. And in the non-traded domestic service sector in which most Americans work, a higher minimum wage, Econ 101 claims, would lead to permanent higher unemployment.
When it comes to traded goods and services, this ignores the effects of relative currency values being the major determinant of prices of exports and imports. It also ignores the fact that high-wage workers who are highly productive, thanks to their machines and skills, can produce more cheaply than poorly paid workers with inferior technologies and skills. According to the Asian Development Bank, most of the high-value-added components of iPhones, which are assembled in China, actually come from high-wage nations like Germany, Japan, South Korea and the U.S. Michael E. Porter and Jan Rivkin state flatly in the Harvard Business Review: “Low American wages do not boost competitiveness,” which they define to mean that “companies operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for the average American …” The countries that beat the U.S. in the latest competitiveness rankings by the World Economic Forum are all high-wage nations: Switzerland, Singapore, Finland, Sweden, the Netherlands and Germany.
In industries that cannot be outsourced, labor is only one of several factors of production that can be substituted for one another. Writing in defense of low-wage immigrant farmworker programs in the progressive magazine Mother Jones, Kevin Drum claims: “Most Americans just aren’t willing to do backbreaking agricultural labor for a bit above minimum wage, and if the wage rate were much higher the farms would no longer be competitive.” But if American farmworkers were paid better, then U.S. agribusiness would have an incentive to cut costs using technology, like automated tomato picking machines, as the agricultural sectors of Japan, Australia and other high-wage nations have done. While transitional unemployment as a result of innovation always has to be dealt with, the effects of high wages in encouraging investment in labor-saving technology should be welcomed, not deplored.
Myth 8: “Industrial policy” is bad.
Econ 101 tells us that letting markets determine how many “widgets” to produce maximizes efficiency. The worst thing government can do is engage in “industrial policy” — a catch-all pejorative used to discredit everything from funding solar energy companies to encouraging more college students to major in science. As former Bush economic adviser Gregory Mankiw stated: “Policymakers should not try to determine precisely which jobs are created, or which industries grow. If government bureaucrats were capable of such foresight, the Soviet Union would have succeeded.” In other words, how can government bureaucrats make better choices than business? Leaving aside the fact that banks issued trillions of dollars of bad loans leading to the financial crisis, for many investments private and public rates of return differ, often quite significantly. And unless society (through government) tilts investment to those activities where the public rate of return is higher (e.g., scientific research), growth will be less. If this is industrial policy, so be it.
Myth 9: The best tax code is one that doesn’t pick winners.
Econ 101 disparages industrial policy, even, or perhaps especially, when it is used in the tax code. Economists call anything other than a completely neutral tax code “distortions,” “special interest tax breaks,” “corporate welfare” or, as the Simpson-Bowles Commission labeled them, “perverse economic incentives instead of a level playing field.” Economists disdain tax incentives because in the words of the Obama administration’s Recovery Advisory Board, “certain assets and investments are tax favored, tax considerations drive overinvestment in those assets at the expense of more economically productive investments.” But as Canadian Treasury economist Aleb ab Iorwerth writes, “Distortions that favor the contributors to long-run growth will be welfare-enhancing.” In other words, tax “distortions” like the R&D tax credit or accelerated depreciation for investments in new equipment lead to more growth since these investments are more productive than others and have significant positive externalities.