The Biggest Economic Myths, Debunked
With the holiday season upon us, the time for end-of-year lists is fast approaching. To beat the rush, today I give my list of the top dead and enduring myths of 2014.
The good news is that two myths that caused great confusion over the last several years are now headed to the trash bin of history. While many prominent pundits may still repeat them to demonstrate that prominent pundits really don't have to care about reality, everyone in the reality-based community now knows them to be nonsense.
The first is the myth of the young invincibles and Obamacare. The story was that the success of Obamacare depended on getting healthy young people to sign up. Supposedly we needed the healthy young'uns to subsidize the rest of the population.
This led to endless stories about whether young people were signing up for insurance. The Obama administration made special outreach efforts to the young. In an effort to undermine the program, the right-wing group Freedom Works even sponsored Obamacare-card-burning rallies (there are no Obamacare cards, so they had to create them) in order to discourage young people from getting insurance.
The problem with the story is that we really didn't need the subsidy from healthy young people to make the program work. While healthy young people subsidize less-healthy people in the program, healthy older people subsidize them even more. The ratio of premiums of the people in the oldest age group (55 to 64) to premiums of the youngest is roughly 3 to 1. And plenty of older people, just like younger people, are in good health and have low medical bills.
This means that if the age distribution of the enrollees skewed toward older people, it really didn't matter much, as the Kaiser Family Foundation showed in a short study. It makes a much bigger difference if there is a skewing toward people in bad health.
The other big myth that got killed in 2014 was that we needed to fear deflation. This was not only silly -- sorry, folks, but there is no magic to crossing zero -- but it had important policy implications. The deflation-scare story implied that as long as inflation was positive, we didn't have to worry.
In fact, the problem of low inflation makes it difficult to boost the economy through monetary policy, since central banks can't have negative nominal interest rates. It also makes it harder for real wages to adjust, since workers rarely get cuts in nominal pay. This is true even at low positive inflation rates. The problem gets worse if the inflation turns negative, but that is because the inflation rate has gotten lower, not because there is any special importance to zero.
Some of us had been trying to make this point since the early days of the downturn, but the pundits and many economists who should know better kept expressing concerns about deflation. The good news in 2014 was that the IMF weighed in to point out that the problem is "lowflation," an inflation rate that is too low.
So now it is official. We all should be very worried about the low inflation rates in the Eurozone, Japan, the United States, and elsewhere. If the inflation rate falls further, that is worse news, but things don't just become bad when the inflation rate turns negative.
Unfortunately, many of our great national myths have survived 2014. We still have the story that the financial crisis, as opposed to the collapse of the housing bubble, caused the Great Recession. The point here should be straightforward. The financial sector is working again, but we are still far from having recovered. That's because we have nothing to replace the demand that had been generated by the housing bubble.
This matters both to understanding policy going forward and to assigning blame. Financial crises can get complicated. The housing bubble was pretty damn simple, and almost all our economists blew it.
Along the same lines, we continue to see the "second Great Depression" myth. This is very important for those in policy positions, because it allows them to say that no matter how bad things are, at least we avoided a second Great Depression.
Sorry, folks, but we know how to get out of a depression. It's called spending money. Even if the dominoes had been allowed to fall and all the Wall Street banks had collapsed, we still could have picked up the pieces and avoided a depression. And we would be freed of the albatross of a bloated financial sector.
Then we have the twin myths of the mystery of a weak recovery and slow wage growth. Every week or two we will get an in-depth story in a major news outlet asking why we still haven't recovered from the downturn or why wages aren't growing.
This one goes right back to the collapsed housing bubble. We need some source of demand to replace the $1 trillion or so in construction and consumption demand that we lost when the $8-trillion bubble burst.
Demand doesn't come from heaven. It comes from consumption, investment, government spending, or net exports. No one has a story as to why we should expect any of these components of demand to be higher than they currently are. Thus the only mystery is why anyone thinks there is a mystery.
And the story with wage growth is equally unmysterious. Wages will start growing when the labor market gets an awful lot tighter than it is now, given that we are still close to 7 million jobs below trend.
We should be glad that we put to death two very silly myths about the economy and economic policy in 2014. Let's see if we can kill these other four fantasies in 2015.