TCS Daily

Economic Illiteracy Quadrifecta

By Arnold Kling - October 11, 2004 12:00 AM

"In the minds of the public, prices apparently go up when businesses suddenly start to feel greedier. Economists, in contrast, expect businesses to be greedy year-in, year-out; but depending on market conditions, greed may call for prices to go up, go down, or stay the same."
-- Bryan Caplan, Straight Talk About Economic Literacy

Bryan Caplan has compared the answers of economists and non-economists to identical questions about markets and the economy. Caplan found that the differences could be grouped into four categories of economic illiteracy: anti-market bias, as explained above; anti-foreign bias; pessimistic bias; and make-work bias.

I will discuss these biases in the context of the current election. In fact, it turns out that in the second Presidential debate, even though economic issues were only touched on in a few of the questions, Democratic candidate Senator John Kerry managed to appeal to all four of the economically ignorant biases identified in Caplan's paper. You could say that Kerry hit the economic illiteracy quadrifecta!

Kerry appealed to anti-market bias when he argued for importing price-controlled drugs from Canada. The basic economics of drug prices is that drugs are expensive because of the high cost of developing and testing them, including the need to write off the expense of the many efforts that fail to yield a marketable medication. Instead, Kerry took the economically illiterate stance that high drug prices reflect corporate greed. In fact, for good measure, he appealed to anti-market bias in other sectors. He said, "That's the difference between us. The president sides with the power companies, the oil companies, the drug companies."

The Outsourcing Issue

On the issue of outsourcing, Kerry said, "I'm going to close the loopholes that actually encourage companies to go overseas...You can't stop all outsourcing, Charlie. I've never promised that. I'm not going to, because that would be pandering. You can't."

Kerry implies that outsourcing is inherently bad and ought to be curtailed as much as possible. Criticism of outsourcing appeals to two economically illiterate prejudices: anti-foreign bias and make-work bias. Anti-foreign bias is the belief that we benefit from economic activity more when it involves people who look and speak the way we do than when it involves people from different tribes or cultures. Make-work bias is the belief that if the economy becomes too productive, there will not be enough jobs.

At a conference on trade and jobs held the day before the Presidential debate, Federal Reserve Board Vice-Chairman Roger Ferguson gave a speech that summarized informed economic opinion about trade and outsourcing. Ferguson said,

"Estimates of the gross number of jobs lost to imports vary, but one representative estimate puts them at a bit more than 300,000 per year during the 1980s and 1990s. This number, while hardly negligible, is dwarfed by the roughly 15 million job losses estimated to occur each year in the United States. As our dynamic market economy evolves, it generates substantial churning in labor markets as jobs are gained in some sectors and lost in others; jobs gained and lost because of trade are only a small part of that process."

What Ferguson was saying is that outsourcing does not affect nearly as many jobs as do other factors in the economy. Caplan's data suggest that anti-foreign bias is what accounts for the hysteria over outsourcing.

Ferguson also said,

"Import competition clearly has cost some American workers their jobs and has caused them considerable hardship as a result. However, economywide equilibrating forces, including monetary policy, ensure that over time such employment losses are offset by gains elsewhere in the economy, so that the nationwide unemployment rate averages around its equilibrium level...Between 1960 and 2003, the trade balance moved from a slight surplus to a deficit of 4-1/2 percent of GDP, and nominal imports rose from about 4 percent of GDP to 14 percent -- yet, the current unemployment rate of about 5-1/2 percent is little changed from its 1960 level, while nonfarm private employment has grown by more than 60 million jobs."

In other words, make-work bias is unwarranted. Large increases in imports do not produce long-term loss of jobs or increase in unemployment. On the contrary, openness to trade leads to higher productivity, better jobs, and higher purchasing power.

Pessimistic Bias

Senator Kerry said, "we have a crisis here at home, a crisis of the middle class that is increasingly squeezed." However, as several economists have pointed out, the real middle-class squeeze is in an upward direction.

Caplan would say that Kerry is appealing to pessimistic bias. Caplan writes,

"Most Americans think that real income has been falling for decades, most new jobs are low-paying, and doubt whether the next generation will have a higher standard of living. Economists think that this conventional wisdom is dead wrong. They appreciate, as few others do, the fact that living standards have risen phenomenally during the past century."

In addition to hitting Caplan's illiteracy quadrifecta, Kerry defied Oil Econ 101 with his claim that "I have a plan for energy independence within 10 years...we're going to free ourselves from this dependency on Mideast oil." He also committed the Economic Attribution Error when he said "Ninety-eight percent of America, I'm giving you a tax cut and I'm giving you health care" and "He's the first president in 72 years to lose jobs." Presidents of the United States do not give health care, and they do not control the job market.

What the Public Deserves

I know a number of liberal economists, and they say that there is no reason to worry about Senator Kerry. The backchannel buzz, which occasionally has leaked onto blogs and into the press, is that Kerry's economic advisers, and even Kerry himself, differ from his public pronouncements. The secret whisperers are telling us, in effect, that the economically literate can trust John Kerry because we know that he is lying.

Look, I'm not trying to tell you that President Bush is an economic wizard. In the debate, he told his own whoppers ("Non-homeland, non-defense discretionary spending was raising at 15 percent a year when I got into office. And today it's less than 1 percent"). On the drug re-importation issue, instead of economics he appealed to anti-foreign bias ("you know, it looks like it's from Canada, and it might be from a third world."). He committed the attribution error ("The quality of the air is cleaner since I've been the president of the United States.").

As I wrote in Sympathy for the Undecided, it is not clear to me which candidate would end up executing better economic policies. It could very well be Kerry. Instead, my concern is with the economic rhetoric. Senator Kerry inundates us with pronouncements that are economically illiterate. And yet his supporters claim to be well-read, well-informed, and well-educated. I am reminded of an economics book that begins by saying, "Each year, thousands of people study economics, but not many learn it."

It would be a mistake to blame Senator Kerry personally. Clearly, he represents the political market at work. Economically illiterate rhetoric on the part of politicians is not stupid. It is what the public deserves.

The author's latest book is Learning Economics.


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