A little more than two years ago, when the disastrous effects of government austerity policies were becoming painfully obvious, both in the U.S. and especially in Europe, a rather remarkable argument emerged. As I described in a Verdict column at the time, the new argument from the right was that austerity policies had simply never been adopted in the first place.
Despite the thousands of laid off teachers and firefighters, the postponement of needed repairs on infrastructure, and the reductions in government programs of all kinds, the remarkable claim was that the failure of “expansionary austerity”—the theory that cutting government’s size would so excite the private sector that businesses would more than make up for the shrinking of government—was not because the theory was flawed, but because it had never actually been tried. This claim was laughable, but it was all that was left for those who refused to give up the ghost. And that group of true believers most certainly included credentialed economists, who used their talents not to understand policy, but to manipulate the data to hide reality.
The same thing is happening again, now that inequality has emerged as a real political and policy concern in the U.S. and elsewhere. Now, as we saw with the denial that austerity had even been imposed on the economy, we see diehard deniers who refuse to accept even the most basic facts about the emergence of inequality, and about the stagnation that has faced middle class and poor workers, over the past generation.
Before I get into the details of these denialist claims, and explain how clear are the objective facts that they are trying to obscure, it will be useful to explain how policy analysts can engage in wishful thinking and cynical manipulation of evidence and arguments, and do so in the service of an ideology that ultimately tries to justify leaving the majority of the population behind.
An Argument That Can Never Be Defeated Is Not an Argument at All, but an Article of Faith
Several years ago, a journalist contacted me to ask about the effect of taxes on the economy. Are increases in taxes the kiss of death for economic growth and prosperity, as so many conservatives (and not a few so-called moderates and even some liberals) reflexively believe? I pointed out the obvious counter-evidence to that claim. Taxes were much higher during the boom years of the 1950s and 1960s than they are today. The so-called Reagan Boom of the 1980s was preceded by tax cuts, but the boom was actually rather tepid. After the Clinton Administration raised taxes in the early 1990s, the economy really did boom. Finally, the second Bush Administration cut taxes in 2001 and 2003, but the economy was so weak thereafter that it gave both houses of Congress to the Democrats in 2006, and the Presidency in 2008.
I stipulated to the reporter that these were merely correlations, and that any careful analyst would want to control for other factors. However, the repeated failure of tax cuts to stimulate growth, and of tax increases to harm growth, certainly made it difficult to believe that the conventional wisdom about taxes always harming the economy was anything more than ideology masquerading as economic analysis. The weight of the historical evidence could be explained away only with a great deal of perfectly timed confounding factors, which would be necessary to rescue the taxes-are-bad theory from such a continuous record of being wrong.
I anticipated that the journalist would contact analysts with contrary points of view, but one of the arguments that he turned up was truly astounding. A Wall Street analyst explained away the post-tax-increase 1990s boom under President Clinton by saying that it was all a matter of the markets having figured out that taxes would have to come down, after Clinton had raised them. In other words, it was not the tax increase at the time, but the anticipation of inevitable tax cuts later, that fueled the Clinton-era prosperity. Just when it seems that we have heard everything . . . .
Although that particular argument was not one that I had previously come across, it is merely one example of the misuse of what economists call “distributed lags.” Simply put, it is true that there are situations when it takes some time, a lag, before a policy or some other economic development takes effect. Careful economic analysis requires being aware of such lags, so as not to conclude that A does not affect B, merely because B did not change immediately after A has changed.
That is all well and good, but of course, it also opens the door to all kinds of manipulation of the analysis. Indeed, with only a little bit of ingenuity, a committed econometrician can build a model with a complicated distributed lag structure that hides real phenomena, or that makes fake phenomena seem to appear. As one economist put it (in what counts as a clever quip among a rather humorless crowd), “distributed lags are the last refuge of the econometric scoundrel.”
The problem, however, is not merely the abuse of lags—and, even worse, claiming that unverifiable changes in expectations have a lagged effect. The deeper problem is that these arguments are used only opportunistically. That is, we only hear these arguments when they work in the direction favored by the ideologue, not when they cut in the opposite direction.
Thus if we accept the analyst’s claim that Clinton’s tax increases helped the economy only because people responded positively to the belief that taxes would fall in the future, that must mean that it would be harmful to reduce taxes because (at least by this logic) people would then know that taxes must soon rise. This conclusion would suggest that those who want to speed up the economy should increase taxes, while those who want to slow down the economy should reduce taxes.
Indeed, it is this refusal to accept the implications of one’s argument that also undermines the claims about “expansionary austerity,” which I noted above. If, as conservative economists loudly proclaimed, the correct way to jump-start a weak economy is to shrink the government (because businesses will enthusiastically make up the difference, and then some), then the correct way to slow down an overheating economy would be to expand the government (in order to make businesses unhappy).
Yet we somehow never hear that argument from conservatives, when the economy is strong. Then, magically, government spending really is expansionary, and we must reduce it. The right response to a weak economy? Shrink the government. The right response to a strong economy? Shrink the government. That is not an argument. It is faith alone, and it is not only based on no evidence, but it is incapable of even being tested by evidence.
The Denial of Facts Comes to the Inequality Debate
In the examples discussed thus far, one could at least partially forgive the offending ideologues on the basis that the discussion is about theories, not facts. When an event happens, followed by another event, it is often truly difficult to figure out whether the first event caused the second event, or instead that they are coincidental.
For decades, for example, tobacco companies funded supposedly scientific studies that claimed to prove that there was no link between cigarette smoking and cancer, emphysema, and so on. It is quite possible, therefore, for even the most clearly established scientific truths to be contested in bad faith. Although some people engage in bad-faith argumentation, at least they are not simply denying the facts in front of their eyes.
We know, however, that committed believers can readily deny inconvenient facts, too. The facts of climate change would seem to be undeniable (and were, indeed, conceded even by the George W. Bush Administration), but that does not stop many powerful people from saying that it is not happening. We are now seeing similar denial of reality in the inequality debate as well.
Last week, my Verdict column included the following unremarkable sentence: “It has become clear over the last generation, however, that economic growth does not guarantee improvements in the living standards of the bulk of our citizens.” My point was that, especially in the first few decades after World War II, we had come to imagine that economic growth was automatically broadly shared, and that “a rising tide lifts all boats.”
When that was still true, we could argue about how best to make the economy grow, but we did not need to ask whether our success in creating economic growth would leave anyone behind. Inequality could increase, perhaps, but only by having the top end grow faster than the bottom end. And although extreme increases at the top have seriously negative consequences, especially on our political system, at least economic growth would alleviate the suffering of the poor and provide stable prosperity to the broad middle class.
One of the most obvious facts about modern America is that the large amount of growth since approximately 1981 has not been equally shared. Even worse, many people are no better off than their parents were a generation ago. How do we know these facts? The most important source is the Census Bureau, which (at least thus far) has never been politicized. The numbers are stark.
For example, the Census Bureau recently published a table (available here), showing the average household income received by each quintile (that is, one-fifth) of the population, as well as the average for the top five percent. After adjusting for inflation, the average for the bottom quintile rose from 1967 (the beginning of the data series) through 1980, from $9,755 to $11,602, an increase of almost 19 percent in only 13 years. By 2013, however, the average income for the poorest fifth of the country was $11,651, an increase of 0.4 percent in 33 years. (Readers who would like to see these data on graphs might want to look here.)
Meanwhile, the top five percent saw their incomes rise by over 72 percent over the same decades. The lower the income group, the slower was the income growth, ending in the all-but-nonexistent growth for the poorest group noted above. Clearly, the growth in the economy after 1981 was not widely shared, so that we can no longer assume that overall growth and poverty reduction go hand in hand.
The situation is even worse in the post-Great Recession era, as a recent article in BusinessWeek noted: “In the U.S., the income of a median household adjusted for inflation is 3 percent lower than at the worst point of the 2007-09 recession” (emphases added). That is, even the people in the middle of the income distribution have been losing ground, even as rising incomes at the top have pushed up overall GDP per capita by more than six percent.
Are Poor and Middle Class People Better Off, Despite the Data? Clearly Not
In the face of those data, one might think that the argument would become how to reverse the trend. Or perhaps one might even hear some conservatives argue that poverty is not something that really matters in setting policy. What one would not expect, however, is the claim that somehow the data are wrong, and that living standards for the poor and middle classes have actually risen.
One way to engage in this denial of reality is to misrepresent the work of prominent economists. For example, I was recently confronted with the claim that a top economist had said that “[i]n every measure that we have bearing on standard of living, such as real income, homelessness, life expectancy, and height, the gains of the lower classes have been far greater than those experienced by the population as a whole, whose overall standard of living has also improved.” Indeed, a well respected economist did write those words, but he was referring to the entirety of the twentieth century, and he was mostly discussing data from the U.K., not the U.S. He further noted that the drop in inequality ended in the 1970s. In other words, that economist’s words were entirely consistent with what I had written.
But beyond rank dishonesty, is there any way to claim that the economic situation of the poor and middle class have really improved? Hardly. Note that the data discussed above refer to “household incomes.” This means that the data hide the emergence of two-earner families, with both parents now working for pay in the labor market (and both parents, but especially mothers, still working for no pay at home), but without seeing an increase in household incomes for all of that extra work.
Moreover, that the living standards of the middle class and poor have not completely collapsed is in large part due to what remains of government programs that support incomes directly and indirectly. The two greatest boons to middle class families in the U.S. have been Medicare and Social Security. At a conference in Washington not long ago, a conservative economist tried to claim that inequality was no big deal, because the upper-income classes are paying the taxes that support Medicare (and, to a lesser degree, allow Social Security to have a progressive benefit structure).
The problem is that it is exactly those programs that are on the hit list of anti-government ideologues. Saying that inequality is not a problem, because Medicare and Social Security (and, to a substantial degree, Medicaid) have cushioned the blow, and then arguing that we should slash those same programs, shows a lack of shame, to say the least.
It is remarkable to see just how difficult it is to get people to face reality. The sad fact, however, is that our economy no longer spreads its fruits across the population, and it has not done so for more than a generation. There are a number of different ways to respond to that reality, but we must begin by admitting that facts are facts.
literally head in the sand.