Not to get too wonky, but this headline caught my eye: "A Call for More Reality-Based Economics."
I had to laugh. A sad laugh, for sure, to think that when you’re talking economics you have to specify that reality should be considered.
Yes, I know economics is as much an art as a science. And I understand that theories must be put forth and hypothetical situations considered and evaluated.
But the pragmatist in me says when money is involved, leave the Ivory Tower every once in a while and come on down to earth and its realities where most of us spend our days.
The economic complications of reality are highlighted in two stories in today’s New York Times, the one with the headline above and another proclaiming "Job Growth Is Strong, Surprising Economists."
And yes, there are a couple of tax ties. The first reality-based connection for most of us is that our job and what it pays is of supreme importance to both us wage earners and the IRS. The more wide-ranging tax component is how the role of government and its collection of revenue shape our economy and our political landscape.
It’s that second matter that George A. Akerlof, the departing president of the American Economic Association, is expected to address in his farewell speech today to the group. According to the Times story, Akerlof will continue his argument for economic analyses that ”push prevailing economic theory further away from the free market approach that has generally held sway for the last four decades.’
I like the way he thinks. Again, from the Times:
"I am trying to effect a return to sensible economics. And what is sensible economics? It is very pragmatic. You think about problems in the world and you ask: can government do something about that? At the same time, you maintain your skepticism that government is often inefficient."
Apparently, Akerlof’s ideas are causing a rift between followers of John Maynard Keynes, who argued that the government could use changes in taxes and spending to help push the economy to full employment without running the risk of excessive inflation (he was one of FDR’s influences), and those who subscribe to the teachings of Milton Friedman, the free-market capitalist and the father of Reaganomics, in concept if not strictly name.
Now, the extent of my economics training was a couple of general courses in college, so I’m staying out of this debate. You know what they say: The only thing more dangerous than an economist is an amateur
economist. But with any good competition, it’s fun to see the big boys go at it. And economists on both sides of the debate apparently aren’t pulling any punches.
Getting real about raises: But I do want to comment on one passage from the reality economics article that caught my eye:
"Mr. Akerlof argues that the Friedman approach is based on false assumptions about human behavior. For example, he says, people don’t automatically insist on raises that keep their pay on par with inflation. They often are happy with smaller raises, considering them a compliment from the boss for valued work. That makes pressure for higher pay less inflationary than the Friedman approach would assume. A result, Mr. Akerlof says, is misleading theory and misguided policy."
While I generally agree with Akerlof’s idea to get real economically, I must quibble with his reason as to why people are happy with smaller raises.
I don’t think they happily accept paltry wage hikes. Sure they take them, but realistically speaking it’s because they’re afraid if they ask for more they a) won’t get it anyway and b) will then have irked their employer to the extent that they might lose their job to someone willing to work at that low pay level.
Sometimes small raises are justified. If you work for a small company that’s watching every cent to survive, you feel like you’re doing your part for the betterment of the business. Eventually, you hope, your sacrifices will be appropriately rewarded in more prosperous times.
But too often, small, "complimentary" raises are just reflections of skewed operational approaches, especially in bigger companies. Witness Home Depot. Embattled ex-CEO Robert Nardelli, who recently departed under pressure, got a butt-load of cash (while there and then to leave) while the stock languishes. I suspect that employee wages languished, too. You’ve got to sell a whole hell of a lot of hammers, or at least sell them for way too much, to cover everything.
Such inequities are common. Sure, good management means a stronger company, more business, rising tide, all boats, etc. etc. etc. But too often, companies make money hand-over-fist for shareholders and top executives while simultaneously shortchanging rank-and-file workers when it comes to compensation and benefits.
To me, both realistically and economically, that’s just not right.
Exploring economics: If you’re registered at the New York Times Web site, you an read the full jobs report story, as well as all about the economists’ set-to.
Read more on Keynes here; on Friedman here.
You’ll find some fun (yes, fun!) comments about economics and the practitioners thereof here.
And Mike Moffatt at About: Economics has an interesting article on income taxes and economic growth, even though he ventures from realities into the world of economic suppositions.
