The real question is not why do people fall through the cracks, the real question is why are there so many cracks?
PBS Frontline has an excellent program “The Retirement Gamble” about how complicated financial instruments are used to confuse and take advantage of people who are trying to save for their retirement through 401(k)’s. It is also just another example of where the limitations of our brains to process information allows corporations to take advantage of unsuspecting consumers.
The episode features interviews with Teresa Ghilarducci, a former faculty member in Notre Dame’s department of economics. She is now at the New School, and I enjoyed reading her bio and remembered what kind of economist Notre Dame used to attract:
Economist Teresa Ghilarducci sees The New School as “an enterprise to design systems that help people live and work better in society.” In her recent book When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them, Ghilarducci discusses developing systems to guarantee all working people a dignified and secure retirement. Perhaps because she grew up in a low-income family, Ghilarducci developed a desire to improve society through economic and social policy. As a 21-year-old, she consulted with unionized workers at Stanford University about their benefits and helped them choose pension plans. This experience started her on the path to a career in labor economics, which has now spanned more than two decades and a variety of roles in different organizations.
In the Forward to Paul Farmer’s Pathologies of Power, Amartya Sen writes on the importance of power in the developing world,
For example, if inequality of power, in different forms, is central to deprivation and destitution, then little sense can be made of the frequently aired and increasingly popular slogan, “I am against poverty, but I am really not bothered by inequality.” xvi.
Recognizing that power determines who will struggle to find adequate health, education, and dignity requires realizing that inequality matters. Inequality is of utmost importance to issues of development. Yet astonishingly, development economists ignore inequality. The recent hit popular econ book Poor Economics by Esther Duflo and Banerjee contains no chapter on inequality, which is truly baffling. Some argue that the entire field of development economics is implicitly about inequality, but this is only falling prey to exactly the kind of ignorance that Sen warns about in the quotation above.
Worrying about increasing wages and educational and health outcomes for those in extreme poverty is necessary, of course; but it is NOT the same thing as inequality. Duflo and Banerjee’s interventions could be successful, and meanwhile the income distribution in India could be increasing, decreasing, or staying the same – depending on whether the rest of the society gains at a faster or slower rate than those at the bottom. The analysis of success or failure of the intervention program is completely independent to changes inequality. And until economists heed Sen’s warning that fighting poverty while ignoring inequality does not make sense, the field of development economics will be vastly limited in its effectiveness.
The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.
John Maynard Keynes, The General Theory (1936)
Mathematician David Orrell writes in a new book that scientific truths may not always be “beautiful” and “elegant” theories:
It is easier to claim a theory is beautiful than to show that it actually works, or makes sense.
As further described by Christopher Shea in the article:
He [Orrell] points to modern physics, in particular, as especially prone to develop ever-more-elaborate models whose goals have more to do with elegance or beauty for beauty’s sake than anything else.
“Historically, there was this give and take between mathematical beauty and scientific productivity,” Orrell said in a recent interview. But in physics, “if you look in recent decades, it’s as if the aesthetics has taken over. Theory hasn’t had the input from data to put it on the right path.”
If even modern physics suffers from this “perfect-model syndrome” of forsaking truth and usefulness in the quest for beauty, what hope do we have for modern economics?
One of Notre Dame’s most hyped economics hires offers some critical opinions on Obama’s the State of the Union, though his remarks really sound more like something one would hear on a conservative talk show aiming to bolster the narrative about the need to shrink government:
As for fiscal solvency, the current budgetary policy is simply not sustainable, primarily because of the rapid growth in entitlement spending. If something is unsustainable, we know that it is going to stop. What is unclear is how it will stop…
Everyone knows that there must be significant budgetary changes to ensure long-run solvency, but the unwillingness to deal with this leads to heightened uncertainty. It may even be the case that this policy uncertainty is one reason that job growth has been so anemic.
The other gem is regarding establishing a living wage:
“It is contrary to all economic logic to suggest that higher minimum wages will lead to increased employment,” according to Fuerst.
Research on minimum wages and employment remain inconclusive, but anyway this quip really misses the point from the speech: many Americans feel that it is not right for employers to hire workers and pay less than a living wage. Though true that in competitive markets employers may not be free to pay a living wage, that is exactly the role of the legal intervention requiring it. The inability of some economists to admit that free markets do not always work well is really astounding.
What a wonderful new economics department that Notre Dame has constructed!
Dani Rodrik on the economists’ role in bringing about the most recent financial crisis:
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.