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Where ‘regular economics’ comes up short, and cold

COMMENTARY | September 08, 2011

ABC, in a series on hunger, shows a lot more compassion and common sense than a professor wedded to the efficient market theory. Score one for the news media.

By Henry Banta

Not long ago two items showed up in the news that on the surface had no obvious connection, but understanding how they were related can shed significant light on our current political paralysis.

The first was a rather esoteric op-ed piece in the Wall Street Journal (August 24, 2011) by Professor Robert J. Barro (Harvard and Stanford’s Hoover Institute) in which he attacked the Secretary of Agriculture, Tom Vilsack, for saying that food stamps were “economic stimulus.”  He attributed Mr. Vilsack’s error to his use of Keynesian economics, as opposed to what he called “regular economics.” Had Secretary Vilsack applied “regular economics” he would have understood that “expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP).” 

The second item was an excellent series on ABC’s Evening News on “Hunger at Home, Crisis in America.” (Beginning August 24, 2011.) This series, reported by David Muir and Kimberly Brown, particularly focused on childhood hunger and highlighted a recent study by Feeding America on this growing problem. (August 24, 2011.)  This report found that as many as 17 million children suffer from “food insecurity,” which means that their parents often do not know where their next meal will come from. “Simply put,” Muir said, “one in six Americans don’t have enough food.”  He reported that the emergency room of St. Christopher’s Hospital in Philadelphia might see 250 children a day and half are hungry.  The series contained interviews with families that had slipped from the middle class and were now engaged in a desperate struggle to get enough to eat.

Brown reported that "the consequences of malnutrition can be severe.  Several studies have shown that food insecurity affects cognitive development among younger children.  And for older children . . . school performance is affected.  Additional research shows that with hunger comes more frequent sickness and higher healthcare costs.
“Medical research has shown that lack of nutrition can permanently alter a child’s brain architecture, stunting intellectual capacity and a child’s ability to learn and interact with others.”

It is strange that Professor Barro chose food stamps to illustrate his point that any “transfer” by the government that attempts to ameliorate the conditions of the less fortunate would reduce the GDP. Any government program would have done as well for his purpose but he picked food stamps. Professor Barro must know that about half of food stamp beneficiaries are children. (Another 20% are elderly.) Yet it was this, of all programs, he specifically accused of creating a disincentive to seek employment.

The key to the Professor’s thinking is this: “In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.” Essentially what he does is what economists of his ilk do: postulate a world filled with selfish greedy people driven solely by economic “rationality,” then predict what such “incentive driven” people would do under various circumstances. Here he conjures up a picture of unemployed workers manically doing some kind of weird cost-benefit calculation on the trade-off between government supported leisure and potential wages. From this he concludes that the food stamp program is harmful to the GDP. The notion that large numbers of children are inevitably, even necessarily, casualties in this Darwinian effort to maximize GDP would come as a surprise to a lot of Americans. Even to some who buy into Barro’s regular economics.

What makes these conflicting views troubling is that Professor Barro’s view represents the economic thinking of a large part of the Republican party, particularly its radical Tea Party wing. For them any government intervention in the market – even to feed hungry children – is misconceived. 

It may be, as some studies have indicated, that the time the unemployed spend out of work increases with government assistance.  How this works for food stamps is not obvious.  Even less obvious is how it works in an economy that has over 9 percent unemployed and close to 16 peercent underemployed. Or when for every vacant job there are more than four job seekers. The notion that there are large numbers of people avoiding work because they know the government will help feed their children is hard to accept. It certainly flies in the face of ABC’s picture of formerly middle class families struggling to feed their children. Granted we wouldn’t want to generalize from such a small sample, but the people they interviewed seemed a lot closer to those  we know as neighbors and friends than to the Professor’s cold, calculating freeloaders.

I will leave it to the economists to deal with the more technical aspects of Professor Barro’s article. Indeed his academic colleagues seem to have fallen on it like piranha on red meat. In my prejudiced view they seem to have done serious damage, particularly in pointing out the inconsistencies with his previous writings. Paul Krugman has noted that Professor Barro’s logic only works in an imaginary world. It requires “a competitive, efficient economy allocating resources to the right uses.”  In reality we all live in a world of imperfect competition and market failure.  If hungry children do not represent a market failure, what does?

Lets suppose, for arguments sake, that the food stamp program actually does reduce the incentive to work. How does this end the argument? Whatever loss to the GDP this may involve, isn’t there some benefit that must be taken into account? Benefits that might also affect jobs?

It is a staple of Republican rhetoric that government debt, and anything that increases it, places a burden on future generations.  Their solicitude for the economic future of children it seems is  limited to the economic burden of paying off such debt with interest.  Somehow they are uninterested in the possibility that a generation of malnourished children will also present the nation with a future costs.  Isn’t there a loss when malnourished children grow up and join the work force?  And what of the additional burden they will place on the medical system?  To put it another way, is it possible that Professor Barro’s efficient market has undervalued healthy, well educated children?

What is involved here is a conflict between two diametrically opposed economic theories. Professor Barro’s position is grounded on the “efficient market” theory, a theory that forms the ideological core of the Republican party’s economics. Their central message from the entire leadership is that the “market” is the solution to all economic problems; there is nothing the government can do except screw it up and make things worse. Indeed all economic problems come from misguided government interference with the “free market.”

It is strange that there is so little understanding by the media, indeed by the general public, how deeply this market based ideology is ingrained in the Republican psyche and how it precludes any political compromise. Those who generalize about a “dysfunctional Washington” or a failure of “civility” simply need to pay closer attention. There is a fundamental ideological divide between those who think the government should help feed hungry children and those who do not. There is no way to buy into the Republican economics a little bit; you either accept its ideology, or you don’t . 

To put it another way, the government is not paralyzed because stubborn, nasty people can’t get along.  It is in deadlock, in part, because a substantial minority in Congress are locked into an ideology that admits of no compromise. They cannot give on one part without giving away the whole thing.

There is no end of irony in a political movement that can consider evolution or climate change as the products of “junk science” yet can buy into the preposterous assumptions of the “efficient market” hypothesis – an abstract and arcane theory if ever there was one.  Indeed there is a mystery in how a political movement that rejects the notion of men descending from apes, can embrace the dehumanizing assumptions of an economics that reduces us all to mere profit-maximizing actors in a senseless Darwinian struggle.  (Does anyone remember family values?”)


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