One of the most interesting passages in Edward Nelson’s new book on Milton Friedman concerns wage and price controls as a tool for reducing inflation. Throughout history, economists have generally opposed price controls. Then around 1970, many prominent Keynesian economists suddenly began supporting the policy. Why?
Here’s Ed Nelson (Vol. 2, p. 258):
Indeed, what is remarkable about events during 1970 is the extent to which mainstream US macroeconomic thinking on inflation moved toward the position on inflation previously associated with Galbraith and with economists in the United Kingdom. In the course of that year, pure cost-push views became prevalent among major US economists and policy makers. Increasingly, major Keynesian academic economists, economists in government and business, and policy officials were judging that market power of labor and government had so altered the United States’ wage- and price-setting mechanisms that, instead of merely responding inertially to economic slack, inflation now did not respond to negative output gaps at all.
A few pages later he names names:
In contrast [to Friedman], the freeze was applauded not only by Burns and Galbraith but also by leading Keynesian economists like James Tobin, Walter Heller, Arthur Okun, and Gardner Ackley . . . One of the most prominent supporters was Paul Samuelson.”
Today, a progressive might say, “Good, Keynesians finally shook off neoliberal orthodoxy.” But there’s a problem with that optimistic view. The wage/price controls clearly failed. And after they failed the Keynesian camp went back to their traditional stance of opposing wage-price controls.
So what can we learn from this bout of intellectual “temporary insanity”?
1. In 1970, Keynesian economists were still working with the wrong macro model of the economy. They thought there was a “trade-off” between inflation and unemployment. So when both inflation and unemployment were high in 1970, they assumed there was some sort of mysterious new phenomenon called “cost-push inflation”, which could only be addressed with wage-price controls. They had not yet absorbed Milton Friedman‘s Natural Rate Hypothesis. (Although just a few years later Friedman’s theory did become widely accepted by Keynesians.
2. In addition, Keynesians made a mistake that I see many economists make even today. They went with their intuition, not with decades of hard economic analysis and solidly established economic theories. For a brief period, it seemed like price controls were a good idea. Today, we see many economists rejecting long established theories such as the idea that free trade is good, or that minimum wage laws are bad, or that wealth taxes are bad, or that persistent large budget deficits are bad, or that unemployment compensation reduces the incentive to work, or that fiscal policy is not a good stabilization tool. They are going with their gut, not with hard economic analysis involving incentives and budget constraints.
Does this mean that we cannot trust the experts? Yes and no. We cannot have complete trust in experts; but what is the alternative? I have no doubt that if you polled economists today on the issue of rent controls, you’d find a few individuals in support of the policy. But if you polled all of the residents of NYC and LA, you find millions in support of rent controls. So yes, the experts goofed on the Nixon wage/price controls, but the public also supported the policy. Indeed I’m not sure the public ever learned the lesson that they don’t work. At least economists learned from their mistake.
Here’s Matt Yglesias:
Most historians whose work I’m familiar with seem to broadly agree with the thesis of Binyamin Applebaum’s book The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society.
Which is to say they don’t deny that economists have some useful technical knowledge or that some economists are very insightful, but they think that the large and growing role of economists in American public life in the last quarter of the twentieth century was basically bad. They think economics as a discipline entrenches a kind of neoliberal worldview, and the elevation of economics over other social sciences was a bad thing.
In fact, the neoliberalism of the final quarter of the 20th century was by far the best thing that ever happened on this planet, producing an astounding decline in global poverty.
Yglesias adds a very astute comment:
I mention this because I often think that what people mean when they invoke “listen to the experts” is basically that people should agree with the aggregate political opinions of people with advanced degrees. In other words, be very progressive.
A particularly comical example of this came recently when Democracy asked a bunch of prestigious law professors to write a new constitution from scratch and they decided there should be a constitutional provision requiring a two percent wealth tax. These law professors are experts, in the sense that they are professors, and professors love Elizabeth Warren and Elizabeth Warren loves the wealth tax. But most tax experts do not like this idea at all.
It really depends on whether progressives have a pre-existing opinion that they hold dearly. They did not have strong views on masks, travel bans, and lockdowns, and hence progressive opinion shifted on a dime in the spring of 2020 in response to sudden shifts in expert opinion on those issues. But they do have strong opinions on rent controls and wealth taxes, and resent being told by economic experts that rent controls and wealth taxes are a bad idea.
PS. Of course progressives also have dearly held views on gender, sex, and race (some of which I agree with, some I do not), but that’s a topic for another blogger. Check out Yglesias if you want to see an example involving IQ.
PPS. There are two types of economists. Those who have read Nelson’s new book and those who have not. David Henderson linked to a New Republic an Atlantic article interviewing someone who clearly has not:
The new consensus on Friedman’s work among economists has essentially reversed Summers’s verdict from 2006. “Almost nothing remains of his intellectual legacy,” according to Columbia University economist Jeffrey Sachs. “It has proven to be a disastrous misdirection for the world’s economies.”
Sigh . . .
READER COMMENTS
David Seltzer
Jun 22 2021 at 3:45pm
Belief persistence irrespective of evidence. I suspect “belief” is one’s more valued personal property. When Thomas Sowell was asked why he no longer embraced Marxism, his one word answer was “FACTS!”
Mark Z
Jun 22 2021 at 4:07pm
Did public opinion turn in favor of price controls first, and economists followed? Experts can deviate somewhat from public opinion, but they also seem pretty constrained by it. Historically experts at any given time and place seem to have had more similar beliefs to non-experts at the same time and place than to other experts at other times and places, no? Yglesias’s point about the narrowness of expertise also really resonates with me. In theory I’m a (very junior) expert of sorts in a field, and I think the average scientist in other fields is only slightly more knowledgable about my field than the average dentist or tax lawyer (and I’m only about as knowledgable about theirs).
Scott Sumner
Jun 22 2021 at 7:58pm
Yes, that’s often true. But there are also issues where economists differ from the general public. Carbon taxes, drug legalization, rent control, etc.
marcus nunes
Jun 22 2021 at 5:25pm
To “finally bury” Friedman has become a research agenda!
13 yrs ago:
http://www.levyinstitute.org/pubs/pn_08_1.pdf
and now:
https://newrepublic.com/article/162623/milton-friedman-legacy-biden-government-spending
Scott Sumner
Jun 22 2021 at 7:59pm
He was buried back in 1971 when people said the wage/price controls discredited monetarism. As E.A. Poe would say, “The “Premature Burial.”
Thomas Lee Hutcheson
Jun 22 2021 at 9:18pm
I don’t think the idea that a short wage-price freeze in the 70’s was such an insane idea. Combined with a new pledge from the Fed to hold inflation at x%, it might have worked. Of course that was not what Nixon and the Fed did.
Thomas Sewell
Jun 27 2021 at 3:50pm
Passing a law that mass may no longer attract other mass rarely has much effect on the gravity of a situation, even if the law is for a “short” time.
Philo
Jun 22 2021 at 9:22pm
“They think economics as a discipline entrenches a kind of neoliberal worldview . . .” (Yglesias). That worked for me: the more I learned about economics, the more neoliberal (actually, just “liberal”) I became. But it seems not to work for a great many people.
Alan Goldhammer
Jun 23 2021 at 7:47am
Perhaps you read my comment to David’s blog post where I cited The Atlantic review by Sebastian Mallaby of Applebaum’s book. Carter’s piece appeared in The New Republic and you my wish to correct the text.
I agree that a ‘wealth tax’ is a stupid idea and like anything else dealing with the tax code, probably difficult to implement. Focus instead should be on dealing with the multitude of tax preferences that allow income to be shielded from proper taxation (carried interest loophole, home interest deduction, and surprisingly I support the SALT provisions). We need low tax rates that are simple to implement and of course a VAT which is even easier. Europe does have some good ideas.
Perhaps a proper debate is the utility of taxing huge wealth accumulation via held stock. Large amounts of capital gains end up not being taxed if it is donated or passed on through inheritance. Is this the proper policy or should the capital gains be subject to some sort of tax?
Thomas Lee Hutcheson
Jun 23 2021 at 11:26am
A VAT is certainly easy to administer and it ought to be part of the tax system as a replacement of the capped wage tax. But a VAT alone does not tax those who consume larger amounts at higher rates and so in my view is “unfair.” Nor does it tax the net emission of CO2 into the atmosphere.
Sticking within the income tax framework, I do not object in principle to subsidizing certain kinds of consumption (owner-occupied housing services and charitable contributions) but I think the subsidies should be the same (up to a limit for housing services) for all consumers, hence there should be partial tax credits rather than “deductions” which are worth less to low marginal rate taxpayers and nothing to those who take the standard deduction. I also approve of provisions that push the system in the direction of progressive consumption taxation such as much higher deductions (here a “deduction” is the right instrument) for retirement savings.
Alan Goldhammer
Jun 23 2021 at 1:21pm
I would use a VAT as a replacement for the awful corporate income tax. Either eliminate it or make it very low such as 5%. It’s too easily gamed by a variety of deductions and movement of IP into low tax countries. I have found TR Reid’s book “A Fine Mess: A Global Quest for a Fairer and More Efficient Tax System.” Reid is a former correspondent for the Washington Post. I heard him speak while he was on a book tour and his presentation is HERE. Well worth watching and the book is a quick read (2 or so hours) and compares tax systems throughout the world.
robc
Jun 23 2021 at 10:24pm
Three words…Single Land Tax.
Scott Sumner
Jun 23 2021 at 12:44pm
Thanks, I fixed it.
Michael Rulle
Jun 23 2021 at 8:55am
One of the least appreciated facts about any intellectual endeavor is how easy it is to forget the complex intellectual thinking that created one’s ability to deduce conclusions and outcomes. It is easy to remember the conclusion, but unless one is involved continually, quite easy to forget the thought process that got you there.
I always like to compare Greg Mankiw and Larry Summers. Summers lost interest in economics 25 years ago——first as an administrator and then as a hedge fund Wall Street guy, and finally as a Political junky. Mankiw went to Washington—-but as an economist—-and is back at Harvard of course.
The type of economists who think Friedman is irrelevant, for example, are those who have because more interested in politics than economics.
Michael Rulle
Jun 23 2021 at 8:58am
“who have become more interested in politics than economics”
Michael Rulle
Jun 23 2021 at 9:14am
I am sure I could have picked a better “counterpoint” than Summers——but I hold to my general point.
dave schutz
Jun 23 2021 at 12:10pm
In grad school I took a course ‘Uses of History’ co-taught by Ernest May and Richard Neustadt. May talked one day about Galbraith and his support for wage and price controls, and the disappointment of other economists with his position. Broadly, May said: “Look, when he was 26 he was in charge of wage and price controls for FDR. He was handsome, the girls looked back at him on the street, everything worked, nothing hurt. Of COURSE he was for wage and price controls!”
Kailer
Jun 25 2021 at 7:27pm
Did you ever catch Jeffrey Sach’s econ talk episode? It’s absolutely bonkers. You’d think someone with such a high opinion of himself could brush off some mild criticism. Russ Roberts is an absolute legend, though and he stick handles through some pretty awkward bits. Good gravy.
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