It turns out that running an economy requires more than just throwing cash at it.
The ultimate aim of the economy is that we all see a sustained and substantial increase in our living standards. But the current economy is failing to deliver in this regard. Real wages are down, not up, as so many assume.
Jason Furman was the chairman of the Council of Economic Advisors under President Barack Obama, and a good economist. He’s been pointing out, contrary to what we might hear from Paul Krugman and co., that we are not all becoming better off. It’s true that average wages, the way we measure them, have been rising. But that’s a result of something called the fallacy of composition. The millions who have lost their jobs are those at the bottom of the income and wage pile. So, the average of those still in work has risen at the expense of those at the bottom now getting nothing. This is not generally shared prosperity.
It’s also true that inflation is significant. Actually, larger than the wage rises currently. So, real wages, what you can actually buy as a result of going to work, is falling, whatever the numbers on the paycheck say.
The one big question in economics, the only one worth answering, is “What the heck happened in 1750?”
All of human history up to then was a story of a little bit forward followed by a little back in living standards. The average peasant lived, in 1600, at very much the same standard as the average Roman had, the Anglo Saxon, the Inca. Then something changed, the usual culprit being identified as this strange mixture of capitalism and markets. This isn’t a simple system. It has no central direction, no purpose, but the one thing it has done these past few centuries is raise that average standard of living.
Something which, as Furman points out, it’s not doing currently. As it turns out, it is too complex a system to be pushed along simply by throwing cash at it. In an emergency, that might be necessary to prevent disaster, as with QE and emergency stimulus. But past those dark days, more money and government trying to help does not, in fact, advance matters.
It’s sad to say, but current economic policy just isn’t achieving the task we set it — making us steadily better off over time.
