Investigative financial analyst Tom Bergin cut his teeth investigating corporate wrongdoing. When he turned his attention to the economics profession, he learned that eight major economic theories—used by experts to shape policy across the globe—entirely lack factual basis. He joins the pod to explain how those theories wormed their way into dominant economic thinking, the evidence against them, and why he believes economists are finally starting to shift toward studying the world as it actually is.
Tom Bergin is an Investigative Financial Journalist for Reuters and the Author of Free Lunch Thinking: How Economics Ruins the Economy
Twitter: @tombergin_News
Further reading:
Economics is Once Again Becoming a Worldly Science https://aeon.co/essays/economics-is-once-again-becoming-a-worldly-science
Free Lunch Thinking https://www.penguin.co.uk/books/111/1118880/free-lunch-thinking/9781847942739.html
Website: https://pitchforkeconomics.com/
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Nick Hanauer:
A lot of what passes for economic science is really just a protection racket for the rich.
Tom Bergin:
So many things that we accept to be true and economists tell us are self-evident and widely shown to be true, actually don’t have an intellectual basis or a factual basis.
David Goldstein:
Bad theory leads to bad policy-
Nick Hanauer:
[crosstalk 00:00:24] Right.
David Goldstein:
… and bad policy leads to bad outcomes.
Speaker 3:
From the home offices of Civic Ventures in Downtown Seattle, this is Pitchfork Economics with Nick Hanauer, the best place to get the truth about who gets what and why.
Nick Hanauer:
I’m Nick Hanauer, founder of Civic Ventures.
David Goldstein:
I’m David Goldstein, Senior Fellow at Civic Ventures.
You know Nick, one of the things I love about this podcast is that we don’t have ads. I never have to do an ad for some mattress or some other product that I don’t use. But what we do ask, is for our listeners to leave us a five star review, wherever you review our podcast and we’re asking you to subscribe to our weekly newsletter, The Pitch. It’s free, just like the podcast. It’s a weekly newsletter about the latest in progressive economics and you can find the link in the show notes.
Nick Hanauer:
Awesome. And today on Pitchfork Economics, we get to talk to investigative journalist, Tom Bergin about his new book, Free Lunch Thinking, which is basically a take down of all of the economic principles that have steered us so wrong throughout the neoliberal era. And Tom’s book does a really great job sort of detailing the what and the who of all of this nonsense. It’s pretty impressive.
David Goldstein:
And there’s so much in this book, we went a little longer on the interview, so why don’t we just get right into it?
Nick Hanauer:
Okay.
Tom Bergin:
My name Tom Bergin. I’m an investigative financial journalist. I work for the Reuters News Agency and I mainly focus on investigating corporate wrongdoing, tax avoidance, breaches of health and safety regulations, and all kinds of nefarious activity that big companies sometimes get up to. My latest book, Free Lunch Thinking is taking some of those skills and experiences of scrutinizing companies and turning the focus onto the economics profession, and examining whether the advice that we receive from economists really is as helpful as it should be or whether we should be scrutinizing that with the same degree of skepticism that we do sometimes with some of our less socially responsible corporate citizens.
Nick Hanauer:
Well, Tom, it seems like we’re fellow travelers.
Tom Bergin:
Wonderful.
Nick Hanauer:
And we were really… We saw the piece that you wrote and looked at your book and we’re really taken by the arguments you make, because we agree with you emphatically that a lot of what passes for economic science is really just a protection racket for the rich. It’s a bunch of made up ideas that advantage a small group of people at the tippy top and disadvantage almost everyone else. And it all passes itself off as science. So, I guess my question is, what started you on your journey?
Tom Bergin:
Well, yeah. It’s interesting because for me, it’s a deviation from what I usually do. As I said, I usually look at big companies, maybe governments and oligarchs and people like that. My focus on economics really grew out of my day-to-day reporting, where… And one of the big areas was around taxation. I started to report upon… They did an investigation about Starbucks tax planning here in the UK, that led to a lot of changes in investigations here in the UK.
And what’s interesting is when you look… Cover that issue, you kind of realize, well, why were the tax laws devised in a way that allowed these companies to avoid paying tax? In that case, it turned out… I met government ministers, spoke to people about it, and they said, well, look the theory shows that this corporate taxation’s a bad idea anyway, because it stops investment. That got me thinking about, what is… Is that really true?
Because I spend a lot of time talking to companies as well and some of these things, theory doesn’t necessarily align with what I seem to appear to see companies doing. I also covered… Reported a lot about regulation and the way in which big companies can game the rules. With respect to regulation, I’ve heard a lot of policy makers talking about how regulation imposed a lot of costs on business, but I spent months covering the BP oil spill where we had a situation there where a flexible approach to regulation contributed to a company losing $70 billion. So, that didn’t seem to be a situation where investors might have been hurt by stronger regulation.
So, my interest in the subject really stemmed from seeing how the economic theories are applied and impact people and companies on the ground. And when I approached this, I did it the way that I typically do with an investigation. Is well, let’s start at the beginning on what do we know. And in a way, that was one of the most interesting and in some ways entertaining aspects of researching the book, was to find that so many things that we accept to be true and economists tell us are self-evident and widely shown to be true, actually don’t have an intellectual basis or a factual basis.
And time and time again… I mean, in the book, when the years are really [dissect 00:06:11] on this is around the minimum wage. And one of the really interesting things about that was the way in which the economic establishment kept on saying there was a body of evidence that showed the minimum wage kill jobs, when there just wasn’t. And I’m not just saying that my assessment of that, but the key 1983 report that they all focused on and said, this shows that, specifically said we don’t have enough evidence to show the minimum wage kills jobs.
Nick Hanauer:
[crosstalk 00:06:43] Right. No, they were all relying on the models, the Pareto Optimality of the equilibrium system and… It wasn’t… Was it ’94 when Card and Krueger did the first actual empirical check? It’s just-
Tom Bergin:
Yeah, and they were treated with just total disdain by the establishment. You had-
Nick Hanauer:
[Inaudible 00:07:06] Right.
Tom Bergin:
… people like Becker, Gary Becker going out… And Becker was one of these people saying, look, this has been shown for years. And you’re thinking, Gary, where is… Which studies are you talking about?
Nick Hanauer:
Yeah.
Tom Bergin:
I mean… So, Card and Krueger had a gag. They used to call the body of evidence that existed the minimum fact research because there just wasn’t that evidence.
Nick Hanauer:
Right.
Tom Bergin:
But it was [inaudible 00:07:26] that the polls on this that had been to taken were more constantly. Economists totally said this would be the result. And the truth is today, it’s effectively much the same. I spoke, when researching the book, to David Card and he said, yeah basically people in labor economics accept that the minimum wage, it doesn’t function the way theory says it should. But if you go outside that, I’m not sure that most people change their opinion. And indeed, if you look at the response to the potential of a $15 minimum wage in the United States, most economists said, yeah this is probably going to kill jobs. And you’re thinking, how can you just say that off the top of your mind? I mean, where is that coming from? And that’s, to me was a really shocking thing. You’re looking at the flippancy with which economists seem to [inaudible 00:08:10] not that be interested in facts very frequently.
Nick Hanauer:
Yeah. But there’s a whole bunch of lies that make up what we think of as the sort of neoliberal framework or trickle down economics or market fundamentalism. Whatever you want to call this framework of thought. And you’ve identified what you call, I think basically eight big mistakes. Can you quickly take us through what those eight are?
Tom Bergin:
In the book, I look at eight economic ideas that are widely accepted around the world. I chose them… Some of them because I’d… These are ideas that I’d come up against in my day-to-day reporting life, but all of them were chosen because they were important and they were applied by governments around the world. Had been for decades now and impacted many people’s lives. The first one was a really big idea that influences people. And that is that the idea that bigger governments stop growth, that countries, where their government’s spending to GDP or taxation levels to GDP are higher, will grow more slowly than ones with lower levels of growth. This is something that people just accept around the world and it influences governments. The interesting thing about it, it’s just, despite the fact that people believe that there’s evidence, there’s not.
I indeed… It’s really interesting to talk to people who are genuinely believe this to be true. They’re economists and oftentimes they would’ve proven this thought out of examining models. But of course, then when you try and get the data, they found themselves frequently confounded on that. That was one that was particularly interesting. It took me… Traveled to the United States and around Europe to examine places where this had been… People had put this into effect with not great deals of success, one would add.
Another idea I looked at was why [inaudible 00:10:02] talk about the Feldstein revelation. And that focuses a little bit more [ granularly 00:10:07] on the concept of taxation and looking really at how taxation might impact growth. And this idea that high taxes discourage us from working. And one of the big arguments with respect to tax cuts is if you cut taxation, that people will work harder. You may, if you’re lucky, get the Laffer Curve impact whereby you actually cut taxes and increase revenues.
But the main point is that people observably work harder. This is continually offered as an excuse or a justification for cutting taxes around the world. [Because 00:10:45], everybody likes it with… [Now 00:10:46], I said the book is called Free Lunch thinking, and hey, doesn’t it sound like a free lunch? You cut taxes, people end up feeling less pain, but they also end up richer. So, it’s a classic free lunch. The problem is there’s been huge amounts of studies at this, really going back. I mean, the first ones I found were from the early 20th century. Literally the first decade of the 20th century, but in the postwar period, we started to get a lot of data gathered on this and a lot of survey data, and other data. And really, there’s just no evidence in any way of that this is something that had happened.
And indeed the only way that idea could be sustained was a massive shifting of the ideas to how you measure working hard. And this is why I focus on that particular chapter looking at Feldstein because [Martin 00:11:41] Feldstein came up with this idea that, oh the reason that we don’t see tax cuts making people work harder is because we were looking at the wrong thing. We’re looking at work hours or employment levels. You should be looking at how hard wealthy people are working. And if you looked at that, the way they judge it is if they’re earning more money, they’re working harder. I mean, it’s totally…
Nick Hanauer:
Such a [tautology 00:12:05].
Tom Bergin:
You just can’t be wrong. You’re richer because you’re richer. I mean…
Nick Hanauer:
Yeah. yeah.
Tom Bergin:
It is circular logic. But that was massively… He did work on this in the early 1990s and it was massively influential. He got a great data set from the IRS.
Nick Hanauer:
Well look, it all fits together, right? Because price equals value. So, if you’re generating more income, that has to be because you’re generating more value.
Tom Bergin:
If you define income as value. Yeah. You’re [inaudible 00:12:35] in that… You’re in that [inaudible 00:12:36].
Nick Hanauer:
Well, Neo classical economics does.
Tom Bergin:
It is something that, that again when Feldstein came up with this information, people with this claim and it comes down to this idea of elasticity. Underpinning the idea that the tax cuts make people work harder. Is this idea that people have this… That their elasticity, their taxable income elasticity lends them to sort of work harder. And this elasticity is something that’s very high. It’s a high number. So there’s huge leverage, huge responsiveness. It goes back to what we were talking earlier about. This idea about demand and supply curves. To me, economics… It reminds me of a review I once heard of the band Oasis. And somebody said Oasis they’re both good and original, the problem is what’s good is not original, and what is original is no good. Economics does that a lot.
They take something like a concept of price sensitivity. Everybody knew about price sensitivity since we had money. I mean, that, wasn’t an idea that [Adam 00:13:35] Smith or anybody else came up with. I think economists like Alfred Marshall brought to the table was this concept of elasticity. That we could measure that responsiveness. That it was stable and predictable. And therefore we could make policies that would use that elasticity to kind of influence the human behavior. The problem with it is nonsense. And every time you try and map it… If elasticity exists, it changes so quickly that it’s useless as a [predictive 00:14:03] tool.
David Goldstein:
Right. Elasticity actually runs through a lot of your points. So, your next one… I’m reading from your chapter outline is you call the hire and fire debate. You ask, is job security economically damaging? That’s an argument that’s been… Was made a lot about economies like the French economy, which provided a lot of job security.
Tom Bergin:
Absolutely. And it was something that really drew a distinction between North America and Europe. And Europe had pursued this model really… Depends when you want to go back. But really of the deviation was quite strong from the 1980s or 1970s even onward. And you saw this situation whereby it became… The European countries gave workers job security in a way that the United States didn’t. The reason for that was in many ways, a sort of economic… This economic theory, that if you were to clog up the wheels of the labor market with these kinds of restrictions, you would make the labor market less efficient, and a less efficient labor market meant unemployment. And so, that was the economic theory to that. And Europe was quite resistant of that. And that was really just politically and depended also a bit in country to country.
So, more right of center country, like the United Kingdom, conservative governments there had eroded some of these job securities and compared to mainland Europe, but it was a different differentiator. But between… I’ll say North America and Europe, what was really interesting was around the time of the financial crisis. And you saw… And this is why this is not just some theory. This is something in the recent past. Countries found themselves in a real hole economically. They didn’t have any money to kind of get the economy going, to start up labor retraining programs. They had the idea, oh, we’ll listen to the economists, they say, if we cut employment protection in places like Spain, Italy, et cetera, then we would create more jobs. That the labor market would solve this. So, they went and they did that. Were significant changes.
And of course what happened was going… Also entirely predictable cause as it happens, the subject had been studied for decades before this. And for decades before, they had not managed to find any evidence, a link between employment levels and job security, either it’s existence or changes in that. So, predictably, unsurprisingly, then the Spanish and the Italian, and other governments had the exact same experiences before. So they’d gone through this process, they had removed all these protections people had, made people feel less comfortable, but they hadn’t got the payoff that they’d hoped for. And in the case of Italy, I make the point that, that’s just not… That’s not just a politically economic argument on a theoretical level. If you even do take a view and you support it, neoliberal economics, or neoclassical economics, whatever, you still look at a situation whereby the government of Italy changed and the leadership that sought to make these changes and make lot of market friendly changes in Italy got thrown out effectively because of their pursuit of that one policy that they had prioritized over so many other things, anti-corruption measures, the change of the [b icameral 00:17:28] system.
I mean, number of political changes that might have made Italy a more efficient economy. They focused on that one because economists told them it was most important. Economists told… Thought it was most important because when they looked at Italy, this was the thing that struck them as most deviant from economic orthodoxy. So it jumped out to them. What was interesting is what… Did it… When businesses, international businesses spoke out about Italy and what was wrong with it, that wasn’t the thing that they focused on. So, if you look at it from a kind of person who looks at well, what’s happening on the grounds in the economy in Italy, you wouldn’t have come to the conclusion that employment regulation is the problem there.
You might have looked at a whole bunch of other things. The fact that the commercial courts don’t work for example. This is… And I think one of the things with the book, it’s not about a left versus right debate necessarily on this. You have a situation where many of these ideas are subscribed to, both by obviously economists at the Chicago School, but also people who are on the liberal side, like Larry Summers and others. So…
David Goldstein:
Right.
Tom Bergin:
But there are opportunity costs to pursuing these, even if not case, oh, they don’t work well, there’s no downside. There certainly is.
Nick Hanauer:
What’s another top sort of economic theory that you think lead us-
Tom Bergin:
[crosstalk 00:18:48] Well…
Nick Hanauer:
… in the wrong way?
Tom Bergin:
I think one of the other things that I looked at was this idea about, can money make you a better manager? I’ve written a lot about executive pay over the years. And I think it’s been a subject that really has illustrated some of the failings of the economy for ordinary people over the past sort of 20, 30 years. What I mean is, that average incomes have pretty much stagnated in real terms, but the pay for the people at the peak of the corporate pyramid has just exploded. And if you look back, and what’s driving that, what I really discerned was coming back to the early 1980s when executive pay and this sort of bubble started… Because if you looked from around about 1940 to 1980, executive pay hadn’t really gone up. But it… I mean, it had gone up in real terms, but only to the extent that average pay had done.
But from then on things changed. And what’s really interesting is you can see this, is a lot of it comes down to a single idea, which is this idea that basically executive remuneration was broken, particularly in America. And the fact that people did not have managers, did not have incentives to encourage them to grow the share price, grow profits, et cetera, explained what was at that time, apparently some levels of poor commercial or corporate performance in America. So, the idea was that if you could take… The idea was this agency theory, as it’s called, that if you could take managers and make them think like investors, shareholders, that then they… For… There… Would represent more effectively the interests of said shareholders. But one of the issues was it was a problem that didn’t really exist. You had people like Mike Jensen who came up with this theory and took it forward and investors loved it.
It really just took off, but there were… There wasn’t actually a… There was a stock market problem in the 1970s. That’s for sure. That the share prices languished. Now, what’s interesting was that earnings didn’t languish. The main problem with the stock market in the 1970s was the P/E earnings compressed. And I… This is interesting. If you look at the [Shiller 00:21:09] data on that, and this is the sort of basis of Shiller’s Nobel prize to show the markets are not rational. The problem was these people believed that they were… These are the freshwater people, some of the [inaudible 00:21:20] Chicago people, a lot of them based around the University of Rochester, but they had believed of course, that markets were always sending a signal that was accurate, and if the share price was low, it must mean that management were terrible.
So, they just decided that. And I think if you looked at it from an operational perspective, very difficult to sustain that. And the fact was, you’d had this wonderful period in American corporate growth from the 1945 to 1970 period over which executive pay had not been tied to share prices as they were later on. But we had this explosion in pay largely because we had these share price programs, which were introduced in the late 1980s and just took off enormously in the 1990s. And the irony of this, that in Rochester where the university had been the biggest exponents of this idea, their home town was home to two of the best examples of the failure of their own theory, specifically Kodak and Xerox. Places where they had doubled down enormously on paying executives to try and turn around the company.
But of course, in both cases, they really illustrated this point that no matter how much you pay somebody, you can’t make them a better manager. You can’t make them have better ideas. These are people who are not working. They’re not slumping off before you gave them the share options. They’re not coming up with better ideas after.
David Goldstein:
It’s a weird because it assumes that these people became these managers without having dedicated themselves to doing a good job.
Tom Bergin:
Yeah.
David Goldstein:
But somehow there’s no reason why they’re running the companies.
Nick Hanauer:
Yeah.
David Goldstein:
They sucked all along. Why were they promoted?
Nick Hanauer:
Yeah. But, but all of this of course is inextricably intertwined with the idea of shareholder value maximization. This was the sort of wind behind those sails, is the idea that the best thing for the economy was for managers to maximize shareholder value. And if you did, it would be good for everyone. Right? You need that idea in place for any of this to make any sense. And of course, it’s just simply not true. The managers didn’t get better, but they may have made a bunch of different choices to increase profits. Usually-
David Goldstein:
[Crosstalk 00:23:38] Well short, short, short terms.
Nick Hanauer:
… at the expense of workers. Right.
David Goldstein:
Short-term profits.
Nick Hanauer:
That’s right.
David Goldstein:
Because now they’re thinking you make them shareholders, they’re going to start thinking like shareholders.
Nick Hanauer:
Right.
David Goldstein:
What matters is the quarterly report.
Nick Hanauer:
Yeah, absolutely.
David Goldstein:
Let’s skip number five, chapter five, which is the minimum wage, because that’s like bread and butter in this show and our audience knows all about it. I think the next one on your list is really fascinating and will surprise people. You title the chapter, “The Russell Graph, Do Syntaxes work?” Are you telling me syntaxes don’t work?
Tom Bergin:
They very frequently don’t work the way in which the people who… The main exponents are… Exponents of them claim they do. And one of the real key examples of the Russell Graph is one of these that I look at, is smoking. And as I said, a lot of the ideas that I’m attacking are okay. Some of them are… Tend to be ones which are I suppose more by conservatives than liberals, but I… It is the case that these ideas are generally supported by people of both sides, or economists of both sides. This is one of those ideas that probably a lot of liberals might be surprised about, but this is something… Because it’s an idea that a lot of liberals subscribe to. The problem is that a lot of syntaxes don’t actually work in the way or don’t work at all, or don’t work in the way that we think they do.
As I said, smoking is one I look at it, and this is one where the whole approach of government to tackling smoking was sort of they’re taken hostage by economics. And people took the view that we could use tobacco taxes to tackle smoking. And then over time that idea that that was successful really took hold because what people saw was look, we’ve brought in tobacco taxes and people are smoking less. I mean, that looks like success. And the problem with that was that when you looked at it more closely, that really wasn’t well correlated. And the second problem with that is, if it’s not correlated and one’s not driving the other, then maybe are we doing the right thing? Are we maybe missing a trick? And what I mean by that is that when the tobacco taxes were increased the most, with not… Didn’t… Weren’t necessarily the time that smoking dropped the fastest.
And the reality is when we saw other measures coming into play, for example, denormalization, smoking bans, and other things, which politically can be difficult because they’re more journalistic, but we saw smoking drop more effectively. But the real damage for the concept as to whether economic theory is applicable in these things is the way in which the human behavior so totally confounds what the economic logic proposes. Smoking taxes should impact people who have the greatest economic incentive to respond to them. So, if it’s a fixed amount in a packet of cigarette, that less well off people should curtail their smoking much more quickly than affluent people. But what we see again and again in every country is the inverse. So, basically you’ve got a situation where… And I was researching the book, I was coming from a borough here in London where 10% of people, less than 10% of people smoke.
I visited a [inaudible 00:26:53] home in a hole in the north of the country where 50% of people smoke. The reality is that the smoking could take income based on typical incomes up there, could be as much as 20% of average incomes. Whereas here it’s just in London, in the boroughs, looking at, it was negligible. It was low single digits. Economic theory clearly wasn’t working there. Now, economists in common as they typically do will try and ad hoc some other ancillary explanation, but what… But hear the thing, the one thing, the price is not working as a disincentive in [inaudible 00:27:28]. And-
Nick Hanauer:
[crosstalk 00:27:30] Yeah.
Tom Bergin:
… if you are involved in health policy, I think you do have something to answer for there. And we saw situations here in the… Over the last 10 years where governments cut back to back tobacco reduction programs with spending money to help people quit, while bumping up taxes at above real inflation… The inflation levels.
And as I say in the UK, for example, maybe it was 1990s before full advertising ban on tobacco came in. We’re incredibly slow here to place restrictions on smoking. Again, when it comes to the environment, we’ve seen situations where economists just can’t get their head off tobacco. Or sorry, get off at carbon taxes. We saw situations in the United States in the run up from 2000 to about 2009, oil prices shot up enormously. But really we didn’t see a huge change in the purchasing patterns of cars. For all the headlines about Prius… About people queuing up to buy a Prius. The reality was the S series truck was still the best selling.
Meanwhile, in the European union, you had a massive increase in automotive efficiency, even though because of the high taxes that already were in place, the percentage increase was low. So, there was little financial incentive for Europeans to get more fuel efficient cars. A massive financial incentive for Americans to get more fuel efficient cars. Who got the more fuel efficient cars because it was Europeans, because of regulation. The economists don’t [inaudible 00:29:00] regulation.
David Goldstein:
[crosstalk 00:29:00] Okay. Well… Yeah. That brings us to your next chapter, the PGO Coast Disagreement. Does regulation harm economic growth? So all these regulations, like those smoking bans, that’s bad for growth. Right?
Tom Bergin:
Well, any kind of… The idea is that any kind of regulation kind of straight puts business in a straight jacket, consumers… It’s sort of like putting cotton wool between two beating drums and it stops everything working.
There’s a famous series that Milton Friedman produced in the… I think it was the ’70s. And one of his programs, he walks through the library of Congress and the stacks of government regulations every year. And he sees them go up and up. And he was saying, this is a sign of the way in which government is really just messing up the economy and getting the weight of normal commerce. I looked at there recently, at the rules of football. Soccer, as you’d call in the United States. And when that first [inaudible 00:30:01] was formalized, there were 13 rules. Took about two pages. The current FIFA International rule book is over 200 pages. Now, nobody is saying that soccer has gotten worse. The existence of more rules hasn’t damaged football. It seems to be a hell of a lot more popular than it ever was, and most people would-
David Goldstein:
[crosstalk 00:30:19] Right.
Tom Bergin:
… agree, the quality is better. And I think it’s the same [inaudible 00:30:21] true if regulations that govern interbank transactions. The existence of regulation facilitate transactions. They might be frustrating to us at times because yes, they have costs, but they also have a big payoff.
Nick Hanauer:
Perhaps with the notable exception of syntaxes, all the rest of these economic propositions seem to magically advantage the rich and powerful.
David Goldstein:
Right. Right. Especially the one we didn’t touch on the last chapter, which asked the question, are taxes on businesses damaging?
Nick Hanauer:
That’s right. The answer is no.
Tom Bergin:
Yeah. And it… And they don’t. The key word is they don’t discourage investment, which of course is the main reason for giving these people. And it’s-
Nick Hanauer:
No. In fact, they probably encourage. High taxes, encourage investment because it’s how you hide profits. What’s fascinating to me, and I’d love for you to address this is that you can call these mistakes or whatever it is. But what’s really interesting is that they all tilt one way. Why is it that every single one of these mistakes advantages the rich and the powerful? How did that come to be?
Tom Bergin:
It’s a really interesting question. I think, what we see time and again, underpinning particularly tax policies. But I think it’s also true of the regulatory policies, is a fear on the part of policymakers of the wealthy. I think that there’s a perception that on the part of certain policymakers maybe because they’ve not been involved in business, I don’t know why, but they see sometimes wealth, this concept of wealth creators, and they seem to willingly attach the moniker of wealth creator to an incredibly small number of people, senior executives, entrepreneurs. And then develop a certain terror that these people may take their wonderful wealth generation, wealth creating skills elsewhere, or just stop working. And therefore, we would all be poor.
It seems to be… It… When you say that like that, it seems like a ridiculous idea, but time and again, we see it. Here in the UK, the ludicrous tax advantages that exist for people who are given non-dom status, for example, basically allows you keep your money off-shore and not get taxed on it. I mean, entirely is defended in the… On the basis of this idea of wealth creators coming and then [inaudible 00:32:57] spreading their magnificence and wonderful abilities and of enriching others around them with everyone. It’s a really strange one, but I think that there is a general fear there. I mean, obviously all-
Nick Hanauer:
[crosstalk 00:33:10] Okay, but I understand policy makers. That’s politics. That’s where the power lies and where the campaign contributions come from. I get that. What I’m asking is, why… These were not mistakes by policy makers. These were mistakes by economists, who surely are not influenced in the same way, aren’t under the same pressure, and yet here we are.
Tom Bergin:
I think there are two problems. I think the first one is where economists can actually be subject to the influence of wealthy people. Which is that if you want to raise money for research, if you want to raise money for your department and frankly, many economic departments do, to have to expand the theories which are acceptable to people who have got the money is going to help you more. And I think that if you have a department that’s associated with ideas that are not appealing to hedge fund managers, business people, et cetera, you might struggle to get money. That’s a real thing. I think there is also though another issue, and this is the self interest in… Of economists. And we were speaking earlier to this idea about models, and models are really helpful for making economists relevant because there’s a-
Nick Hanauer:
[Crosstalk 00:34:32] Yes.
Tom Bergin:
… beauty for models. What it allows you do. It just provides you with a multi tool that whatever the situation is, you bring in an economist. He always knows what to do about it, because he knows, or she knows, and unfortunately, maybe-
Nick Hanauer:
[Crosstalk 00:34:47] No. It’s, he’s. It’s he.
Tom Bergin:
… the problem is-
Nick Hanauer:
[crosstalk 00:34:48] Pretty much.
David Goldstein:
[crosstalk 00:34:48] It usually…
Tom Bergin:
… the problem is [inaudible 00:34:49]… I think the… Because interesting, I think some of the economists I refer to as maybe showing a different way, I would say are disproportionately women, but anyway… But so the economists comes along and they always have an answer for that. And now, the interesting thing about that and where the economists really showed themselves, their weakness in this is… Alan Krueger, as we spoke, mentioned earlier on of minimum wage fame, who was an advisor to President Obama said, models can be really useful in situations whereby you don’t have a lot of data, don’t have any data and you need to make a… Get… Give somebody advice in the short term, in the media situation.
And you can cite models… Can help you with that. The problem with so many of these economic truisms in particular, the eighth I deal with in the book, we have decades of data. You can’t actually argue that the dominant truism is supported by information because there’s so much [effect 00:35:45] to the country that shows the opposite.
David Goldstein:
Right.
Tom Bergin:
But people feel its to advance them. So why are they doing it? And the reason is because it makes them relevant. If you look at the economics, which is increasingly, fortunately being recognized, it… Where you have people like Esther Duflo and people looking at randomized trials, they’re really good at providing answers to problems, but they’re very narrow answers.
These aren’t the kind of things that help people get hired as a governmental advisor and climate change, or these other big roles that economists clearly want to be involved in helping fill. And economists are made relevant by being able to offer answers to problems, and the toolkit allows that. So, these old truism, the idea that the price sensitivity can be measured, it’s constant, and we can predict people’s behavior, that helps keep people in jobs. So, I think that’s a big-
Nick Hanauer:
[crosstalk 00:36:37] Yeah.
Tom Bergin:
… corruption-
Nick Hanauer:
[crosstalk 00:36:38] And gives them status.
Tom Bergin:
… in part to economists.
Nick Hanauer:
Yeah.
David Goldstein:
So, Tom, you call your book Free Lunch Thinking, and I’m wondering how much the success of this orthodoxy and it’s staying power comes from that story being so appealing, because everybody wants a free lunch. It’s really nice that you can… There’s no sacrifice involved. We can… If we cut taxes, it’ll actually increase tax revenue. That’s a story. We wish it worked that way, and whereas the other side has a much more complicated and not as likable theory.
Tom Bergin:
Absolutely. I mean, the world is incredibly messy. And if you look at the idea of value creation in the world, it’s incredibly complicated just to look at price and quantity. And to think that this is a simple machine where you bring in a few different units of production and you [inaudible 00:37:42] it out as a… Like it’s just some machine. It’s not like that. It’s incredibly complicated and growth in particular depends on ideas. And how do you get people to work more efficiently? And these things… And how do you get an economy to work more efficiently? And that probably will involve some regulations over to time. And they’re messy answers.
Whereas if someone says as Milton Friedman did, and obviously there’s a cue here to his book title “There’s No Such Thing as a Free Lunch”, because what I… The reality is you’re looking at Friedman’s economics and what he’s saying is, there is a free lunch, just get out of the way. Don’t… Just don’t bother trying to solve these problems. Leave it all to the market. And now everything will be magically easy. Looks to me like a friend. Yeah, like a free launch.
David Goldstein:
Yeah. So Tom, I’m going to challenge you with another piece of orthodoxy for you to be skeptical about. And that is, whether efficiency should even be our primary goal. I mean, you… We toss out that word efficiency, like it’s the be all and end all. And I think that in the COVID pandemic and the supply chain crises we’ve seen during it, we created a very efficient supply chain that ended up grinding to a halt when it got really stressed. So, I think we’ve over emphasized the-
Nick Hanauer:
[crosstalk 00:39:04] Yeah.
David Goldstein:
… benefits of efficiency.
Nick Hanauer:
Well, quoting from my favorite movie. I don’t think that word means what you think it does. It is an economic parlance, the end, all be all, but it doesn’t mean they think it means. And efficiency isn’t a measure of increasing human welfare. What it usually means is, our corporate profit’s going up and or not. That’s it. That’s what it means.
Tom Bergin:
No. I mean, I get it’s like the term product… I agree. I mean, the term, the way which economists measure productivity-
Nick Hanauer:
[Crosstalk 00:39:32] Yeah.
Tom Bergin:
… is often very circular-
Nick Hanauer:
[crosstalk 00:39:33] Just ridiculous. Yeah. Yeah.
Tom Bergin:
… but it’s… I mean, I think at the end of the day, we want to live better quality lives. I mean, sitting-
Nick Hanauer:
[Crosstalk 00:39:40] Yeah.
Tom Bergin:
… here in Europe that will frequently involve a lot more holidays.
Nick Hanauer:
[Crosstalk 00:39:44] Yeah.
Tom Bergin:
… that’s one of the things-
Nick Hanauer:
[Crosstalk 00:39:45] 100%.
Tom Bergin:
… I look at in the book. So, welfare is really important. And I think the irony is, with a lot of these ideas, that people will say, this is about making us wealthier. And even if you think that’s the most important thing, these things don’t help you get wealthier. So, I don’t think they’re defensible, no matter what you say the objective is.
Nick Hanauer:
Do you think there’s hope for change?
Tom Bergin:
I think that the… One of the big problems for economics is the incentives are against economists starting to say, hey, it’s a lot more complicated. I’m not even sure I know what that course is going to look like. So, I think that economists are they going to start teaching a fundamentally different economics to students? Are they going to start giving policymakers fundamentally different ideas?
I think the problem is, if you look at policy making over the past several years, Boris Johnson is [inaudible 00:40:44] had been talking about a Laffer curve. Obviously Donald Trump gave Laffer the Presidential Medal of Freedom. So, the whole thing is that I think that it’s difficult to be overly optimistic about the future. I think that there’ll be lots of great economics, but I’m not sure how actually influential it’ll be.
Nick Hanauer:
Yeah. Well, it’s going to take a lot of work to tear all this nonsense down. That’s for sure. So, one final question. Why do you do this work?
Tom Bergin:
I do this work because I’m really fascinated by how the world works. I’m also really fascinated with the way in which that we can believe things which are not true. I guess, as a journalist… Investigative journalist, excuse me, you’re always really trying to illustrate that and to look at these issues that are important and show people how we might live better lives and more just lives than that if we just understand what the actual facts of the situation are. Because in many cases, this particular case, for example, we see that people end up behaving in a way that’s contrary to their own interests. And even if you agree with the objective, you’ll see that this particular course of action is unlikely to get you there any quicker or likely to be less quickly than the alternative.
Nick Hanauer:
Well, Tom, thank you so much.
Tom Bergin:
Really appreciate you having me on and you… Appreciate your interest in the book.
Nick Hanauer:
You bet. Best of luck with it.
Tom Bergin:
Thanks very much, Nick. Thanks Goldie.
David Goldstein:
So Nick, I think a lot of our listeners will find the eight areas that Tom talked about familiar, because we have talked about these to various extents-
Nick Hanauer:
[crosstalk 00:42:26] Yep.
David Goldstein:
… over the course of the podcast and early on in the podcast, one of the main heuristics we started with was bad theory leads to bad policy-
Nick Hanauer:
[crosstalk 00:42:38] Right.
David Goldstein:
… and bad policy leads to bad outcomes. And what I find fascinating about Tom’s work, his book, his research is that to me, it’s kind of like fact checking. We started with the theory and said, hey, look, if you’ve got bad theory, you’re going to get bad policy. And Tom started covering the outcomes and-
Nick Hanauer:
[crosstalk 00:43:01] Yeah.
David Goldstein:
… the policy and started questioning, well, how did we get to this thing which doesn’t really work?
Nick Hanauer:
Yeah.
David Goldstein:
And worked backwards to the theory.
Nick Hanauer:
Right.
David Goldstein:
So he came at it-
Nick Hanauer:
[crosstalk 00:43:12] Ended up at the same place we did.
David Goldstein:
… and he came out in the exact… Came to the-
Nick Hanauer:
[Crosstalk 00:43:15] Yeah.
David Goldstein:
… exact same conclusions that we started from. So, I view this as confirmation. Of course, I expected somebody to find that the world works this way, but the fact that he didn’t start from the theory.
Nick Hanauer:
Yeah.
David Goldstein:
He started from the outcomes and worked backwards and found it. That tells you that something we know, we’re on the right track.
Nick Hanauer:
Yeah, for sure. Yeah. It’s a lovely book and a great primmer on what went wrong with economics over the last 40 or 50 years and why people need to push back against this orthodoxy.
Speaker 3:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer. Follow our writing on Medium at Civic Skunk Works and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening. See you next week.