ith the holiday season upon us, the time for end of year lists is fast-approaching. To beat the rush, today I give my list of the top dead and enduring myths of 2014.
The good news is that two myths that caused great confusion over the last several years are now headed to the trash bin of history. While many prominent pundits may still repeat them to demonstrate that prominent pundits really don’t have to care about reality, everyone in the reality based community now knows them to be nonsense.
The first is the myth of the young invincibles and Obamacare. The story was that the success of Obamacare depending on getting young healthy people to sign up. Supposedly we needed the healthy young'uns to subsidize the rest of the population.
This led to endless stories about whether young people were signing up for insurance. The Obama administration made special outreach efforts to the young. In an effort to undermine the program, the right-wing group Freedom Works even sponsored Obamacare card burning rallies (there are no Obamacare cards, so they had to create them) in order to discourage young people from getting insurance.
The problem with the story is that we really didn’t need the subsidy from health young people to make the program work. While healthy young people subsidize less healthy people in the program, healthy older people subsidize them even more. The ratio of premiums of the people in the oldest age group (55-64) to the youngest is roughly three to one. And plenty of older people, just like younger people, are in good health and have low medical bills.
This means that if the age distribution of the enrollees skewed toward older people, it really didn’t matter much, as the Kaiser Family Foundation showed in a short study. It makes a much bigger difference if there is a skewing towards people in bad health.
The other big myth that got killed in 2014 was that we needed to fear deflation. This was not only silly - sorry folks there is no magic to crossing zero - it had important policy implications. The deflation scare story implied that as long as inflation was positive we didn’t have to worry.
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In fact, the problem of low inflation makes it difficult to boost the economy through monetary policy since central banks can’t have negative nominal interest rates. It also makes it harder for real wages to adjust, since workers rarely get cuts in nominal pay. This is true even at low positive inflation rates. The problem gets worse if the inflation turns negative, but that is because the inflation rate has gotten lower, not because there is any special importance to zero.
Some of us had been trying to make this point since the early days of the downturn, but the pundits and many economists who should know better kept expressing concerns about deflation. The good news in 2014 was that the IMF weighed in to point out that the problem is “lowflation,” an inflation rate that is too low.
So now it is official. We all should be very worried about the low inflation rates in the euro zone, Japan, the United States, and elsewhere. If the inflation rate falls further, that is worse news, but things don’t just become bad when the inflation rate turns negative.
Unfortunately, many of our great national myths have survived 2014. We still have the story that the financial crisis caused the Great Recession, as opposed to the collapse of the housing bubble. The point here should be straightforward. The financial sector is working again, but yet we are still far from having recovered. That’s because we have nothing to replace the demand that had been generated by the housing bubble.
This matters both to understanding policy going forward and also assigning blame. Financial crises can get complicated. The housing bubble was pretty damn simple and almost all our economists blew it.
Along the same lines, we continue to see the Second Great Depression myth. This is very important for those in policy positions because it allows them to say that no matter how bad things are, at least we avoided a Second Great Depression.
Sorry folks, we know how to get out of a depression. It’s called, “spending money.” Even if the dominos had been allowed to fall, and all the Wall Street banks collapsed, we still could have picked up the pieces and avoided a depression. And, we would be freed of the albatross of a bloated financial sector.
Then we have the twin myths of the mystery of a weak recovery and slow wage growth. Every week or two we will get an in depth story in a major news outlet asking why we still haven’t recovered from the downturn or why wages aren’t growing.
This one goes right back to the collapsed housing bubble. We need some source of demand to replace the $1 trillion or so in construction and consumption demand that we lost when the $8 trillion bubble burst.
Demand doesn’t come from heaven. It comes from consumption, investment, government spending or net exports. No one has a story as to why we should expect any of these components of demand to be higher than they currently are. Hence the only mystery is why anyone thinks there is a mystery.
And the story with wage growth is equally unmysterious. Wages will start growing when the labor market gets an awful lot tighter than it is now, given that we are still close to 7 million jobs below trend.
We should be glad that we put to death two very silly myths about the economy and economic policy in 2014. Let’s see if we can kill these other four fantasies in 2015.
This article originally appeared on TruthOut
About the Author
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. He is frequently cited in economics reporting in major media outlets, including the New York Times, Washington Post, CNN, CNBC, and National Public Radio. He writes a weekly column for the Guardian Unlimited (UK), the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting. His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News. He received his Ph.D in economics from the University of Michigan.
Getting Back to Full Employment: A Better Bargain for Working People
by Jared Bernstein and Dean Baker.
This book is a follow-up to a book written a decade ago by the authors, The Benefits of Full Employment (Economic Policy Institute, 2003). It builds on the evidence presented in that book, showing that real wage growth for workers in the bottom half of the income scale is highly dependent on the overall rate of unemployment. In the late 1990s, when the United States saw its first sustained period of low unemployment in more than a quarter century, workers at the middle and bottom of the wage distribution were able to secure substantial gains in real wages.
The End of Loser Liberalism: Making Markets Progressive
by Dean Baker.
Progressives need a fundamentally new approach to politics. They have been losing not just because conservatives have so much more money and power, but also because they have accepted the conservatives' framing of political debates. They have accepted a framing where conservatives want market outcomes whereas liberals want the government to intervene to bring about outcomes that they consider fair. This puts liberals in the position of seeming to want to tax the winners to help the losers. This "loser liberalism" is bad policy and horrible politics. Progressives would be better off fighting battles over the structure of markets so that they don't redistribute income upward. This book describes some of the key areas where progressives can focus their efforts in restructuring the market so that more income flows to the bulk of the working population rather than just a small elite.
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