Over the years, academic economists have received a lot of criticism for relying on unrealistic models, and, on occasion, I have been among the critics. One of the first pieces that I wrote for The New Yorker, back in 1996, was titled “The Decline of Economics.” After the global financial crisis of 2008, I published a wonky book that placed some of the blame on policymakers’ uncritical embrace of free-market theories. A decade on, there is still plenty to critique about the economics profession, but some of its members, particularly younger ones, have responded to the criticism and to the changing reality that they see around them.
Today the “typical course in microeconomics spends more time on market failures and how to fix them than on the magic of competitive markets,” Suresh Naidu, of Columbia; Dani Rodrik, of Harvard; and Gabriel Zucman, of the University of California, Berkeley, wrote in the Boston Review earlier this year. “The typical macroeconomics course focuses on how governments can solve problems of unemployment, inflation, and instability rather than on the ‘classical’ model where the economy is self-adjusting.” At the research level, meanwhile, “distributional considerations are making a comeback. And economists have been playing an important role in studying the growing concentration of wealth, the costs of climate change, the concentration of important markets, the stagnation of income for the working class, and changing patterns of social mobility.”
Especially for non-economists, that is a lot to take in. Fortunately, Heather Boushey, the executive director and chief economist at the Washington Center for Equitable Growth, a grant-giving organization that was founded in 2013, has provided a timely and very useful guide to some of the new developments. In her book “Unbound: How Inequality Constricts Our Economy and What We Can Do About It,” Boushey assimilates a great deal of recent economic research and argues that it amounts to a paradigm shift. Referring to Thomas Kuhn’s book “The Structure of Scientific Revolutions,” from 1962, she writes, “Scientific knowledge isn’t accessible as absolute truth: it develops only through the consensus of scholars in a particular field, whose work is upended by scientific discoveries that challenge existing frameworks and forced the paradigm to shift. New data-driven discoveries are causing just such a revolution in economics today.”
The key term in that passage is “data-driven.” Twenty years ago, the biggest stars in economics were theorists, such as Robert Lucas, Paul Krugman, and Joseph Stiglitz. Today’s stars tend to be empiricists known for finding new data sets and applying new techniques to analyze data. They include Harvard’s Raj Chetty; Thomas Piketty, of the Paris School of Economics; Berkeley’s Emmanuel Saez; and the three economists who were awarded this year’s Nobel Prize, for their pioneering use of randomized field trials in assessing efforts to fight global poverty—M.I.T.’s Esther Duflo and Abhijit Banerjee and Harvard’s Michael Kremer. Boushey refers frequently to the work of Chetty and Saez, but one of her book’s merits is that it shows how the trend toward empiricism encompasses many different subfields and researchers. (The book’s footnotes, which reference hundreds of different studies, are a treasure trove.) Another encouraging development Boushey highlights is that women, such as Duflo and Princeton’s Janet Currie, have produced some of the most influential recent research in economics, a subject long dominated by men.
As the subtitle of her book indicates, Boushey’s main theme is that inequality of various kinds impedes economic development at the individual and aggregate levels: “A rising tide can’t lift all boats when some can’t even get launched and others, pushed off course and deprived of navigation tools, founder on the rocks.” “Unbound” goes deeper, however, than merely recounting the now well-known facts that income and wealth have become increasingly concentrated and that intergenerational mobility has stagnated or fallen. Over-all statistics, such as percentile-income shares, don’t account for the reality that people are divided along many different lines, including sex, race, and geography. In a section on rising wealth inequality, Boushey cites the work of Lena Edlund and Wojciech Kopczuk, both at Columbia, which shows that “from the late 1960s to the 2000s, the share of women in the top 0.1 percent and top 0.01 percent of wealth holders in the United States has decreased from around half to approximately one third.” Considering that female participation in the labor force increased sharply over this period, this is a pretty stunning finding, and it confirms what we already know intuitively: the very top ranks of American business, where huge rewards are handed out as a matter of course, remain overwhelmingly male.
Race is another historical fault line that is still gaping. Boushey points to a survey by William Darity, of Duke, and Ohio State’s Darrick Hamilton which showed that in Los Angeles “black and Mexican households collectively hold 1 percent of what white households do.” She also mentions a study by Marianne Bertrand, of the University of Chicago, and Sendhil Mullainathan, of M.I.T., who responded to help-wanted ads by sending in résumés from people with “white sounding” names and “black sounding” names. The outcome of this experiment: “applications submitted under black-sounding names received 50 percent fewer invitations to interview than those with white names.”
For decades, economists emphasized investments in human capital, usually measured in terms of years of schooling, as the main determinant of a person’s economic success. Focussing on the research that Currie and others have carried out, Boushey explains that there is now convincing evidence that early-childhood experiences—including birth weight, nutrition, parenting, and access to child care—also play key roles in determining later outcomes. She writes, “The message of Currie’s work is if we want to remove the obstructions to children’s development that inequality causes, we need to focus on families with the youngest children—and even families as they plan to have children—particularly families of color.” A frequent objection to early-childhood interventions, such as day-care programs, is that the costs are significant. But so are the long-term benefits, in terms of higher incomes, better health outcomes, and fewer social pathologies, the new research suggests. According to one study that Boushey specifies, a national, high-quality child-care program would generate 81.6 billion dollars in net benefits in thirty-five years.
In the wider economy, rising inequality has been accompanied by slower G.D.P. growth. A central question is which way the causation goes, and Boushey lays out some of the arguments for inequality stifling growth. Keynes pointed out that rich people save more out of each dollar than other people do, which in unequal societies can lead to a glut of saving and lower over-all demand. This may well be an issue now. Boushey cites a 2004 research paper by Karen Dynan, of Harvard, Jonathan Skinner, of Dartmouth, and Stephen Zeldes, of Columbia, which found that households in the top one per cent of income distribution save fifty-one per cent of their income, whereas households in the bottom fifth save one per cent, or virtually nothing.
Another, more indirect argument is that rising inequality distorts the political process, which in turn hampers growth. For example, wealthy interests use their political heft to promote tax cuts that denude the tax base. In time, this can lead to lower spending on public goods that promote long-term development, such as education and infrastructure. The same wealthy interests may also push for policies that undermine antitrust enforcement, which can enable firms to monopolize their markets and raise their profit margins without making the innovative investments that boost growth.
Boushey provides a wealth of evidence that rising inequality is having precisely these types of effects. Despite record profits, the proportion of G.D.P. that businesses invest in new equipment and machinery is running below its historical average. And, in many parts of the economy—not just the technology sector—a few giant companies have acquired dominant positions. Boushey points to the work of Harvard Business School’s Leemore Dafny and her colleagues, which shows how mergers between health insurers and hospital chains led to higher prices for the insured and for patients. Generally speaking, Americans don’t want corporate mergers or higher prices, of course. But the political and regulatory systems often respond to money and influence rather than to the desires of ordinary voters. Boushey references the political scientists Martin Gilens, of Princeton, and Benjamin Page, of Northwestern, who examined almost eighteen hundred different political issues and found that “policies with low support among the rich became law only about 18 percent of the time, whereas policies with high support among the rich ended up as law about 45 percent of the time.”
Boushey, who served as a senior economic adviser to the Clinton campaign in 2016, doesn’t get into the 2020 campaign. So far, however, Elizabeth Warren and Bernie Sanders are the candidates who have addressed rising inequality and its consequences most directly. Both have proposed taxes on wealth. Warren has also proposed universal child care and a tougher antitrust policy to break up monopolies and prevent them from emerging. This policy agenda has been directly influenced by the new economic research; for example, Saez and Zucman advised Warren on her wealth tax and provided an estimate of the revenues it could generate.
In concluding her account, Boushey returns to the argument that a paradigm shift is taking place: “Behind the scenes, in academic conferences and journals, a new consensus is emerging, one that explains how economic power translates into social and political power, and, in turn, affects economic outcomes.” One way to think about this, perhaps, is that at least some economists are returning to their discipline’s nineteenth-century roots, when it was known as political economy. During the twentieth century, a determined effort was made to reconstruct economics on the basis of rationality and scientific methods, with all value judgments excised. All too often, however, this project translated into a naïve faith in the market, and a deliberate neglect of the underlying factors that bias economic outcomes, such as history, geography, class, culture, race, gender, and access to political power. In many areas of the subject, economists are now trying to reintegrate these factors into the analysis. Reading “Unbound” is a good way to get an update on their progress.