How Zombie Ideas create fragile economies
|Zombie ideas are as destructive as terrorists|
I have always found some economic hypotheses a paradox. They appear to belie the conclusions of the economic theories and their benefits, if any, appear transitory.
Among the hypotheses are; higher minimum wages are a sure killer of jobs; tax cuts for the rich pay for themselves; the private sector is more efficient than the public sector; market efficiency is the best determinant of the true value of a factor of production.
There is no scientific evidence to back these beautiful sounding hypotheses. For instance, the hypothesis that higher minimum wages are a sure job killer is not persuasive when juxtaposed with factors that drive economic growth.
Wealth creation is a function of demand: The higher the demand, the higher the production of goods and services, the higher profits and therefore, wealth. The theory of demand teaches us that demand is effective when backed by money to buy the goods or services. So demand, call it consumption, is a function of income. Wages, the price of labor, is income to the worker and the worker is a consumer. The implication here is; higher labor income increases demand for goods and services. So how do higher wages kill jobs? They should ideally, expand the market for local goods.
Another thesis is tax cuts for the rich “will always pay themselves” through the trickle-down effect. One of the cardinal principles of a progressive tax regime is equity. That is the broadest shoulders bear the greatest burden. Taxes are an income to the government to fund its operations including acquiring public goods such as roads, hospitals, schools, security, name them. Payment of taxes enables the government to fund these acquisitions and operations. Tax cuts deny governments income but do not necessarily lead to savings and investment. If anything, they increase private consumption or speculative investment as in Stocks. They do nothing about brick and mortar activities that create jobs and public goods. So how does it trickle- down to the poor?
After the privatization of public enterprises frenzy in the 1980s and 1990s, the trend is reversing with some of the previously privatized public enterprises being re-nationalized. What went wrong?
On higher minimum wage as a sure job killer thesis, Paul Krugman and his colleagues said that employers are just seeking higher profits and eating workers’ wages. The elite, backed by think-tanks they finance, craft these ideas to lobby for weak trade unions, and weaken government controls on the private sector. These ideas mask corporate greed sugar-coated-in economic jargon and are designed to intimidate policymakers, consumers, and workers to accept exploitation.
Are Stock Markets, a barometer for an economy’s health? This is a Zombie idea. In the US, the Stock Markets are high amid a general economic downturn due to COVId-19 induced lockdown. Investors buy shares in order to gain from a firm’s profit. This year, profits will take a hit and there could be no dividends paid. Logic dictates therefore that the stock market moves in tandem with the general economic trends. But in the US, the stock markets buck this trend. Why?
This is why; a lot of money fled emerging and developing economies into the US in the early days of virus-induced lockdowns, and is now looking for outlets. Given the low-interest rates in the US, the only profitable outlet is the stock market, where debt paper is traded. It is something of a gambler's den.
Professor Joseph Stigliz, another Nobel price Laureate, writing in the IMF journal, Finance and Development echo similar sentiments. In calling for a rewrite of the rules for the new economy, Stigliz states, “the economy is rife with Market power and exploitation.” Adding that “Weakening constraints on corporate power; minimizing the bargaining power of workers; and eroding rules governing the exploitation of consumers, borrowers, students, and workers have all worked together to create a poorer-performing economy marked by greater rent-seeking and greater inequality.”
Ann Florin, an Epidemiologist, agrees. In an IMF podcast, on the impact of COVID-19 on the international economy, says “the balance between the state and market has been lost. Governments do not provide a perfect counter-weight to the private sector.” She blames these outcomes “on deliberate choice.”
These choices, she says, have “stripped economies of resilience disparaging it as redundancy as the private sector prioritized efficiency and maximization of profits.” The result is fragile economies where the firms, households, and governments are heavily indebted and cannot withstand crises. Yet the advocates of the Zombies cannot provide any feasible economic theories to come out of the current crisis. In fact, says Paul Krugman, “they (the Zombies) could hinder economic recovery.” Like the Faith Healers in the spiritual world who never concocted a cure for COVID-19, although early on, they promised one, advocates of Zombie ideas are quiet.
Despite their beauty, Zombie ideas plunged the world into a recession in 2008 when the financial market collapsed. The 2001 IT bubble burst was the first warning shot against zombie ideas. Regardless of their destruction, Zombie ideas keep “shambling along.” The idea of frugality rejects “public support for the unemployed, yet the same ideas shifted responsibility for workers’ welfare to the individual away from institutions. In the face of the redundancies caused by COVID-19 imposed closures, some form of financial
support for the unemployed and weak firms is necessary.
Asked why these ideas persist, Krugman says, “It is difficult for someone to understand something when their paycheck depends on not understanding it.” It is pure propaganda, he says by institutions funded by the elite.
In the current economic situation, governments are likely to become the investor and insurer of the last resort. That means huge public expenditure and public debt will grow.