Top-down systems bottoms up

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Thomas Sargent (CP)

Henry Ford, the car czar, was expounding in the 1930s that governments should concentrate not on workers' wages, but on capitalists who invested in assembly lines.

"But who's going to buy your cars?" asked Walter Reuther, the famous American labour leader.

It's an old argument: Should government economic policies favour the owners or the workers? And it's part of the background to the Occupy protests that started near Wall Street and have spread to cities around the world, including Winnipeg.

Top-down -- also called trickle-down or supply-side theories -- became popular in the U.S. during the time of President Ronald Reagan. And there's some truth in them. People who invest and set up the means of production are important.

But some economists pushed the idea too far. They wanted to make economics a mathematical science. So they created economic models. In model building, you need some constants.

They picked two: People are rational and always make decisions that benefit them, and free markets do what's necessary for the economy and don't need regulation.

Both are wrong. Behavioural economists, a new branch of the dismal science, say people are emotional and sometimes get carried away. We saw that in the U.S. in the bubbles with tech stocks, housing and sub-prime mortgages.

Reagan deregulated some markets, but the process continued under both Democratic and Republican presidents. As a result, greedy, improvident investment bankers twisted the U.S. market and we ended up in the financial recession of 2008-09, which affected the world.

Now here's what bugs the young people sitting in the cold in Zuccotti Park: The U.S. government pumped in billions of taxpayer money to prevent Wall Street from imploding. But many of the Wall Street wolves are back at their stands doing mostly what they did before the bubble burst and making more money, thanks to the taxpayer. And few of them have been convicted of anything and few laws have been changed.

Main Street, which bailed out Wall Street, is not doing well. The U.S. Bureau of Labour Statistics in August said only 48.8 per cent of Americans between the ages of 16 and 24 were employed. A survey by the Wall Street Journal says Americans' incomes dropped in 2000 and are not expected to make up the lost ground before 2021. At one time, Americans could borrow to get what they wanted, No longer. Many of them are deeply in debt.

The problem with the economic-model builders was identified by French economics students in the Autisme economie movement in 2000. They wondered why politicians and economists were not talking about life as they knew it. The economists, the students concluded, were autistic -- they lived in their imaginary world and didn't know about and couldn't communicate with the real world around them.

Investment bankers say they are only following the ideas of Adam Smith, who wrote The Wealth of Nations in 1776. In the one page of this tome that became famous, Smith describes markets being helped by an "invisible hand." But, he added, the markets should be surrounded and guided by a moral society. In his new book, The Price of Civilization, economist Jeffrey Sachs says a moral meltdown is responsible for most of America's political and economic woes.

The students in the Occupy movement put it more simply: "I'm a university graduate, and I'm getting sick of existing on beans and rice" said one.

Autism has also affected politics. You can see that in recent elections in Manitoba and Ontario. The top-down politicians came up with a plethora of picayune policies that confused voters, who felt they had not been consulted and couldn't see how the policies related to them. As a result, voter turnouts were extremely low. It's even worse in the EU and U.S., where politicians can't resolve major issues that could lead to another recession.

In reaction to the inaction of their leaders, the students in New York say they have no leaders. Everything is decided by consensus. It's an awkward system, but they manage to make some progress because of their skill with the social media.

The Occupy movement is angry about the income gap between the one per cent of society and the 99 per cent -- a problem that Canada shares, although the recession did clip the earnings of our richest citizens.

The top one per cent took home 11 per cent of total income in 2009, Statistics Canada says, a decline from the 12 per cent they got in 2008. A major Canadian problem is that one-third of our jobs are "non-standard" -- they come with little job security, few benefits and often low pay.

Another problem, says the Canadian Centre for Policy Alternatives in B.C., is some secretaries pay taxes at a higher rate than their bosses. The reason is that some provinces have moved away from income taxes, which are mildy progressive, and are collecting more money from regressive taxes.

A leading advocate of economics as a branch of mathematics, Thomas Sargent, 68, of New York University, was this month awarded the Nobel Prize in Economics for 2011. He hoped his models had not played a role in "wrecking the world."

A nice piece of academic humour. I hope the professor doesn't mind if I don't laugh.

Tom Ford is editor of The Issues Network.

Republished from the Winnipeg Free Press print edition October 25, 2011 A10