iOS app Android app More

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors
Ian Fletcher

Ian Fletcher

Posted: September 16, 2010 07:45 PM

Economics vs. Fakeonomics

What's Your Reaction:

We skeptics of free trade are used to being told, "You don't understand economics." In fact, one major reason I wrote the book Free Trade Doesn't Work was simply to expose, once and for all, that there do exist extremely serious and intellectually reputable arguments, within the confines of accepted mainstream economics, which question free trade. And indeed they exist.

But I've noticed something. We skeptics are often not really struggling against real economics at all. When I pick up a copy of the Wall Street Journal, or Forbes, or the New York Times, or turn on Fox TV or MSNBC, or read papers issued by the libertarian Cato Institute or the Peterson Institute for International Economics, I don't even find economic arguments. I find a mischievous substitute for economics we can call "fakeonomics."

What is fakeonomics? It sounds like economics to the uninitiated. It uses the same language, addresses the same issues and fills the same logical hole in the national policy discourse. Most people can't tell the difference. But fakeonomics is not the real thing.

How is fakeonomics fake? It tells a story that goes something like this...

• Free markets are always right, always and everywhere.

• Anyone who doesn't believe this is stupid. Smart people not only understand that free markets are best, they like free markets, because free markets mean opportunities to get rich.

• Or maybe they're corrupt. The opposite of free markets is government. Government is always incompetent. It never does anything right. Ever.

• Or maybe they're evil. Anyone who doesn't believe in perfectly free markets is a Marxist wannabe or a loser jealous of more-successful people.

• Free trade is just free markets applied internationally.

• Therefore all smart, good, successful people must believe in free trade.

Unfortunately, fakeonomics is at best a crude parody of economics. It is often larded with a thick layer of moral hectoring, courtesy of a certain variety of the American Right which seems to think that economics is its exclusive property, a stick given it by God to beat liberals with. There is even a whole class of people, known as "libertarians" who elevate fakeonomics to the level of an all-encompassing moral ideology. (Their fundamentalist sect is the old Ayn Rand cult, who call themselves "objectivists.")

So let's be clear about one thing: real economics does not support the idea that 100 percent pure free markets are best. Not domestically, not internationally. That's why the U.S. has, like every other developed nation, a mixed economy, with government amounting to about 35 percent (pre-2008; it's spiked since then) of our GDP and various laws, from child labor laws to environmental laws and the SEC, regulating much of the rest. It's easy to fulminate against this fact in beautiful after-dinner speeches about economic liberty, but the reality is that when in office, even conservative Republicans grasp the necessity of most of these policies -- whatever adjustments on the margin they may make.

Surveys indeed show that about 90 percent of economists support free trade. But, and this is crucial, only about 70 percent of them support it without reservation. Economists are, in fact, well aware of a number of problems with free trade, like:

• Free trade for America is one-sided, with most major foreign economies practicing managed trade of one kind or another.

• When free trade involves trade deficits, it may be optimal in the short run but is unsustainable over longer time horizons.

• Even if it increases GDP, it has even stronger effects on income distribution and can thus harm many, or even most, of the people in the economy.

• The adjustment costs of declining industries -- from unemployment checks to the rubble of Detroit -- are huge and ongoing.

• It brings us cheap goods today at the price of building up economic rivals who will take markets away from us tomorrow.

• It helps dirty industries move from environmentally-strict jurisdictions to environmentally-lax ones.

• Even if it is efficient in the short run, efficiency per se has little to do with long-term economic growth.

• The theory of comparative advantage -- which supposedly proves that free trade guarantees win-win outcomes -- doesn't hold in the presence of capital mobility between nations.

None of the above is especially new information, though these points are legitimately controversial like anything else. My point here is simply that economics does not grant free trade the blank check many people seem to think it does. Nonetheless, the juggernaut of fakeonomics, which doesn't understand this, rolls on.

The really scary thing about fakeonomics is that it is not just a vulgar version of economics, served up to amuse the audience of Bill O'Reilly's TV show. It is also believed in by people who should know better. Like it or not, fakeonomics is mistaken for real thinking by a disturbingly large number of people with top MBAs, graduate degrees in serious fields, congressional staffers, et cetera. (I know; my job obliges me to talk to these people all the time, and they tell me so.) Perhaps it's just laziness on their part, but people who should be taking their bearings from more serious sources -- people whose careers depend upon the idea that they have genuine expertise -- are drawing their ideas from fakeonomics. These are people who pride themselves on understanding the most sophisticated ideas when it comes to, say, corporate finance, but here they are, relying upon intellectual constructs of a chat-show level of sophistication.

Make no mistake: Fakeonomics matters. For one thing, it is the implied theoretical model of current U.S. trade policy. That is to say, if one looks at American trade policy and asks what picture of the economy one would have to hold in order to believe that these policies make sense, fakeonomics is that picture. So whatever sophisticated version of real economics someone like ex-Harvard professor Larry Summers may have tucked away in his head somewhere, when he acts as economic adviser to President Obama, fakeonomics is what he dishes out.

One can, of course, gin up rationalizations bridging the gap between real economics and fakeonomics on any given issue at will. So there's no point confronting people like Larry Summers with the gap between, say, their own theoretical writings and the policies they support in office. If they weren't bright enough to pull off a piece of minor casuistry like that, they wouldn't be where they are in the first place.

Why are the nominally sophisticated so misguided? Because fakeonomics tells them what they want to hear. At bottom, fakeonomics is the ultimate free lunch story. Its seductive message is that we can consume all we want, right now, and never worry about the consequences. "Free" trade translates as "don't worry about" trade. The market forgives all sins.

Unfortunately for this happy fantasy, fakeonomics can only maintain this fantasy vision by systematically ignoring half of economic reality. It is, for one thing, almost exclusively focused on consumption, ignoring the production side of the economy. So it has plenty to say about how cheap imports provide consumers lower prices, but blithely airbrushes out of the picture the way imports deplete our industrial base. Of course, in the long run, nobody can afford imports, however cheap, without the ability to produce something to exchange for them. But that, of course, is the long run, and fakeonomics is about instant gratification and letting the chickens come home to roost in the next administration.

What does all this mean? It means that there are really two targets, for those of us who would criticize free trade. There is economics per se, which tends to be pro-free trade, but is actually surprisingly well aware of the counterarguments and becoming slowly but inexorably more skeptical. And there is fakeonomics, which is dogmatically pro-free trade, proactively ignorant of the counterarguments, and determined to stick its head in the sand. Shooting at the first target does almost nothing, unfortunately, to hit the latter, which is arguably more important, at least in the short run, for determining real-world policy outcomes. As a result, the first question one must ask when querying some piece of economic reasoning offered as justification for policy is this: is it real?

Or is it fakeonomics?

Ian Fletcher is the author of the Free Trade Doesn't Work: What Should Replace It and Why (USBIC, 2010, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.