Economics attracts more than its share of a particular kind of idea: the ones that are fundamentally unsound, but make up for it by sounding good. Whether that says something about economics or about economists is an unresolved question, but either way the ideas keep popping up.
A presidential election year provides an ideal weather pattern for these ideas to flourish. Exhausted candidates and campaign managers, having run out of new ideas themselves, latch onto anything that sounds good and seems likely to gain supporters.
As you might expect, these ideas do not come packaged with consumer warning labels. In fact, many of these ideas sound logical and seem so obvious we might wonder why we’re not doing it already, whatever it is.
It is especially interesting that many of the best-sounding ideas founder in the sea that separates the land of microeconomics from the territory of macroeconomics. It is a body of water where the theories of many economists met their fate, also.
The temptation is understandable. The macro-economy, where things like Gross Domestic Product (GDP), Investment, and National Income hang out, seems like something we could reshape into anything we wish.
The Federal Reserve Bank of New York has responsibility for the central bank’s open market operations and has a vital interest in monitoring the economic situation. It has developed something it calls its “Nowcast” which portrays in graphic form the latest data and trajectories of all of the key elements in our nation’s economy, such as production, sales, inventories, and employment.
When viewed as a total picture, it looks like a macro-economy mission control, and our minds need no prompting to make the jump from what Nowcast is to a control system where we would see a problem and could throw switches or issue orders to bring the economy back on track to full capacity.
Unfortunately, in our system the mission is in the macro-economy and the control is the micro-economy, individuals and businesses, where all of the economic decisions are made.
An example of the gap between the macro and micro economy is embodied in one of the ideas that has popped up in this election year: gender parity would add $4.3 trillion to the U.S. economy.
What is often left out of the idea is that it will take 10 years to add that to the economy, but since Congress and Presidents have lent a kind of legitimacy to that sort of time-compression when announcing their budget cut “savings,” we should give advocates of the gender parity idea a pass on that point.
The idea is given its clearest description and numerical support in a report by McKinsey &Co. entitled, “The power of parity: Advancing women’s equality in the United States.” Embedded in the report, though, is the same old problem of fitting macro-economic goals into a micro-economic model.
One example of this is the amount of private investment required. As the report notes, “Achieving this potential would require about $475 billion more capital investment in 2025 to help create the 6.4 million jobs needed to secure that boost to GDP and improve productivity.”
The decision-makers in the economy, though, think along different lines. No individual or business makes decisions in order to increase GDP. They make economic decisions about investment, hiring, and spending based on furthering their own short and long term interests. Only the government, perhaps prompted by election or re-election forces, makes decisions based on their expected impact on GDP.
The McKinsey report notes that the largest single GDP growth effect, 40 percent will be due to “higher female labor-force participation,” essentially increasing the employment level by adding women without subtracting men. We’ve done it before, of course, but in the extended post-war prosperity of the mid-20th century women were hired to fill open jobs and do needed work. With few exceptions, businesses do not “create” jobs. That is the government’s idea of how things work — again, mixing up micro data relationships with micro-economic decision-making to create an economic policy stew.
Businesses invest when they believe there is a profit to be gained. It doesn’t seem likely that they would use the stockholders’ money to hire people, of any gender, to stand around waiting for an increased demand for the company’s product or service. Our slow economic growth could use a boost in investment but a foolish one will set us back, not move us forward.
The biggest advantage the gender equality idea has is that it is something we should do — for fairness reasons, though, not because of projected benefits based on fractured economics. The biggest obstacle is the conflict between the microeconomic supply-demand system which determines job structure as well as wages, and the macroeconomic goals of parity and equity.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.
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