Economics and Policy in an Election Year: A lecture by Associate Professor Akila Weerapana

 

On Monday, June 20th, Akila Weerapana, Associate Professor of Economics at Wellesley, joined us for an evening discussion on Economics and Policy in an Election Year. This event took place at Eight Club Moorgate. The Wellesley Club UK also hosted a small dinner with Associate Professor Weerapana after the lecture.

Professor Weerapana's published work is in the areas of international economics, the economics of conflict, and the political economy. Since this is an election year, we thought this topic would be particularly apt. (Please visit http://www.wellesley.edu/economics/faculty/weerapanaa#xuWQisklXJSUD0iZ.97) for more on Professor Weerapana's education, career, and published papers.)

Professor Weerapana started his lecture by noting that there were a few familiar faces among the alums in the room: Sarah Cussen [class of 2002], took the very first class he taught at Wellesley College, and Simone Liano [class of 2017] took the last class he taught before the summer. The class was International Finance, and he recalled that in both classes — 17 years apart — a key topic was "will the euro survive?"

He also told us, "it's always fun to do these talks. ... But you haven't really arrived until you reach what I call the Chip Case level. Which is when your invitations start coming from outside the US. So when this invitation arrived my first response was YES! I've made it. Seventeen years after I arrived at Wellesley I have finally, finally, finally made it."

He then turned to the substance of this lecture, which addressed four main areas:

  • What are the key economic issues that will come up in the Presidential Election?
  • What are the candidates’ positions on these key issues?
  • Some economics to help us think about these issues.
  • What is the policy outlook for the economy after the election?

Professor Weerapana started by providing some important context: "this election is happening eight years after the most devastating post-war financial crisis. In 2008, when some of you graduated, it was a terrifying economy that you graduated into. We in economics talk about recessions in the following terms: we think about the economy growing over time, and think of recessions being things that will take you off the growth path. Typical economic language talks about V-shaped recessions, which have sharp declines and sharp recoveries, or U-shaped recessions, which are slow declines and slow recoveries. What was striking about 2008 is it's a shape that we haven't really seen before." Although the economy is growing again, it's "growing parallel to where the economy would have been growing if it had continued following the pre-crisis growth." He illustrated the point with the chart below.

The Lost Half-Decade
 


 

He noted that compared with 2008, we should be optimistic about where the economy is now:
 

  • Unemployment is down from 10% to 4%.
  • We had extreme uncertainty about the automotive and banking industries, but we've now removed many of those doubts.
  • We had budget deficits and debts that spiraled we've stabilized (but not reduced) those.
  • We had a health care system that was extremely dysfunctional, now the uninsurance rate has fallen dramatically.

However, most people aren't comparing where we are now with where we were in the depths of the recession. They're trying to understand why we're not back on the original growth path. Or as Donald Trump would say, what is it going to take to Make America Great Again?

And that's the background on which the debate is happening. Despite the economic recovery, people aren't optimistic. People are worried. Professor Weerpana believes their concerns boil down to two words: inequality and insecurity.

Inequality in the sense that many of the gains haven't been distributed evenly. Some people have done very well in the last seven or eight years, but some people have not seen that much improvement, or any improvement in their lives.

And insecurity: the 2008/9 crisis highlighted the fact that things can change very quickly and that some may not be able to get back on their feet again for a while. Even people who have found jobs are feeling extremely vulnerable; they believe those jobs could easily go disappear.

Those two themes are going to dominate much of the economic discussion.

And within those themes are four issues which Professor Weerapana believes will be the key economic talking points for the election.

  • International trade.
  • Immigration.
  • The future of the American worker. "I initially had the future of the blue-collar American worker, because that is the current concern, but I think before long it's going to be the concern of not just blue-collar workers but also white-collar workers."
  • Restoring the growth trend of the US economy.

These are the four big issues around which the US presidential election is going to revolve. They're not necessarily the four most important economic issues; they are the four the two candidates are going to talk about the most.

Professor Weerapana then went into detail on the two candidates' positions on these four issues, and the differences and similarities of those positions.

For Donald Trump they are:

  • International trade: China’s days of currency manipulation and cheating are over. We will cut a better deal with China that helps American businesses and workers compete
  • Immigration: build a wall, deport, raise H1-B program wage levels, make it harder to hire foreign workers
  • These changes will restore the incomes of blue-collar workers.
  • Restore economic growth via
    • Tax cuts: 0%, 10%, 20%, 25%. No estate taxes, 15% corporate tax.
    • Health care: end Obamacare, delink insurance from employment, make insurance portable.
    • Regulation & Infrastructure: not much (other than the wall!)

For Hillary Clinton and the Democrats, they are:

  • International trade: supported TPP, now opposes TPP

            “it’s complicated”

  • Immigration: more pathways to citizenship, fewer deportations, not much about H1-B
  • American workers need stronger unions, higher minimum wages, paid family leave, earned sick days, fair schedules, and quality affordable child care.
  • Economic growth: avoid another major shock
    • Tax cuts: tax relief for middle class families, close corporate tax loopholes. Penalize short-termism using cap. gains taxes
    • Health care: defend Obamacare, Crack down on rising prescription drug prices and hold drug companies accountable
    • Regulation: more regulation on banks, high frequency traders, size-based fees
    • Infrastructure: small infrastructure bank, expand Federal infrastructure spending.

We then heard Professor Weerapana's thoughts on the four issues, to give us an economic perspective on the election.

"Let's start with trade. That's really the most interesting one intellectually. It's one that .. you have professor [David] Lindauer who when he teaches his international trade classes talks about the importance of free trade. And if you see him these days he's is in a funk. He is struggling, because he feels like, I am telling my students this, I'm teaching them about why free trade is so important, but everything they read in the newspaper tells them free trade is bad.' So, what's going on here?"

He noted that trade expands our consumption. It allows us to specialize in something and then trade it for something else, which means we expand the possibilities of what we can consume. This is true for us as individuals and as countries. If we try to do everything ourselves we won't do as well as if we specialize in some things and trade for others.

"For a country like the US, an expansion of trade creates clear winners and clear losers. Who wins? High-skilled workers and owners of capital. Who loses? Relatively low-skilled workers. ... The other thing trade has shown us is that when you open up a country to trade, it's not just about what's happening to the country, it's not just what's happening to industry, but it's also about what's happening to firms within industry. The most productive firms expand and flourish and the least productive firms shut down."

Professor Weerapana noted that trade is making the lives of blue-collar unskilled American workers worse: "Economists don't dispute that. ... Trade is still good because the winners win more than the losers lose. The problem is that the winners are a completely different group than the losers. So what you have to have within a country is some effective way of redistributing those gains from trade to compensate the people are losing."

Moving on to immigration, he started by saying he has some bias: "I came over to the US as an immigrant and a lot of my students come from all over the world to study in the US and I think particularly in the US, a country that owes its existence to immigration, it's crazy to think that immigration is hurting the country."

He pointed out that a great deal of economic research has been done, "and I have not yet found anything convincing that says immigration plays a significant negative role in driving down wages in the US. ... In the high-skilled area I think that the US should be much more willing to accommodate and keep these international students. Many are majoring in science and tech, in STEM fields, and if you go back and look at who are the people starting these companies in Silicon Valley, we're going to be depriving ourselves of many many new companies."

On the subject of blue-collar workers, he considered it important to be aware of "a hidden side of this issue, which is that in the US the system is such that when the factory goes away in that small town in Ohio, it destroys not only the livelihood of the factory worker, it destroys the livelihood of the next generation. Because the schools are funded with local taxes. And so when the jobs go away and the tax revenues go away, the schools start shutting down. When the schools start shutting down or the quality of the schools starts deteriorating, then crime starts to go up." 

He also discussed the growing use of opioids among these communities, and the related increase in mortality rates among 45- to 60-year-old white men and women in rural America. He said, "...the challenge to the American blue-collar worker is even deeper than the candidates are willing to say, which is that we're not only destroying their lives, but destroying the lives of the subsequent generation."

The fourth point: can we really get back to that growth path?

He discussed the Republicans' position that if you cut taxes, people will work harder, the economy will grow, and tax revenues will boom, as well as the view from Bernie Sanders's campaign that we should expand spending, and when we expand spending the economy is going to grow so much that we will get enough tax revenue to cover the impact of spending. However, "if you look at these projections that the parties are putting out, you don't get very optimistic. Because they are based on a lot of assumptions and most of those assumptions aren't going to be true."

Further, "you might start out having a substantive debate, but after a while it deteriorates because each party finds the people don't care about the details as much as they do about the big picture. So then you start proposing plans... [that] don't really have to be well grounded in reality."

The hope, he said, is "that when you go beyond the election, the policy will become more substantive. Everybody talks the talk, but then when you have to govern, you have to have policy." However, given that compromise is currently a four-letter world in the US, he isn't optimistic.

He took Obamacare as an example. "It's very complex. There are lots of economists on both sides ... some think it's a great idea, some not so great. But what everyone will agree on is that there's no way you can write a law as complex as that to manage something as complicated as the US healthcare system and get it right on the first go...You write a law, you find out what works, you find out what doesn't, you change the things that don't, you try to make it work better."

However, the Republicans say the first thing they're going to do is get rid of it.  And the Democrats say if you're going to get rid of it, we're going to keep it. There is no debate about what needs to be changed. It's just you can have it or you cannot have it.

He asked, "how is that going to ever change?" His view was that if Trump wins, there will certainly be change. The Republicans will have all three branches of government, and will get rid of legislation they don't like. Then in four or eight years, we'll see if the big changes work or they don't.

However, if Hillary Clinton wins, "it's almost like it doesn't really matter what Hillary Clinton believes in terms of economic policy because unless you can get the other two branches of government to agree with you ... Hillary Clinton's economic policies aren't going to matter except on the margins."

Professor Weerapana concluded by telling us, "I think we have reached a world that is a post-policy world. As an economist, as an economics teacher, we always try to teach students to think about policy, and what works, what doesn't, the costs, the benefits and how to weigh them. And then you think, why? Because when the public debate happens it's happening at such a crude level. When you see that Brexit poster about the hordes of refugees coming over, you think, 'how is that a substantive policy debate about the costs and benefits about intra-EU migration?'....

Here is the best way to end this talk in a positive way: what would an economist have told you in 2005? "Economies are booming; we haven’t had a recession in years; we got it all right."

Economists are always wrong. And it's better that they are always wrong when they are telling you that things are terrible. That's the bright side. I'm spreading gloom, so the likelihood is that I'm going to be wrong."

Despite the dark conclusion, we had a lively Q&A session after the formal talk, which carried on with a smaller group over dinner. The Club would like to thank Professor Weerapana for a truly thought-provoking lecture.