Elizabeth Warren’s plan to save us from recession isn’t based in reality – Washington Examiner

Have you heard the news? Presidential candidate Elizabeth Warren has a plan. No, not that plan, nor that one, but another plan: this one. She says the U.S. is on the verge of a terrible recession, one which she has a plan to beat. So far so normal for a politician on the stump, sans moi le deluge — without me, the end of the world. There is a slight problem here though, a problem with her plan: Any plan to improve the country has to start from where we are, from some sort of base in our actual and extant reality. Warren’s plan is not based in reality.

For example, we are told that household debt in the U.S. is even higher than it was in 2008, just before that last flood. This means that we’ve got to forgive those student debts, really get a grip on auto loans, and force wages up, according to Warren. It is true that debt is higher, the Federal Reserve tells us so. It’s $13.5 trillion now, up from $12.7 trillion. Horrors!

First we’ve got to introduce the Wise Solon to the concept of “inflation.” These are nominal numbers, not real — the economists’ jargon for before adjusting for inflation and afterwards. Plug that 2008 number into an inflation adjustment and we get about $14.8 trillion. Debt levels are below where they were.

But that’s not enough of course. Debt is worrisome only as a portion of income, not as a number in itself. Owing $1,000 when you’re on $5,000 a month isn’t a problem, owing the same sum when you’re earning minimum wage could well be. By definition, all GDP is an income to someone and GDP has risen from $14.8 trillion to $20.8 trillion over the last 11 years (nominal!). That means that debt as a percentage of our collective income has fallen to 65% of GDP, well below that peak of 85% and more.

Warren is either just throwing large numbers around in the hopes of scaring us, or she really doesn’t know this — which is even less of a qualification for office.

Moving away from the simple ability to do useful sums, we also have a certain theoretical problem. The senator rightly notes that manufacturing wages are now below average wages for the economy as a whole. Or, as we can also put it, below service industry wages. This leads to a demand that we should and must invest hugely in manufacturing.

Why? Why would we want to invest a lot in a sector which pays lower than average wages? This would just be making us all poorer, obviously. Think on it: Fast food workers make less than accountants, so therefore we must invest in burger joints not financial management? No, of course not, we want to invest in the industries that pay the higher incomes to the workers, on the sensible grounds that we think it a good idea that people get higher incomes. Investing in manufacturing, given those lower wages, thus makes us all poorer — both by gaining more lower-wage jobs and also by losing the higher incomes that would have been gained by more sensible policies.

By the way, the very complaint being made of free-market economics is that it’s already doing this, investing in the better-paid sectors. That’s why there’s a plan, to force the market to stop investing in nice highly paid service jobs and to spray money at impoverishing manufacturing ones. The basic insistence here is that laissez faire economics is by itself and on its own making us richer. By golly, surely this must be stopped!

Having a plan or 17 to improve the world is just great. But it does rather help if the plans start with a basis in reality. If we feed garbage in, we’re going to get garbage out. Reality is a good starting point for dreams about the future.

Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.


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