David R. Henderson  

Alan Blinder's Bad Article

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Princeton economist Alan Blinder, who has often written very good work--I'm a fan, with qualifications, of his book Hard Heads, Soft Hearts and he has two excellent entries, here and here, in The Concise Encyclopedia of Economics--has written a bad article. In it, he essentially takes off his economist hat and becomes a pundit--and not a good one.

Blinder is one of the most articulate and clear defenders of free trade. So when I saw that he had written an article critical of Trump, who is awful on trade, I hoped that he would do a good job of taking apart Trump's weak case. He doesn't. He does point out that Trump's trade policies would have bad effects, but he gives no reason for why. Instead, he spends most of the piece talking about how Trump's views are at odds with those of the American public. Even if that's true--and I'm not as convinced as Blinder is about that--so what? What if the American public is wrong on many of these issues? Blinder thinks they're wrong on trade. What else might they be wrong on?

But instead of doing any real economic analysis--and Blinder has shown in the past that he can do so beautifully in a short article--he writes as if he's not even an economist. Here's one of the items that stood out:

Labor standards: Trump's choice for Secretary of Labor, Andrew Puzder, is a CEO in the fast-food industry. Never mind that he uses crass sexual imagery to sell hamburgers. What's more germane is that he prefers robots to human workers, doesn't want to raise the minimum wage, and opposes the Department of Labor's attempt to raise the salary level below which companies must pay extra for overtime.

The public could not disagree with him more. Raising the minimum wage has been winning in polls consistently for decades, and by wide margins - generally even among Republicans.


Yes, it has been winning. I bet that if Alan surveyed a bunch of Princeton students coming into their first economics class, he would find that they support the minimum wage. Would he then say, "Ok, then, we've got that one solved; let's raise the minimum wage." Or would he point out that the wage for a worker tends to come close to the value of what he produces? Would he then go on to point out that a higher minimum wage doesn't magically make low-skilled people more skilled? Would he, finally, show his students a supply and demand curve and then show them that some of the people whom minimum wage supporters want to help with a higher minimum wage will end up with a zero wage? I hope so. The Alan Blinder whom I met in November 1975, who gave me some tips about my career, would have done so.

Also, Alan Blinder is a very smart guy. So it's shocking that he doesn't see the irony in this sentence segment in his own article:

What's more germane is that he [Puzder] prefers robots to human workers, doesn't want to raise the minimum wage,

Does Alan not see any connection between those two things? Does he not see that the higher the minimum wage, the more businessmen will start to prefer robots to human workers. It's called substitution. In any introductory microeconomics class, we talk about how people respond to incentives. Make one option more expensive, and you give people an incentive to switch to another option. Blinder, in this sentence segment above, has actually, and, apparently, unwittingly, said why the U.S. government, if it wants people not to be replaced by increasingly sophisticated robots, should favor cutting or even abolishing the minimum wage.

Like the late Vince Lombardi, I wonder.


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COMMENTS (20 to date)
Don Boudreaux writes:

Nice job, David. That article by Blinder truly is shockingly distressing.

To your point that the popularity of a policy is no proof that the policy achieves its stated goals or that it otherwise works as advertised can be added the popularity of protectionism. Would Blinder argue that the long-standing and significant popularity among the populace of protectionist measures proves that the populace is correct, and economists mistaken, about the consequences of protectionism? I suspect that he would not conclude from protectionism's popularity that economists have been wrong all along that protectionism makes most people poorer rather than richer than they would be under a regime of free trade. (Although, given the contents and tenor of this recent piece by Blinder to which you link, my suspicion along these lines is far less strong now than it would have been 30 minutes ago.)

Alexandre Padilla writes:

David,

I don't know Blinder as a person, it's likely I am completely wrong. It seems to me that when people criticize Trump, it becomes less about showing why he's wrong but more about proving to people (readers in this case) that you aren't a Trump supporter and it can go as far as arguing in favor of things that anti-Trump people argue in favor because otherwise it could come across as being pro-Trump.
See, if you say, we shouldn't raise minimum wage because this or that, you will be put in the pro-Trump camp. Even if you are saying, while raising minimum wage a little is unlikely to have much disemployment effects, it won't really help the poor, it's likely to hurt small businesses, in the long run, business will get robots (self automated ordering machines) people will only read you aren't a strong supporter of raising minimum wage = Trump voter.

It's no longer about the Truth, right or wrong. It's more about "are you with us or against Trump?"

Again I might be wrong but Blinder is a renowned economist but he's only human after all.


Jon Murphy writes:

As an Alan Blinder fan, it breaks my heart to see this article. What's worse is the tacit implication that economics is opinion-based, rather than scientific. While there are normative aspects to economics (we are dealing with values after all), there are many positive outcomes, too. By not providing any evidence or theory, but instead deferring to opinion polls, I fear Blinder implicates that economics is nothing more than people's opinions. And that undermines us all.

I have no doubt in my mind he doesn't believe this implication or that he even meant to imply this in his article, but it is still there, at least in this man's reading.

David R. Henderson writes:

@Don Boudreaux and Jon Murphy,
Thanks for your compliment, Don.
I think both of you missed my point about free trade: Blinder doesn’t throw out his belief. By attacking Trump on trade, he shows that he still believes in free trade. My criticism on this score is that he doesn’t make a single argument for free trade.
@Alexandre Padilla,
You may well be right. That excuses nothing. Ask yourself this, Alex: would you go after someone on something you agree with him on if doing so made you look good to those to whom you want to look good?

walterb writes:

Perhaps Mr Blinder is heading this direction in order to become a more popular columnist like, say, Paul Krugman. I'd remind him that Milton Friedman did quite well on that score without compromising his standards.

About the state and its conjoined media industry, isn't it the case that demand for a particular and seemingly authoritative expression of opinion can usually find an entrepreneur willing to supply that (seemingly authoritative expression of a particular opinion)? So I am seeing not so much a good economist gone bad as opinions growing where opinions are demanded.

Thaomas writes:

Probably Blinder just considers a higher EITC so far out of political feasibility that he does not even bother pointing out that it would be a better way to transfer income to low paid workers. What I wonder is why those who oppose a higher minimum wage on grounds that is increases unemployment do not support a higher EITC as an alternative.

Jon Murphy writes:

@Thaomas

"What I wonder is why those who oppose a higher minimum wage on grounds that is increases unemployment do not support a higher EITC as an alternative."

Simple. Both are market distortions. Both cause inefficiencies. Minimum wage, being a price floor, causes too few to be employed. EITC, as a subsidy, causes too many to be employed. Therefore, the free-marketer opposes both.

OH Anarcho-Capitalist writes:

@Thoamas- One can easily be against both from a freedom of contract and government interference POV. Personally, eliminating the vast social-welfare state benefits that create an employment wage premium that employers must overcome to incentivize taking a job over sloth would be more productive than the EITC.

After all, those eligible for the EITC are at least already in the workforce...

Alan Crowe writes:

The minimum wage is a prohibition. When politicians adjust the legislation to prohibit things that were previously permitted they are tightening the minimum wage. Sometimes adjustments go the other way, allowing things previously forbidden; that is loosening the minimum wage.

I notice every-one using a euphemism. Perhaps folk are trying to learn a lesson from the Anti-saloon League which won in 1919 and lost in 1933. Perhaps the lesson is: don't talk about prohibition of alcohol and shutting down saloons. Talk about increasing sobriety. Use language that skips what you actually do and assumes the good results that you intend.

So one talks of "increasing" the minimum wage because one hopes that the effects of tightening the minimum wage will reverberate around the economy to the benefit of the low paid. And those who advocate loosening the minimum wage, hoping to benefit the unemployed, are derided for "reducing" the minimum wage.

I think I understand the politics around the language choices. I don't understand the pervasiveness of those choices. I expect to find plain speaking here. On these blog comments we could avoid the euphemism and talk of tightening and loosening the minimum wage.

Mike W writes:

According to a McDonald's franchise owner I know, since all competitors are subject to the same minimum wage they will all just pass the increased costs onto their customers. It's a tax on users, not a big deal.

Jon Murphy writes:

@Mike W:

I'm sure, to the extent they can, they will pass along the costs. But their ability to do so doesn't depend on whether or not everyone else is doing it, but rather the sensitivity of their customers to price changes. The more sensitive customers are, the less willing they will be to take a price increase, even if everyone else is doing it.

A simple example:

If all the fast food joints in an area were to universally decide the price of a hamburger is now $100, they would all see customers cut back their quantity demanded of burgers.

Mike W writes:

@ Jon Murphy

C'mon, really? Extreme examples like that...and abstract theoretical models...are why the public doesn't take economists seriously. If all the fast food joints in an area were to increase prices 5-10%...pennies...to cover the increased labor cost, would the public even notice? It seems like an empirical question, so why aren't economists doing more actual research to resolve it?

Jon Murphy writes:

@Mike W

Extreme examples like mine are good for examining the outcomes of variables. Small changes will have small effects and can lead to mistaken conclusions like "minimum wage has no effect"or "since all competitors are subject to the same minimum wage they will all just pass the increased costs onto their customers." Rather, by making the hypothetical case so large it cannot be ignored, it allows us to discuss the effects of the change and not get bogged down in minutia.

And you're right. It is an empirical and theoretical question. Lots of work have been done on the matter (for example, this study.) Like any group of literature, they vary, but we do see some rather substantial price elasticities. In the above-linked study, a 10% increase in the price of a soft drink ("pennies") leads to an ~8% decrease in sales of soft drinks!

Further, I suspect this elasticity issue is prevalent in the fast food industry given the way fast food industry reacts to minimum wage hikes: there is some price raises, but we see a lot more adjustments along other margins (cutting hours, benefits, increased automation, that sort of thing).

There is a lot of interesting research out there on fast food. I wanted to avoid a literature study, that's why I stuck solely with the theory when I originally responded to you.

Mike W writes:

The devil is in the "minutia".

For example, if labor for all fast food outlets in the area represents, say, 50% of total costs then an increase in the average wage of 25%...from $12 to $15...would increase total costs about 12%. If the average sale is, say, $6, then an increase in price of $1 would more than cover the minimum wage increase in cost. Would a $1 increase in the price of all fast food meals in the area reduce demand significantly? I don't know...maybe the labor share is 40% or the average sale is only $4.

And why would a fast food employer cut hours to make up for an increase in wages? Is the employer currently operating with so much excess labor hours that he can just cut some?

And why wouldn't an increase in his labor cost incentivize the employer to improve his employees' productivity by providing training, tools or management to offset the cost?

The effect of a minimum wage is an empirical question and I don't see abstract economic theory contributing much to the answer...especially in the minds of the general public.

Jon Murphy writes:

@Mike W:

" Would a $1 increase in the price of all fast food meals in the area reduce demand significantly? "

Depends on the elasticity. That's why whole point. If customers aren't very price sensitive, then it wouldn't reduce quantity demanded very significantly. If they are, it would (the above study I liked indicates a 10% increase in price would reduce sales about 8%). That is exactly we we need an "abstract economic theory."

"And why would a fast food employer cut hours to make up for an increase in wages? Is the employer currently operating with so much excess labor hours that he can just cut some?"

Simple price theory: if the cost of something rises to other substitutes, one will use less of it. An employer may cut hours, from say 50 hrs/wk to 40 hrs/wk and make up the slack by increasing automation (or working himself. Or cutting business hours. Or many other margins he could adjust along. The hour cutting thing was just a simple example, and firms do it in response to artificial wage changes).

"And why wouldn't an increase in his labor cost incentivize the employer to improve his employees' productivity by providing training, tools or management to offset the cost?"

I've heard this argument before, but it doesn't make sense to me. If an employer could already increase productivity (which would, in turn, increase his profits), why wasn't he already doing so?

"The effect of a minimum wage is an empirical question and I don't see abstract economic theory contributing much to the answer"

On the contrary! The theory is what allows us to parse the data more carefully. As I said earlier, incorrect understanding of the theories involved can lead to erroneous conclusions. Lack of knowledge of price theory can lead to conclusions like you have said your friend draws: if everyone raises their prices, nothing will change. Similar to lack of understanding the theory of gravity will lead to incorrect conclusions.

Let me use another example: let's say a person, who is unaware of buoyancy, says "Steel sinks. You could never build a boat out of steel." Another person, schooled in the theory of buoyancy, says "No, that is incorrect. There is a theory that says anything can float with certain properties."

Theory is extremely important, as I think this conversation shows. Incorrect or incomplete understanding of a theory can lead to incorrect or incomplete conclusions. Empirical evidence, absent a theory, is all but useless. Another example: empirically, it is colder in January than in July in America. An incorrect or incomplete understanding of weather theory could cause one to conclude the coldness was due to the Greek goddess Persephone spending the time down in Hades (as the Ancient Greeks believed) rather than the fact we are tipped away from the Sun. Further, such a misunderstanding could lead to the erroneous conclusion that it is also colder in Argentina in January than July. Theory plays an extremely important role in answering questions!

Dan Jennings writes:

Am I the only one who has been reading Mr. Blinder's articles over the past decade? This is par for the course, from what I have come to expect from him. Alan Blinder has increasingly become more political in his articles picked up by the WSJ(selective choices by WSJ?).
IMO, his writings have had the intent to carefully try and not cross his Economics beliefs but find supportive arguments for economic policies that Democrats propose. I question his integrity on opposing trade barriers(even if he has been consistent in supporting freer trade) due to his politicking, at times stumping for democrats and their policies, due to the political affiliation of the incoming presidential administration and a Republican Congress.
His support for minimum wages based on populism rather than empirical evidence is another policy he supports that Leads me to not take his advice, seriously.

Dan Jennings writes:

I am still trying to figure out why a bunch of people are trying to dictate how a business should operate and how much they must compensate their employees. Why are a bunch of people, who are not running a business trying to determine what is the best way for someone else to run a business?

J Mann writes:

@Mike W,

I'd love to ask your acquaintance some follow up questions. The usual theory on this is:

1) If you raise all the prices of fast food by 5%, some people will chose to prepare their own food more often than they otherwise would.

2) If you raise the price of labor, some customers will prefer restaurants that have more automation and less labor, and therefore charge less.

(1) and (2) together reduce the number of fast food jobs over time. Obviously the larger the increase over the natural rate, the larger the effect.

Mike W writes:

@J Mann

But how many? It's an empirical question, why does everyone want to answer it with abstract economic theories?

I went through McDonald's this morning for breakfast and got an egg sandwich, an oatmeal and two large coffees for $7.55. If the price had been 5% higher...$7.93...I would still have gotten breakfast there.

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