What Are Economies For?


What is the purpose of a nation’s economy? Is it to maximize the wealth and power of its governing elites, no matter the consequences for the rest of the population? How about to relieve poverty in the poorest parts of the world, even at the expense of its own working poor? Or is the purpose of a nation’s economy to maximize the economic well-being of all its citizens?

In the case of the United States, at least, the correct answer is clear. Or rather it ought to be clear, provided our policy-making elites take seriously the opening sentence of the U.S. Constitution. You know, the sentence that begins with the words, “We the People of the United States, in order to. . .” For among the stated purposes for which the United States has been founded is “to promote the general welfare” of we, the American people, both now and in the future (“for ourselves and our posterity”).

By this criterion, a good national economic policy is one that tends to promote the economic well-being of the American people as a whole in these general terms. Anything less fails that fundamental test.

I bring this up because our current trade and immigration policies so clearly fail that test. How do we know this? One clue, in fact the very best clue, is that our policy elites—the people who actually make and defend these policies—don’t even attempt to justify them on these grounds. Instead, they resort to other arguments entirely, the most rhetorically effective one being that current policies tend to increase the total income of the American-born population as a whole, and hence, by definition, their average income as well.

This is true in a technical sense. But what these influential voices fail to mention is that the increase in income that these policies bring about is dwarfed by a wholesale redistribution of income from labor to capital that is many times greater in magnitude. In other words, workers will lose and their employers will gain, big time in fact.

Take, for example, the impact of mass low-skilled immigration on the welfare of American-born workers since Congress passed the 1965 Immigration Act. The well-regarded Harvard labor economist, George Borjas, using data through the year 2013, has estimated that while the total increase in the income of the American-born population as a whole is $35 billion annually, this has been accompanied by a $402 billion dollar decrease in the yearly income of American-born workers (along with, not coincidentally, a $437 billion increase in the income of their American-born employers).

A similar case can be made against the new trade legislation enacted by Congress at the end of the Cold War—in particular those parts that regulate our trade with poor countries in the less-developed parts of the world, where workers are paid a small fraction of what they are in the U.S.. As a direct consequence of these changes in the law, American manufacturers have been forced to offshore their most labor-intensive facilities to these areas if they plan to stay in business.

For here again, as in the case of mass immigration, the underlying logic is the same: any policy that serves to increase the supply of labor relative to capital will bring about a redistribution of income from labor to capital. In other words, wages will fall and profits will rise.

Of course, our policy making elites are loath to dwell on this fundamental fact. On the contrary, as Upton Sinclair once famously observed, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Or to frame the issue in slightly different terms, policies that stand to benefit not only the people who ultimately employ you, but all of one’s colleagues, friends and neighbors, to say nothing of the future prospects of one’s children and grandchildren, are bound to generate a certain amount of hypocrisy. And doubly so if those policies can be clothed in compassion for the poorest, most downtrodden people on earth.

I think this probably explains a most extraordinary remark recently made by Larry Summers, who has long been my favorite living economist. What has always appealed to me about Summers was the way he married an easy mastery of economic theory to a lot of first-hand experience in the ways that economies actually respond to changes in policy. I especially like the careful way he always expresses himself when talking about the current state of the U.S. economy.

It is all the more astonishing, therefore, that Summers recently said, in a public lecture no less, that the proper aim of economic policy is not jobs, but rather “to maximize the availability of goods at low cost to consumers and firms.” Now granted, if Summers is right about this, then there can be no doubt that America’s current trade and immigration policies put us squarely on the right path. And no doubt also, it was in tacit defense of these policies that he said what he did.

But to focus on “the availability of goods at low prices to consumers and firms” alone, while gliding over the adverse effects that these policies are having on wages and living conditions of ordinary working Americans, is an inexcusable error for an economist to make.

Consider, for example, the situation of typical two-earner families in the bottom half of the income distribution. How important is it to them that they can now buy cheap goods at Walmart if they are unable to afford adequate health insurance or professional daycare, to say nothing of a half-way decent single-family dwelling in a safe neighborhood with good public schools? And how are they going to support themselves when eventually they are forced to retire? They are unable save for retirement, even as their future Social Security benefits seem destined to dwindle.

Now, I am sure Larry Summers will agree that he left a lot of things out when he made that remark. In fact, he admitted as much when he said he had no idea how our elected officials might get the national debt under control before it ends up ruining us all. I imagine he would be equally flummoxed if asked how to contain America’s rapidly growing health care industry, which looks like it is going to eat us alive. But that’s ok. I don’t have answers either.

One thing I do know, however, is that America’s current trade and immigration policies are not helping matters. Without a fair and efficient way to transfer income from capital to labor on a scale never before seen, these policies will never make the American people better off than they otherwise would have been. [For an approach to this problem, see here.]

But more than anything else, the United States needs a lot more low-skilled jobs that pay considerably higher wages than the ones we currently have. If America’s policy making elites wish to demonstrate that they genuinely do care about the happiness and well-being of the American people as a whole, then they are going to have to shape the U.S. economy to fit the human material that actually exists.

But then too, just like Larry Summers, I also have an unstated motive in making this pitch, which I will leave to my readers to guess.

This piece first appeared at The New Country Town. Subscribe to Luke Lea's Substack here.

Luke Lea is the author of A Part-time Job in the Country: Notes Toward a New Way of Life in America.

Photo: Grand Canyon National Park Service; NPS/Isabella Robbins, via Flickr under CC 2.0 License.