From Alexandria Ocasio-Cortez to Donald J. Trump, our political class is profoundly ignorant of basic economics.
We economists, especially those of us who have had some responsibility for educating students, have a lot to answer for. Presumably all the politicians strutting across our television screens did attend some sort of educational institution at one time. Indeed, many attended institutions of so-called higher learning. Yet somehow their economics teachers failed them.
We have Alexandria Ocasio-Cortez announcing her pleasure at defeating “Amazon’s corporate greed” and at the company’s decision not to pour time, energy, and money into the impossible task of satisfying the progressives who have wrested control of the state’s Democratic Party from Governor Andrew Cuomo, and made enough noise to over-shout the majority of the voters they are supposed to represent. The congresswoman is delighted that she and her progressive colleagues will now have $3 billion to spend on infrastructure. Where is this $3 billion? The bulk of it is the portion of the $27.5 billion in state and local revenue that Amazon would have generated over 25 years by creating 25,000 jobs over the next decade, with an average salary of $150,000 per year. No Amazon, no jobs, no $27.5 billion in taxes, no $3 billion rebate for Amazon, or for AOC. One bad mark for the Boston University economics department, unless AOC never darkened the classroom doors of its able professors to avail herself of this basic math.
Another demerit is due for teaching AOC that her multi-trillion-dollar Green New Deal can be financed without tax increases. “The Federal Reserve can extend credit . . . . and new public banks can be created . . . . The government [can] take an equity stake.” I leave it to Nancy Pelosi (Trinity College) to educate her new freshperson.
Most people credit state senator Michael Gianaris with playing the key role in driving Amazon away. Gianaris, a long-time enemy of Governor Andrew Cuomo, was chosen by senate leader Andrea Stewart-Cummings, eager to demonstrate that her new Democratic majority could thumb its nose at the governor, lead sponsor of the deal. Genaris made it clear that he opposed the deal because Amazon is not unionized, and cooperates with U.S. Immigration and Customs Enforcement (ICE). Nothing, he said from the outset, could change his mind-a fact that Amazon chose to ignore, probably because they assumed the governor was in charge.
For good measure Gianaris accused Amazon of destroying communities, citing its destructive effect on Seattle (2017 median household income $80,000), from which he wants to save Queens (2017 median household income $62,000). The Bureau of Labor Statistics puts the average private sector salary in Queens at about $56,000, more than a tad below the $150,000 of the scorned Amazon workers.
Then there is Jimmy Van Bramer, Deputy Leader of the New York City Council. He doesn’t want any company to come to New York unless it agrees to unionize its work force, which Amazon has persistently declined to do. He feels it is better for his union workers to see the back of Amazon. His teachers at St. John’s University failed to point out the ripple effect of Amazon’s investment (they would have called it the multiplier effect, but it would be unreasonable to expect Mr. Van Bramer to recall the precise term). Never mind that the state estimated that the project would generate 1,300 construction jobs as part of the 107,000 direct and indirect jobs the Amazon project would create: office cleaners and maintenance contractors, servers at restaurants in the area, Uber drivers and all the others whose services Amazon and its highly paid employees would have called upon. In addition Amazon agreed to allocate $5 million for workforce development and to host job fairs and training sessions at the nearby housing project and build a 600-seat school.
Turn now to those politicians who want Amazon to return to the bargaining table, who feel it left in too great haste, and that with a few changes to make the deal more attractive to the state’s progressives it could go forward. They understand very little about how negotiations are conducted. The specifics of the deal are now irrelevant. For one thing, when Gianaris, the official in charge of giving final approval, sees nothing but poverty in Seattle and economic progress in Queens-“all those cranes”-and when the intellectual leader of the rebellion, AOC, thinks the $3 billion is now available for infrastructure, best not to sink $2.5 billion into a campus.
More (and in my view most) important, Amazon learned that the New York City political environment is irretrievably hostile to it. No matter that a majority of the people were eager of have Amazon build its campus, and that includes a majority of blacks, Hispanics, and other groups. The opposition is small but noisier, better organized, and with an agenda that transcends this specific transaction. Gianaris is opposed to all subsidies, Van Bramer to non-union companies, and Ocasio-Cortez to, well, “immoral” capitalism.
Which brings us to economic ignorance at the national level, a subject I can only touch on here. Senator Kamala Harris’s professors (assuming she was exposed to some) at Howard University and UC Hastings School of Law failed to instruct her sufficiently in how taxes are computed, which makes it fortunate that she chose a career in what is called public service rather than a lawyer for clients with tax problems. She concludes from the drop in average tax refunds that the tax burden on the middle class had increased. Tax payments during the year are the tax man’s best guess as to the tax that will prove to be due from each taxpayer. If the taxes deducted during the year are insufficient to cover the finally determined liability, the taxpayer sends a check; if they are excessive, the taxpayer gets a refund. If the IRS got it exactly right, which is of course impossible, refunds would be zero. In 2018 the reduced taxes were largely reflected in higher weekly paychecks, leaving less for refunds at year-end.
Then there is our President, an undergraduate of the Wharton School of Finance, no less. He persists in claiming that China and other countries are enriching us by paying our Treasury for the tariffs he has levied on them. Actually, as is taught in every elementary economics course, and most certainly at Wharton, the tariffs are a tax paid by American consumers. Ford buys some steel from an overseas supplier. The shipment arrives at an American port. Ford pays the tariff due by sending its check to the Treasury. It then turns that steel into an automobile, and raises the price to cover the cost of the tariffs that it, not China, has paid to the Treasury. Ford would then pass the cost of tariffs to consumers, or take it out of shareholders’ hides. China might lose sales because of the higher prices Ford and other auto companies are compelled to charge, but no member of the government of the People’s Republic sends a check to our Secretary of the Treasury. Either the President knows this, and is congratulating himself on having imposed a hidden tax on Americans, or, worse, he believes what he is saying, in which case some economics teacher at Wharton owes all of us an apology.
Not really. We economists should be allowed the defense used by the later Robert Bork when I asked him how he felt about having taught both Hillary and Bill Clinton. “A failure of pedagogy,” he sighed.