The Economic Experiment That Upended Reality - The Atlantic

In the fall of 2011, one of us gave a presentation on the idea of a $15 minimum wage to a gathering of the Democracy Alliance—one of the most influential networks of left-leaning donors and advocates in the country. It did not go well. Heads shook. Some people in the audience laughed out loud. Later, when we raised the idea with Democratic members of Congress, progressive economists, and liberal think tanks, the reception was similar. They thought we’d lost our minds.<br>These were not people who disagreed with our goal of fighting inequality. But they were unwitting captives of an economic paradigm that said a $15 minimum wage had to be crazy. That paradigm, which we call the neoliberal consensus, generally holds that markets, left largely to themselves, allocate resources efficiently. One of its iron laws is that anything that forces employers to raise wages kills jobs. It was basic supply and demand: Make something (labor) more expensive, and you’ll get less of it. If you accepted that premise, then a $15 minimum wage was an act of economic madness that would harm the very people we were intending to help. Such is the power of a dominant paradigm that, in the 1990s, after the economists Alan Krueger and David Card published work suggesting that minimum wages didn’t necessarily kill jobs, the Nobel laureate James Buchanan declared, “Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.”<br>In 2014, Seattle went ahead and implemented a $15 minimum wage anyway. And all the apocalyptic predictions failed to come true. The restaurants did not close. The jobs did not disappear. Instead, 100,000 workers got raises, and spent them. Seattle’s economy, far from collapsing, continued to boom. San Francisco soon passed its own $15 minimum wage. Then came minimum-wage hikes in state after state, including not just liberal New York and California but also Missouri, Nebraska, Florida, and Alaska—red states where voters, given the direct choice, said yes. In every case, predictions of economic catastrophe proved false.<br>Annie Lowrey: How the low minimum wage helps rich companies<br>By now, most economists accept that raising the minimum wage doesn’t mechanically lead to job loss. But the broader lesson hasn’t fully sunk in. Although the neoliberal paradigm has taken heavy fire over the past decade from academics, activists, and populist politicians, it has proved stubbornly hard to eradicate, and its flawed assumptions still shape large swaths of economic policy making. Within that paradigm, recent experience with the minimum wage is an exception to the otherwise-reliable rules of neoliberal economics. In reality, the minimum-wage evidence isn’t an outlier. It was perhaps the first clue that the entire paradigm was fundamentally wrong.<br>And yet the paradigm won’t quite die, in part because no one has come up with a better alternative to replace it. We believe that a new paradigm exists, emerging from the work of a large community of researchers and practitioners. But understanding why it is correct first requires understanding why neoliberalism got so much so wrong.<br>The neoliberal consensus asserts that inequality is the price of economic growth. Fairness and efficiency are in fundamental tension. You can have a bigger pie or more equal slices, but not both.<br>This isn’t fringe thinking or exclusively Republican doctrine. Since the late 1970s, it has dominated the shared intellectual infrastructure of the political establishment, and it continues to be taught in Econ 101 classes today. The two parties have differed on how much growth to trade in for more fairness—not on whether such a trade-off exists. When Larry Summers, Barack Obama’s top economic adviser, wrote a glowing foreword to a new edition of Arthur Okun’s 1975 classic Equality and Efficiency: The Big Tradeoff, he noted the book’s profound influence on his own thinking and on a generation of Democratic policy makers. Donald Trump has broken with several elements of neoliberal orthodoxy, as did Joe Biden, but the paradigm still structures how most of the expert class approaches policy choices.<br>One hint that the paradigm might be wrong is that it delivered the opposite of what it promised. Tax cuts, deregulation, globalization, and reduced worker power were supposed to grow the economic pie, to society’s collective benefit. Instead, the neoliberal era produced the greatest upward transfer of wealth in American history—$79 trillion from the bottom 90 percent to the top 10 percent since 1975, according to a RAND study—without the growth that was supposed to make that transfer worth it. GDP growth averaged 3.8 percent annually in the postwar Keynesian era but slowed to 2.6 percent from the 1980s onward.<br>The minimum wage was a perfect test case for the trade-off theory of growth versus fairness—and the theory failed....