“Practical men, who believe themselves to be quite exempt from any intellectual influence,” the great economist John Maynard Keynes once wrote, “are usually the slaves of some defunct economist.”
Today, however, practical men—and women—ain’t what they used to be. Jerome Powell, the Trump-appointed chair of the Federal Reserve, says he’s more concerned about unemployment than he is about inflation—by the historic standards of the Fed, an act of high heresy. Congress just passed President Biden’s economic-rescue package, which does more for poor Americans than any program since it enacted Medicaid 56 years ago. Congress may yet enact a $15 minimum wage, while its most progressive members advocate a tax on wealth.
The powers that be are not getting these ideas from dead economists, or from the mainstream American economists who have dominated the field between the 1970s and the past few years (though they remain a considerable force). They are getting these ideas from a group of labor and public-policy economists who’ve surged to the forefront of the profession over the past decade. And more than anyplace else, these economists are clustered at the University of California, Berkeley.
Much of the work that shaped the groundbreaking child benefits in the $1.9 trillion stimulus bill, and directed those benefits for the first time to the genuinely poor, was done by Hilary Hoynes, a professor in both Berkeley’s economics department and its public-policy school. As Hoynes has documented in a series of studies, both the welfare reform of the 1990s and the reliance on tax credits to provide the child benefits largely, and perversely, excluded children in poverty. The benefits in the new stimulus bill are specifically targeted to include poor kids.
As for scholarly work that made the case for the $15 minimum wage, the multiple studies produced over the past quarter-century by Michael Reich—like Hoynes, a Berkeley professor of both economics and public policy—have documented that the presumed downsides of mandating such a raise are largely fictitious. The senators who tried to persuade the Senate parliamentarian that the raise would have a positive effect on the federal budget over the next decade relied on Reich’s fiscal estimates that it would net an additional $65 billion to federal revenues.
And the wealth tax? When Elizabeth Warren and Bernie Sanders began advocating for it while on the presidential campaign trail in 2019, they based their advocacy on the research of two other Berkeley economists, Emmanuel Saez and Gabriel Zucman, whose studies had concluded that the wealthiest 0.1 percent of Americans held 19.3 percent of the nation’s wealth—three times what that group had held in 1979. Saez and Zucman also reported that the total tax rate for billionaires in 2018 was 23 percent; while for all taxpayers, it was 28 percent. Warren’s proposal, updated this February, called for a 2 percent tax on families with wealth exceeding $50 million, with an additional 1 percent surcharge on wealth exceeding $1 billion—which the Berkeley duo estimated would raise roughly $3 trillion over ten years.
What, we may wonder, has been going on at Berkeley?
In brief, a historic change. Over the past two decades, Berkeley’s economics department and associated institutes have been at the forefront of two critical changes in the practice of economics: a heightened emphasis on empirical research, and an increasing focus on inequality.
For non-economists like me, these epochal changes in methodology and focus were largely invisible until the 2014 publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, still the most surprising best-seller of its eponymous century. Piketty’s presentation of income tax data from a range of nations—with Saez’s help on the U.S. data, dating back to 1913—documented the growing concentration of income among the very rich, and the corresponding stagnation or decline of income shares among everyone else. The work was relatively light on equations (other than the one showing that the return on investment was almost invariably higher than the growth rate of the overall economy) and jam-packed with tables and graphs showing the upward distribution and redistribution of income.
While the book had not caused a great stir when initially published in France, it certainly did when, in translation, it came across the pond. To a nation that had been through the 2008 crash and ensuing K-shaped recovery, that had had Occupy Wall Street encampments in most major cities, and that was soon to witness the breakout presidential campaign of avowed socialist Bernie Sanders, Capital in the Twenty-First Century provided a definitive picture, a compelling analysis, and a plausible remedy for an economy that no longer worked for the majority of Americans.
For economists not tethered to the doctrine that markets generally work for the general good, the book was less of a revelation; Piketty and Saez had begun their deep dive into previously unseen U.S. tax data as far back as the turn of the 21st century, when they began publishing their joint studies. Over the subsequent two decades, the economics departments at three other leading universities—Harvard, MIT, and Princeton—also began turning in more empirical directions focusing on inequality. But Berkeley, then as now, led the pack.
“Introductory economics courses are about 12 or 13 weeks long,” says Berkeley economics professor Brad DeLong, who worked in the Treasury Department during the Clinton administration. “At Chicago and similar institutions, they teach 11 weeks on how great markets are and one week on market failures. We teach three weeks on market successes and ten weeks on market failures. They neglect the problem of income distribution and have fuzzy thinking about the asymmetry of information that impedes the knowledge that people need for markets to work.”
In a sense, the evolution of the Berkeley brand of economics and the substance of liberal and Democratic thought are both reactions to the end of the “Great Compression,” the period of World War II and the postwar decades during which income gaps between rich, middle, and poor grew narrower. The work of Berkeley economists and their peers at those three other universities and a handful of progressive think tanks certainly informed the larger zeitgeist, and did so in opposition to many of the non–empirically based theorems taught in most economics departments. “But I don’t want to exaggerate our role,” Saez says. “It was the facts that drove the story.”
Merely to access verifiable facts, though, required a methodological change. “The transformation of economics into a more empirical subject with no reliance on pseudoscience has taken a long time and required people to step back from earlier assumptions,” says David Card, who chairs Berkeley’s economics department and whose own work heralded that change. “Maybe that’s what we’ve done at Berkeley.”
“HARDLY ANYONE TAKES data analysis seriously,” economist Edward Leamer wrote in 1983. “Or, perhaps more accurately, hardly anyone takes anyone else’s data analysis seriously.”
At the time Leamer was writing, mainstream economics thought it was doing just fine without data. The “saltwater” school—chiefly, Harvard and MIT—practiced a watered-down Keynesianism which held that government could intervene to boost purchasing power during a downturn, and that, with some exceptions, intervention in markets wouldn’t do much good at other times. The “freshwater” school—Chicago, where Milton Friedman and his apostles ruled the roost—held that any such interventions disrupted the smooth operations of a market guided by Adam Smith’s “invisible hand.”
In the 1960s, ’70s, and ’80s, much of Berkeley economics had also exemplified what Leamer noted as the great data aversion. The department had excelled in theory, no one more so than Gerard Debreu, who won the Nobel Prize in economics in 1983 for his work on how prices balance supply and demand. In the early 1990s, however, the department was compelled to downsize, as revenues to the state plummeted due to the decimation of the aerospace industry—then California’s largest private-sector employer—in the wake of the Cold War’s end. The old theorists left, and when the state’s budgets began to recover, the department began hiring.
“The modern renaissance in empirical microeconomics was driven by David Card relocating to Berkeley [in 1997] and poaching Emmanuel Saez from us,” says Harvard economist Lawrence Katz, himself one the nation’s leading empirical microeconomists, specializing in labor. “Berkeley had been a complete desert in labor economics,” Card says, in the years before he arrived.
Card’s arrival ended that particular drought. Three years earlier, he had co-authored a groundbreaking paper with his Princeton colleague Alan Krueger, which looked at the effect of different minimum-wage levels in two adjoining counties—one in New Jersey, the other in Pennsylvania—and concluded that there was no job loss or shift due to the wage differentials. The prevailing theory on the disruptive effect of minimum-wage laws on labor markets had failed to stand the test of an empirical experiment. Another paper Card had authored on the effects that the arrival of 100,000 Mariel boatlift expellees from Castro’s Cuba had on wage levels in South Florida also showed that wages didn’t drop, in violation of time-honored if untested formulas on labor supply.
“The problem in economics,” says Reich, “is always separating causality from correlation; it’s hard to do in the social world. These papers shocked a lot of people. They went against expectations. And they showed a way to tease out causality from correlation”—through the empirically based data analysis whose previous absence Leamer had noted.
COURTESY OF EMMANUEL SAEZ
Emmanuel Saez
Once at Berkeley, Card turned his interest to other researchable topics like education; and Reich took up the task of studying different minimum-wage rates in proximate jurisdictions. Card began hiring other economists with an empirical bent. Saez arrived in 2001 for a summer visit and was “poached” the following year.
“When Saez gave his first seminar paper, I virtually fell off my chair,” says Reich. “We were still considered by some as being on the fringes of the profession for our empirical research, but Saez had the kind of data that no one had had, and it made a real difference.”
Saez had received his doctorate from MIT in 1999, and for the next three years worked at Harvard. “I was a mainstream economist,” he says, “but some of the work I did that wasn’t encumbered by the standard models pushed me a little bit outside of the mainstream. It was a slow process.”
The process was accelerated by his beginning to work with Piketty while he was at Harvard. “There had been a tradition of looking at tax data, but it had fallen out of favor,” Saez says. “Then Piketty began to look at it, and the trend of income concentration had become so extreme that it forced economists to notice it.”
His 2001 summer at Berkeley convinced Saez to move across the country (that and his passion for surfing; California’s waves completely rolled over New England’s piddling tides). “I preferred the feeling in Berkeley to that then in Boston; it was a view of economics that had entertained more doubt about some of the standard models.”
Emmanuel Saez’s 2001 summer at Berkeley convinced him to move across the country; that and his passion for surfing.
Both by himself and later with his colleague Gabriel Zucman, whom Berkeley hired in 2016, Saez has produced not only scholarly papers on both income and wealth concentration, but short, journalist-friendly annual summaries of income concentration. The 2020 edition of “Striking It Richer” documents that from 1993 through 2018, the real income growth for the wealthiest 1 percent of Americans came to 100.5 percent, while the other 99 percent had to settle for an increase of 18.3 percent. During this time, the wealthiest 1 percent captured 48 percent of the nation’s total increase in income.
“This is a place that does empirical economic research not tied to any particular theory,” Zucman says. “No one framework, like the neoclassical at Chicago, can make sense of everything. Neoclassical economics can’t deal with questions of income and wealth distribution, and so it can’t understand the U.S. economy since 1980.”
“During the postwar decades,” Zucman continues, “economics was almost entirely about questions of efficiency, about demonstrating that a market economy worked better than a planned one. But this was a historical parenthesis, economics in a Cold War context. Historically, economics was about questions of distribution—it’s in Ricardo, it’s in Marx. Now, in the 21st century, we’re rediscovering the importance of distributional issues.”
Saez readily admits that his kind of focus on inequality and taxation is only part of the picture. Many of his colleagues do empirical research on labor economics and labor policy, which is another leading component of Berkeley economics, bound up in the same post-1980 history. “After all, the Reagan ‘Revolution’ destroyed both progressive taxation and unions,” Saez says.
ZUCMAN IS ANOTHER Berkeley economist with a joint appointment at the university’s Goldman Public Policy School. “We’re here not just to study the economy because it exists, like the stars in the sky,” says Zucman. “The motivation for many of us is to do research in social science that improves public policy.”
Another key Berkeley institution is the Institute for Research on Labor and Employment (IRLE)—formerly the Institute for Industrial Relations, one of many such centers founded at the nation’s universities in response to the great strike wave of 1945–1946, with the intent of incorporating labor into the nation’s economic order in less disruptive ways. Nonetheless, the IRLE has long been a fount of progressive economic studies and policy advocacy. In October of last year, for instance, as Californians prepared to vote on Proposition 22, a measure conceived and funded by Uber and other employers of gig workers to repeal a state law that compelled them to treat their drivers as employees entitled to such commonplace privileges as the minimum wage, Reich authored an IRLE study showing that defeating the measure would enable the drivers to increase their incomes by 30 percent, which would require fare increases of only between 5 and 10 percent.
Reich was the director of the IRLE until 2015, when he was succeeded by another joint appointee in the economics department, Jesse Rothstein. For Rothstein, working at Berkeley was a homecoming of sorts: He’d received his doctorate there in 2003, with a dissertation on the shortcomings of school choice. (Writing on anything related to education, he says, was the last thing he wanted to do when he arrived, as his father, frequent Prospect contributor Richard Rothstein, was then the education columnist for The New York Times. Nonetheless, the younger Rothstein became a research assistant for Card, for whom he ran a study concluding that when offered a choice of schools for their children, parents tended to select those whose students were disproportionately well-off, rather than schools that were disproportionately well run. The study morphed into his dissertation, and he’s been writing about education and labor issues ever since.)
Rothstein began his teaching career at Princeton, then moved to Washington to serve as the chief economist in Barack Obama’s Labor Department. When he left, he took the joint appointment at Berkeley. As the head of the IRLE and as an economics professor, he has mentored a wide range of budding labor economists. One lesson that he and his colleagues try to instill is “being careful with the data. The mantra here,” he says, “is ‘Let the data speak.’ If you find a result, it should be clear how you found it, what your research strategy was, and that it should be replicable.”
Berkeley’s emphasis on data isn’t limited to labor and public-policy economists. Professors and students focused on development and trade now routinely are researching large data sets for their work. “Trade has gone from a theoretical subject to an empirical one,” says Card; “the younger trade economists all do empirical work.”
Rothstein also founded and heads the IRLE’s California Policy Lab, which studies such problems as homelessness and low-wage work, and advises the legislature on those and other issues. According to Ken Jacobs, who directs Berkeley’s Labor Center (yet another IRLE division), both Saez and Zucman have “helped us grapple with possible revenue strategies for the state,” which is home to more billionaires than any of the other 49. “We have a set of relationships with the state’s unions and other groups on the ground,” says Jacobs, “and with an extraordinary group of academics. It’s one of the privileges of being at Berkeley.”
“Department boundaries here are very porous,” says Robert Reich (no relation to Michael Reich), one of the three founding editors of the Prospect, who’s long been one of the nation’s leading public intellectuals focused on issues of economic inequality, and has been a Goldman professor since 2006. That his courses are among the most popular on campus—800 students are enrolled in his current course, “Wealth and Poverty”—testifies not only to Reich’s pedagogical charisma but also to the interests of Berkeley’s undergrads.
COURTESY OF GABRIEL ZUCMAN
Gabriel Zucman
Goldman isn’t the only Berkeley graduate school with which the economics department works. Some of its professors have joint appointments at the Haas School of Business, among them Sydnee Caldwell, one of the three new assistant professors the department hired last year, all of them women. Much of Caldwell’s work deals with the effect of monopsony (excess market power on the part of a dominant buyer, an increasingly pervasive and pernicious form of market failure) on men and women in the labor market.
What Robert Reich describes as “porous boundaries” has long been a feature of Berkeley’s academic life. The most prominent economist ever to receive a Berkeley doctorate, John Kenneth Galbraith, was nominally a student in agricultural economics, which was then distinct from the economics department proper. Before he completed his course of study in 1933, however, Galbraith was able to take many courses in the economics department, where he encountered a range of professors who had a more tolerant, even occasionally supportive, view of New Deal economics—a viewpoint, his biographer Richard Parker has noted, that he would not have encountered in the more classical laissez-faire departments of Harvard and Yale.
Berkeley was also ahead of the game when it came to trade and industrial policy. In the 1980s, economist Laura Tyson, political scientist John Zysman, and planning school professor Stephen Cohen formed the Berkeley Roundtable on the International Economy, better known by its cheesy acronym, BRIE. In 1992, Tyson authored one of the first serious challenges to orthodox globalization, Who’s Bashing Whom? In 1987, Cohen and Zysman published the path-breaking Manufacturing Matters, making the case that manufacturing was essential to the national interest and the economic fortunes of the nation’s working class (a case that Democratic elites disastrously ignored).
“We’re here not just to study the economy because it exists, like the stars in the sky,” says Gabriel Zucman.
Even before its turn to empirically based labor and policy economics, Berkeley had occasionally been home to economists who dealt with market failures. George Akerlof’s 1970 paper “The Market for Lemons” dealt with the problem that sellers of used cars knew a lot more about those cars’ clunkier attributes than their buyers did. Though the paper was in no way based on empirical research, it was still sufficiently heterodox in its acknowledgment and study of information asymmetry that it was rejected by a number of academic journals before it found one that would publish it. Years later, it proved to be the foundation of Akerlof’s study of this particular branch of market failure, which won him a Nobel Prize.
Akerlof’s wife was also a Berkeley economist, who branched out while there to serve on the regional board of the San Francisco Federal Reserve Bank. In time, Janet Yellen would serve as chair of the President’s Council of Economic Advisers, then the first woman to chair the Federal Reserve, and now the first woman Treasury secretary—a post in which her concern for the victims of market failure, be they unemployed, underpaid, and/or victims of discrimination against women and minorities, stands in sharp contrast to her predecessors’ unvarying and bipartisan concern for the care and feeding of Wall Street.
BERKELEY HASN’T GONE it alone over the past three decades. Two Washington-based think tanks—the Economic Policy Institute and the Center for Economic Policy Research—have played key roles in studying our increasingly dysfunctional economy and developing policies to create more broadly shared prosperity. EPI, which was founded in 1986, has chiefly served as a tribune for the interests of American workers. In its long-running annual reports on The State of Working America and in a host of other papers, it has created some memorable explanations of the rise in inequality, including its graph charting the increases in productivity and income since the end of World War II (which rose in tandem until the 1970s, after which productivity continued to increase while median wages flatlined) and its yearly reports on the ratio of CEO pay to median worker pay. For its part, CEPR has highlighted a range of concerns, not least the several years of pre-2008-crash warnings from economist Dean Baker that the housing market had become a bubble that would soon and calamitously pop.
Berkeley builds on one other valuable and unsung tradition. Beyond the rarified debates of freshwater versus saltwater economics in elite universities, a few heroic radical economics departments kept alive the tradition of historical inquiry and critique of market folly. At the University of Massachusetts at Amherst, the New School in New York, and the University of California at Riverside, neo-Marxists and institutionalists created centers of scholarly dissent. Other schools, such as the Levy Institute at Bard College, were hospitable to the radicalism of Keynes, as opposed to watered down neo-Keynesianism. These critics proved prescient about the failure of markets and influenced the new mainstream at Berkeley and beyond. Heather Boushey, now on President Biden’s Council of Economic Advisers, has her Ph.D. from the New School.
Within the circuit of Berkeley, Harvard, MIT, and Princeton, there are frequent migrations of professors and newly minted Ph.D.s. “I have eight former Ph.D. students now on the Berkeley faculty,” says Harvard’s Katz. Sometimes, the migrations flow west to east, as in the case of Harvard’s Raj Chetty, one of the discipline’s leading empirical economists on such topics as intergenerational mobility (or the lack thereof), who began such work at Berkeley and is now continuing it in Cambridge.
That said, Berkeley sounds increasingly confident about its hard-won place in the economics ecosystem. “If you want to do labor economics, or public [policy] economics, you can make the case that Berkeley is the place to come,” says Rothstein. Ellora Derenoncourt, who was hired last year as an assistant professor both in the economics department and the Goldman School, says she came because Berkeley offered “a space to combine inequality studies with policy solutions.” Since she’s been on staff, she’s talked to a number of students who’d been admitted to several graduate economics programs at top-ranked schools and were deciding which to attend. For many, she says, “it’s the inequality issue that pushes them to come to Berkeley.”
Increasingly, that issue isn’t seen as one simply of income, education, and class. “Economics has not been the discipline at the forefront of understanding racism,” Derenoncourt notes, and, indeed, economics departments have long been the whitest and most male of any of the social sciences. Not surprisingly, a growing number of professors and graduate students are now working on issues of racial and gender inequality, and the experience of immigrants as well.
“Economics has not been the discipline at the forefront of understanding racism,” says Ellora Derenoncourt.
Nina Roussille is one of those students; she just completed her doctoral studies after five years at Berkeley and as an IRLE associate. Her dissertation used the database provided by Hired.com to research gender differences in salary, where she found that mid-career women generally ask for lower salaries than their male counterparts seeking the same jobs, as their networks tend to include more experienced women workers who’ve been accustomed to lower salaries than their male co-workers.
At Berkeley, she says, the emphasis in choosing your dissertation topic is often on whether the topic could address a question in a way that could change the way people work, or the policies that shape their work. “It’s certainly not the case in departments across the nation,” she says, “but at Berkeley, everyone is trying to be on that frontier.”
And that frontier may just be spreading. “Berkeley, Harvard, MIT, and Princeton are the leaders, but there’s a broad shift toward a more empirical focus,” says Harvard’s Katz. “You see it in young European economists. Even the young people at Chicago are using these methods.”
Indeed, a paper issued this February confirms Katz’s assessment. Using “anonymized bank account data covering millions of households,” the paper examined whether the federally funded increase in unemployment insurance benefits during the pandemic actually discouraged the recipients of the more-generous-than-usual UI from seeking work, as the standard economic models predicted (and as West Virginia Sen. Joe Manchin said he suspected). Instead, the authors wrote, while “simple job search models predict a sharp decline in search in the wake of a substantial benefit expansion … we instead find that the job-finding rate is quite stable.”
In not discouraging job hunting and in boosting economic activity generally, they concluded, “benefit expansions during the pandemic were a more effective policy than predicted by standard structural models.”
And the authors of this bit of empirically derived heresy? Three economists from the JPMorgan Chase Institute and three from the University of Chicago. And, the unkindest cut of all, the paper was published by Chicago’s Becker Friedman Institute, named after the university’s celebrated laissez-faire apostles Gary Becker and Milton Friedman.
The age of Berkeley economics may just be getting started.
