The real question is not why do people fall through the cracks, the real question is why are there so many cracks?
Posts Tagged ‘Economic Crisis’
Dani Rodrik on the economists’ role in bringing about the most recent financial crisis:
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks. It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense. But this argument conveniently overlooks the legitimizing role played by economists themselves. It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil. In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned. With influence must come accountability.
I think a lot of economists were deeply impressed by the elegance of their models. These models describe an imagined economy where the markets functioned perfectly. In such an environment, the market achieves very good results and does not need any kind of state intervention. That’s a very elegant model. It was something which Adam Smith did discuss, but he discussed it along with all the limitations that must be borne in mind. Other early economists who used simplified models of this kind also stressed the importance of noting that the world isn’t anything like that. Edgeworth did that, Walras did that, Wicksell did that. Many modern economists take their simplified models too seriously.
In which ways do you think new economic thinking is necessary and how should it look like?
I think we need a bigger, more integrated view that economists tended to look for, in the past. We have to see the totality of the concerns that make human beings want a good economy. The kind of economic thinking that I would like to see pays a lot more attention to issues of human freedom. What I have in mind is real freedom, not just formal liberties but also what kind of lives people manage to achieve, what they can do with their lives, and what help of the state they need for more substantive freedom. The basic question economists should ask themselves is: What can we do to have a decent society where people get much more freedom to live the kind of lives of which they would have reason to be proud and happy.
You make a lot of references to old economic thinkers like Smith, Keynes and so on. However, if you look at the current economic research that is published in the journals and taught at universities, the history of economic thought does not play a big role anymore…
Yes, absolutely. The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.
Is there any hope that this trend can be reversed?
Yes, I’m quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I’m particularly delighted that the corrective has come to a great extent from student interest. I’m very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith’s philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard.
When I picked up Jamie Galbraith’s new book, “Inequality and Instability,” (OUP) I was expecting something pretty simple: a pithy narrative of how inequality in the 2000s destabilized the world economy by forcing demand to grow through a credit bubble. However, Galbraith did waited until the very end to cover that argument. Instead, he spent the majority of the book using inequality as a lens to recast our economic history from the last several decades.
For those seeking a Krugman-esque polemic that weaves together narrative threads on how the crisis happened (as I was), this book may be disappointing. It offers a rich set of essays on inequality that draw from careful work of applied statistics. Galbraith develops a novel approach to dealing with income and wage data for inequality statistics, and then hops around the globe, retelling the stories of regions and countries alike in light of data on inequality. By sector, region, and year, Galbraith shows how countries from Cuba to Argentina to Norway have changed over time.
His data yields rich insights; for example, based on a careful study of US data, he concludes,
There are practically no jobs to be had in the winning sectors…the American economy became leveraged, in such a way that its performance as a whole came to depend on the possibility of a very small number of people becoming very rich in very limited lines of work.
Piketty and Saez have offered data that shows the fractal-like qualities of the entire income distribution, but Galbraith’s data, by sector and region, show that economic geography matters deeply.
Later, writing about Argentina and Brazil, Galbraith finds that
declining inequality in this part of Latin America appears directly linked to a weakening of the political forces that supported neoliberal globalization.
Galbraith’s sector-level view of the economy leads to some key conclusions about finance as well- he finds that finance drives inequality, and as it siphons more and more of total income, its cycles drive employment as well. With these insights in hand, Galbraith does eventually get around to the argument I was waiting for:
The financial crisis…was the consequence of a deliberate effort to sustain a model of economic growth based on inequality that had, in the year 2000, already ended….when the collapse came, it would utterly destroy the financial sector.
Of course, finance’s role in the economy persists heavily, and economists and politicians alike continue to debate its value. What is clear from Galbraith’s work, though, is that growth based on finance will likely not be shared, and thus, not sustained.
Thomas Frank hits the nail on the head when describing responses to the crisis in his new book, Pity the Billionaire. First, there is the Tea Party response, which views the problem as government intervention, despite strong evidence that deregulation of financial markets and institutions is the greater culprit. Thomas Frank writes that this response was “as extraordinary as if the public had demanded dozens of new nuclear power plants in the days after the Three Mile Island disaster”:
Before the present economic slump, I had never heard of a recession’s victims developing a wholesale taste for neoclassical economics or a spontaneous hostility to the works of Franklin Roosevelt. Before this recession, people who had been cheated by bankers almost never took that occasion to demand that bankers be freed from red tape and the scrutiny of the law. Before 2009, the man in the bread line did not ordinarily weep for the man lounging on his yacht.
This naturally raises the question, what has been the response from the other side? The point that I have made before, and Frank makes in this book, is that the response from the other side has been “nothing”:
On the surface, the Tea Party line and the new revived radicalized conservatism sounds pretty good. They’re asking questions that need to be answered. Why did the regulators fail? I mean, that’s a really good question. Their theory is that, you know, it’s government. Government always fails. Right?
The important thing is what’s the answer coming from the other side? What is, say, the administration of Barack Obama? What’s their answer to the question? You know what it is? Nothing. They don’t ever talk about it.
This is the key point. The Left has not had a response to the crisis. And in my opinion, the key obstacle is that the Left does not have a theory about the crisis. This is the main difficulty that the Occupy Movement faces. And neoclassical economics has not been much use. Neoclassical economics has an obsession with general equilibrium; price changes occur when there is a shock to either demand or supply, but a new equilibrium should quickly take hold. It’s not clear that this story is at all useful: there was no external shock, rather the financial markets proved to be inherently unstable. It’s even hard to see how the concept of equilibrium is useful in our present situation.
Going forward, this is the paramount challenge to liberal economists. We need to build a new theory, one that answers these questions that so many people ask but mainstream economists cannot answer: why did the regulators fail? How can we think of markets as inherently unstable? And, as Thomas Frank warns, we want to make sure that this new theory does not pity the billionaire, as does the Tea Party response.
The Occupy Wall Street movement has spurred forward various other movements that attempt to imagine a new, people-based economy. One such initiative was Bank Transfer Day [ht:cr]:
Bank Transfer Day began out of the Occupy Wall Street movement as thousands of Americans took to rallying in Lower Manhattan against, among other things, the bailout of the institutions that have made many homeless and broke. As the Occupy movement spread from city to city, so did the agenda of the demonstrators. Bank Transfer Day quickly became a hot topic across the Internet and in Occupy encampments across the country, and with the help of the hacking collective Anonymous, snowballed into a major part of the large Occupy agenda.
“The 99 percent movement is all about finding ways for people to change the economy that is benefiting only the 1 percent,” Courtney Yax, 24, tells The Buffalo News. “Bank Transfer Day is about the power of individuals to take their money out of institutions whose profits go almost entirely to Wall Street and keep that money in our community, where we can control it.”
Rodger Backhouse and Bradley Bateman take an interesting look at how the teaching and research of the economics profession has changed [ht:av]:
IT’S become commonplace to criticize the “Occupy” movement for failing to offer an alternative vision. But the thousands of activists in the streets of New York and London aren’t the only ones lacking perspective: economists, to whom we might expect to turn for such vision, have long since given up thinking in terms of economic systems — and we are all the worse for it.
Perhaps the protesters occupying Wall Street are not so misguided after all. The questions they raise — how do we deal with the local costs of global downturns? Is it fair that those who suffer the most from such downturns have their safety net cut, while those who generate the volatility are bailed out by the government? — are the same ones that a big-picture economic vision should address. If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.
With increased media attention, everyone is offering up their opinions about the Occupy Wall St. movement. Find out who said what at the New York Times [ht:cr]
1. “I for one am increasingly concerned about the growing mobs occupying Wall Street and the other cities across the country.”
2. “I think it expresses the frustration the American people feel.”
3. “They blame, with some justification, the problems in the financial sector for getting us into this mess, and they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them.”
4. “Don’t blame Wall Street, don’t blame the big banks, if you don’t have a job and you’re not rich, blame yourself!”
5. “We are the 1 percent.”
6. “God bless them for their spontaneity. It’s young, it’s spontaneous, it’s focused and it’s going to be effective.”
7. “This is like the Tea Party — only it’s real. By the time this is over, it will make the Tea Party look like … a tea party.”
8. “I think it’s dangerous, this class warfare.”
9. “What they’re trying to do is take away the jobs of people working in the city, take away the tax base that we have.”
10. “I’m very, very understanding of where they’re coming from.”
I don’t think we have posted this one yet [ht:jm]:
But actually it is quite well done and fairly witty. And it gets to some important points about inflation that have been discussed by others: there are winners and losers. That is, economic actors are affected differently depending on their position in the economic system.
Joseph Stiglitz has always seemed to me to be among the more reflective members of the profession. Here, he steps back to take a broader perspective on the relationship between economic theory and the economy:
Just a few years ago, a powerful ideology – the belief in free and unfettered markets – brought the world to the brink of ruin. Even in its hey-day, from the early 1980’s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.
Moreover, output growth in the United States was not economically sustainable. With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.
I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case.
These arguments mirror his story in Freefall, which I maintain is one of the more reasonable accounts of the financial crisis. Stiglitz realizes that finance has been and will continue to be a race between the regulators and the regulated. Undermine the regulators and chaos ensues.