The Eastern Economic Association held its annual meeting in New York this past weekend, and on Friday Paul Krugman delivered the presidential address to an overflow crowd on "The Profession and the Crisis." Although most of it he has written or said before, it was well put and generally well received. Among his points were that economists failed to forecast the crisis and were particularly remiss in failing to note the housing bubble, that poor policy analyses were given with much bad advice as the crisis unfolded, and that that the profession exhibited massive ignorance of both economic history (particularly regarding the Great Depression) as well as of the history of economic thought (particularly that of Keynes) before and even during the crisis.
There were two main items he left out, one brought up by a questioner, one not brought up at all. The first involved the role of income distribution. Krugman sort of fumbled this, going on at some length about how Princeton will have a conference on this very soon without saying who would participate or what they might say. He went on also about how this was not like in the GD, with underconsumption not playing a role, although he did think it interesting that peaks of inequality immediately preceded this crisis and the GD. He finally admitted that inequality might have had something to do with the financial part of the housing mortgage problems.
The unmentioned issue was corruption. Now, with Elizabeth Warren being appointed over strong opposition within the administration, something on this matter might be done. However, that little has been done may reflect how many people from Goldman Sachs have been (and still are) involved in both the last and current administrations at top economic policy making levels. I note that people who have emphasized this issue have included former regulator, Bill Black (the initial whisteblower on the Keating Five S&L scandal), and Jamie Galbraith. Of course, Minsky and Kindleberger both emphasized that corruption and scams are a common side accompaniment of most speculative bubbles.
7 comments:
income distribution is crucial, both consumers and the government go into debt to compensate for maldistribution. This works for a while but makes the crisis worse ultimately. Corruption is simply a symptom of some people having too much money, like mansions and expensive cars, etc. Economists have missed these things for a long time, including Krugman.
Economists pack the hall to hear that those who understood Keynes would have gone for a $1.5T stimulus package instead of a $.8T stimulus package.
Being a "good Keynesian", Krugman will never say the words "quantitative easing" with proper respect. He and Brad Delong and even Dean Baker are absolutely convinced that money must be borrowed from rich people or created by private banks and that government can't be allowed to do so. They still believe this crap in the face of the total collapse of "endogenous money theory". The "good Keynesians" still believe in the absolute sanctity of the "financial sector" as the provider of money in pace with economic expansion and that low interest rates in times of economic contraction allow government to borrow cheap and then recover as the increased tax revenue pay the debt when good times come again. It's pig crap unless you have a very highly progressive tax system. You will find that flattening the progressive nature of the income tax system always causes bubbles and that indexing the tax code to the cpi is theft. There is also the point that if spending does not cause significant inflation then there should be no BORROWING and no tax increase. Why the hell can't economists actually look at the historical data and see these realities?????? The $800B stimulus would have done the trick if there had been no T-Bill sales to soak up the liquidity. Borrowing money from the people who stole it instead of taxing them is pretty stupid.
Re: "..the profession exhibited massive ignorance of both economic history ..as well as of the history of economic thought .. before and even during the crisis....There were two main items he left out[i] income distribution [ii]
corruption."
How about Krugman and other professional economists failing to explain the working of the Bretton Woods II system to the interested public?? Do they know how it works?
I direct the reader's attention to a paper downloadable on the internet entitled:
'Asia, Interest Rates, and the Dollar' sponsored by Deutsche Bank and authored by Michael Dooley, Senior Adviser. David Folkerts-Landau, Managing Director, Global Head of Research . Peter Garber, Global Strategist. Second Edition March 6, 2008
An excerpt:
"The large US current account deficit has been and is generally expected to be financed by dollar bloc emerging market countries at low real interest rates for many years more, as indicated by low market long-term real interest rates. Low rates in the US and other industrial countries support asset prices that look high by historical standards at this stage of the business cycle but are fully consistent with the unusual combination of low market discount rates in a period of rapid growth, high profit, and low inflation...."
Implications and ramifications of this system on the global economy include the emergence of a global liquidity glut, low returns on capital. This, in turn leading to excessive risk taking, financial fraud, theft etc. All in order to increase financial returns on surplus dollars; in an environment where there is a relative lack of global investment opportunities.
ala subprime!
Economists could take note of this predictive paragraph:
"...Our basic story is that a group of foreign governments will be willing and able to finance the US current account deficit for an extended period. [*Not forever]. "Since it is very likely that private investors in these countries, like private investors elsewhere, will not want to invest in the US at the current rate of return, it is key that their governments “dominate” the private sector for an extended time period…. Our forecast is that an increasingly important group of countries do not now and will not for a considerable time period allow private investment decisions to dominate..."
Hmmm... did capitalism end at the very time the Berlin Wall came down?? That was when hundreds of millions of under-employed workers were added to a global market system that we can see simply couldn't cope.
Brenda, why are you surprised taht this has come about? why on earth would you expect Krugman to be opposed to it? What is inconsistent about a general attitude in which the government should direct the economy and our present layout of leadership in which the government directs the economy through a group of very-rich appointed in the interests of the super-rich?
In other words, is there anything between your liberalism and a discretionary monetary policy which has turned out to favor the biggest banks over the whole population of little mortgage borrowers?
Brenda,
Many people were thinking before the housing bubble blew that the large and persistent US current account deficit would cause a crash. I was one of those, but it has not happened so far.
Wellbasically asks: "is there anything between your liberalism and a discretionary monetary policy which has turned out to favor the biggest banks...?"
Well, yeah!
"your liberalism". I'm against concentrated power and wealth. I'd dearly love to see 'government' without these features.
Is that 'liberalism'?
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