Blame the Economists?: No Longer Fresh at Project Syndicate
A short version of my review of Adam Tooze's excellent Crashed: How a Decade of Financial Crises Changed the World: No Longer Fresh at Project Syndicate: Blame the Economists?: Ever since the 2008 financial crash and subsequent Great Recession, economists have been pilloried for failing to foresee the crisis, and for not convincing policymakers of what needed to be done to address it. But the upheavals of the past decade were more a product of historical contingency than technocratic failure: BERKELEY—Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade. From the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives. Then came 2008, when everything changed. The goal of full employment dropped off Western leaders’ radar... Read MOAR at Project Syndicate
How to evaluate and understand economists' role in the disasters of the past decade? We are, after all, now a full decade into what looks—this time for real—like the Decline of the (North Atlantic) west. From the end of World War II up until 2007 its rulers—understood as those that the voters elected not always and perhaps not often because of the policies they would pursue—were or were at least believed to be concerned with full employment, price stability, a middle class society with an acceptable distribution of income and wealth, and an open international order in which all countries benefited from international trade and finance. There were always tensions among these goals—perhaps we had to fall short on income distribution to generate incentives for growth, or fall short on openness to protect employment—but the thrust toward all four was not. Then come 2008 all this changed. The desire of North Atlantic rulers to push for full employment dropped off the radar even though there was no threat of inflation or benefits to openness. Making the international order win-win for all similarly disappeared as a policy goal, but not sacrificed for any tangible upside. Restoring the fortunes of the superrich seemed to become the guiding star of economic policy—with perhaps a hope, but not a plan, for it then to trickle down.
At the level of the macroeconomics at which I spend most of the time, this story of the past decade is almost always viewed and understood as a failure of economic analysis and communication. We economists failed to tell politicians and bureaucrats in a convincing way what needed to be done, in large part because we failed to analyze the situation fully and properly in real time. Some—like Carmen Reinhart and Ken Rogoff—saw the dangers of financial crisis, but greatly exaggerated the risks of public spending to boost employment. Others—like me—were looking the wrong way at global imbalances rather than at U.S. financial misregulation as the principal source of risk, but understood well that expansionary monetary policy would not be enough. Still others—like Ben Bernanke—understood the importance of keeping interest rates low, but had a very exaggerated idea of how much good could be done by additional monetary policy tools like quantitative easing. If only we economists had thought more quickly and correctly, and been more convincing where we were right—and less convincing where we were wrong—all would be, if not well, considerably better.
Adam Tooze of Yale University has little time for this story. He is a historian. His history of the post-2007 Decline of the North Atlantic, Crashed: How a Decade of Financial Crises Changed the World https://books.google.com/books?isbn=0525558802 is a story of deeper historical currents, not of technocratic errors of analysis and communication. Increasing inequality driving pressure for cowboy finance and lower taxes on the rich—and higher government deficits and debt—driving further increases in inequality. The George W. Bush administration's decision to busy giddy minds outside the administration as well as its own giddy mind with the ill-planned and ill-thought out attack on Iraq, robbing America of the status and credibility to lead the North Atlantic in 2007-9 when leadership was most needed. The breakdown of the rationality of American politics, as evidenced by the Republican choice of the unqualified George W. Bush and the unbalanced Richard Cheney in 2000, and then its doubling-down in 2008 with Sarah Palin and in 2010 with the Tea Party. when the combination of the financial crisis, the Great Recession, and the Failed Recovery led to the political apotheoses of a race-baiting and nasty ex-reality TV star on the one hand and of a Vermont self-labeled socialist who had previously failed to make alliances or have much of an impact as a legislator. "This denouement", Tooze writes, "might have seemed a little cartoonish"—probably too cartoonish for a writer for a "House of Cards", a "Veep", or a "West Wing" to submit to the showrunners.
Before the crisis it had been rising celebrity-superstar senator Barack Obama who warned that nativism and political breakdown would follow from a failure to construct a "purple America" that would address the concerns of working- and lower middle-class income stagnation and economic security. But the Obama administration he headed had little tolerance for what Franklin Delano Roosevelt had seen as the best way to attempt to deal with problems of this magnitude: "bold, persistent experimentation... common sense... take a method and try it: If it fails, admit it frankly and try another. But above all, try something..."
That Barack Obama beforehand saw—or at least talked as though he saw—the need for aggressive action, but that his adminstration could not carry through, is powerful evidence that Tooze has strong arguments. Economists were unconvincing because ongoing political breakdown, the throwing-away of American credibility, and the malign influence of rising plutocracy meant that economists calling for "bold, persistent experimentation" along the lines suggested by well-founded economic theories were trying to swim against the tide. The political nation—or at least the journalistic-bureaucractic-influence peddling castes often mistaken for the political nation—did not demand and would not tolerate policies that would have made things right.
But I do not find Tooze's arguments to be as strong as he thinks they are. We economists and our theories did make a big difference: save for Greece, we had nothing like a rerun of the Great Depression, and we might have had one. Had we been smarter and more articulate—and less divied, with too many of us chasing red herrings and false wills-o-the-wisp—we might have made a bigger difference.
No Longer Fresh at Project Syndicate: Blame the Economists?: Ever since the 2008 financial crash and subsequent Great Recession, economists have been pilloried for failing to foresee the crisis, and for not convincing policymakers of what needed to be done to address it. But the upheavals of the past decade were more a product of historical contingency than technocratic failure.
BERKELEY – Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade.
From the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives.
Then came 2008, when everything changed. The goal of full employment dropped off Western leaders’ radar, even though there was neither a threat of inflation nor additional benefits to be gained from increased openness. Likewise, the goal of creating an international order that serves everyone was summarily abandoned. Both objectives were sacrificed in the interest of restoring the fortunes of the super-rich, perhaps with a distant hope that the wealth would “trickle down” someday.
At the macroeconomics level, the story of the post-2008 decade is almost always understood as a failure of economic analysis and communication. We economists supposedly failed to convey to politicians and bureaucrats what needed to be done, because we hadn’t analyzed the situation fully and properly in real time"
Some economists, like Carmen M. Reinhart and Kenneth Rogoff of Harvard University, saw the dangers of the financial crisis, but greatly exaggerated the risks of public spending to boost employment in its aftermath.
Others, like me, understood that expansionary monetary policies would not be enough; but, because we had looked at global imbalances the wrong way, we missed the principal source of risk – US financial mis-regulation.
Still others, like then-US Federal Reserve Chairman Ben Bernanke, understood the importance of keeping interest rates low, but overestimated the effectiveness of additional monetary-policy tools such as quantitative easing. The moral of the story is that if only we economists had spoken up sooner, been more convincing on the issues where we were right, and recognized where we were wrong, the situation today would be considerably better.
The Columbia University historian Adam Tooze has little use for this narrative. In his new history of the post-2007 era, Crashed: How a Decade of Financial Crises Changed the World, he shows that the economic history of the past ten years has been driven more by deep historical currents than by technocrats’ errors of analysis and communication.
Specifically, in the years before the crisis, financial deregulation and tax cuts for the rich had been driving government deficits and debt ever higher, while further increasing inequality. Making matters worse, George W. Bush’s administration decided to wage an ill-advised war against Iraq, effectively squandering America’s credibility to lead the North Atlantic through the crisis years.
It was also during this time that the Republican Party began to suffer a nervous breakdown. As if Bush’s lack of qualifications and former Vice President Dick Cheney’s war-mongering weren’t bad enough, the party doubled down on its cynicism. In 2008, Republicans rallied behind the late Senator John McCain’s running mate, Sarah Palin, a folksy demagogue who was even less suited for office than Bush or Cheney; and in 2010, the party was essentially hijacked by the populist Tea Party.
After the 2008 crash and the so-called Great Recession, years of tepid growth laid the groundwork for a political upheaval in 2016. While Republicans embraced a brutish, race-baiting reality-TV star, many Democrats swooned for a self-declared socialist senator with scarcely any legislative achievements to his name. “This denouement,” Tooze writes, “might have seemed a little cartoonish,” as if life was imitating the art of the HBO series “Veep.”
Of course, we have yet to mention a key figure. Between the financial crisis of 2008 and the political crisis of 2016 came the presidency of Barack Obama. In 2004, when he was still a rising star in the Senate, Obama had warned that failing to build a “purple America” that supports the working and middle classes would lead to nativism and political breakdown.
Yet, after the crash, the Obama administration had little stomach for the medicine that former President Franklin D. Roosevelt had prescribed to address problems of such magnitude. “The country needs…bold persistent experimentation,” Roosevelt said in 1932, at the height of the Great Depression. “It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something.”
The fact that Obama failed to take aggressive action, despite having recognized the need for it beforehand, is a testament to Tooze’s central argument. Professional economists could not convince those in power of what needed to be done, because those in power were operating in a context of political breakdown and lost American credibility. With policymaking having been subjected to the malign influence of a rising plutocracy, economists calling for “bold persistent experimentation” were swimming against the tide – even though well-founded economic theories justified precisely that course of action.
Still, I do not find Tooze’s arguments to be as strong as he thinks they are. We economists and our theories did make a big difference. With the exception of Greece, advanced economies experienced nothing like a rerun of the Great Depression, which was a very real possibility at the height of the crisis. Had we been smarter, more articulate, and less divided and distracted by red herrings, we might have made a bigger difference. But that doesn’t mean we made no difference at all.
#shouldread #tooze #greatrecession #financialcrisis #highlighted
