Joe Stiglitz, via Vox: The lessons of the North Atlantic crisis for economic theory and policy
In analysing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last thirty years – as liberalisation policies became dominant – have given us a wealth of experience and mountains of data. If we look over a 150-year period, we have an even richer data set.
With a century and half of clear, detailed information on crisis after crisis, the burning question is not “How did this happen?” but ‘How did we ignore that long history, and think that we had solved the problems with the business cycle’? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.
Markets are not stable, efficient, or self-correcting
The big lesson that this crisis forcibly brought home – one we should have long known – is that economies are not necessarily efficient, stable or self-correcting.
There are two parts to this belated revelation:
- One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.
There are not only short run endogenous shocks; there are long run structural transformations and persistent shocks. The models that focused on exogenous shocks simply misled us – the majority of the really big shocks come from within the economy.
- Secondly, economies are not self-correcting.
To add an asymmetric point on the question of “endogenous” and “exogenous.” If nature, including the economy, is fundamentally asymmetric, then it is interconnected is such a way as to make perfectly exogenous shocks impossible. But borderlines can and should be drawn to define circumstances and cases arising in models within the economy, within nature. But nothing can be totally outside the asymmetric economy. This endogeny, as described in Unicycle, provides a foundation to deduce a progressive ethics of the market, as well as more generally.
It is predictable that the political orientation of believers in a self-righting market would be temperamentally against endogeny and prefer to emphasize “outside” shocks to the economy that would supposedly upset its closed perfection, as though there are perfect circles in reality. The illusion is to think we can step outside the market (try fasting); if we want to help the market, we must do something positive about it.
Heraclitus, according to Plato, famously said something like: we can’t step in the same river twice; he might have added something like: nor can we step out of the “river of asymmetry,” where all our actions together include the bustling marketplace, day after day.
Et voilà! Life can be so simple.
Here it is:
Berkeley economist Emmanuel Saez’ lecture presents evidence on income inequality from the World Top Incomes Database. The database includes top income shares time series over the long run for more than twenty countries. He summarizes the key empirical findings and discusses the role of technology and globalization, government regulations, and tax progressivity in explaining the empirical findings. Published on Feb 1, 2013.
And here via Mark Thoma: A Conversation with Emmanuel Saez: Taxing away Inequality
Hard to know what to add to this example of serious attitude by serious money. But I should not be so surprised; after all, writers have been on about this for a long time, Charles Dickens for one — an example of how to handle it without becoming moralistic and caught up in the process. Without having to say so, Paul Krugman makes it clear that economics cannot be entirely separated from moral philosophy, even as he warns that economics is not a morality play. That is to say, it is supposed to be based on reason and evidence. Curiously, all the evidence is that nature is asymmetric, and thereby hang a tale—
Labs for Testing Fiscal Policy Positions by Owen Zidar
And Paul Krugman wonders, “Will it make any difference that Ben Bernanke has now joined the ranks of the hippies?”
Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice.
First of all, he pointed out that the budget picture just isn’t very scary, even over the medium run: “The federal debt held by the public … is projected to remain roughly 75 percent of G.D.P. through much of the current decade.”
He then argued that given the state of the economy, we’re currently spending too little, not too much …
Finally, he suggested that austerity in a depressed economy may well be self-defeating even in purely fiscal terms: “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”
So the deficit is not a clear and present danger, spending cuts in a depressed economy are a terrible idea and premature austerity doesn’t make sense even in budgetary terms …
Mr. Bernanke is a fine economist, but no more so than, say, Columbia’s Joseph Stiglitz, a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored. No, the point is that Mr. Bernanke’s apostasy may help undermine the argument from authority — nobody who matters disagrees! — that has made the elite obsession with deficits so hard to dislodge.
Asymmetrically perhaps, lawmakers who actively promote extreme ideas should be held responsible for the human suffering caused by their economics and its philosophy, especially when they consciously deny the facts and reasons. When data accumulate over time it provides history. Here is a good example (going into the “sequester”) of how history can focus the record and the mind, from Brad DeLong and via Project Syndicate.
But let’s back up historically, to the founding of what we might call modern conservatism in early nineteenth-century Britain and France. There were some – Frédéric Bastiat and Jean-Baptiste Say come to mind – who believed that government should put the unemployed to work building infrastructure when markets or production were temporarily disrupted. But they were balanced by those like Nassau Senior, who spoke out against even famine relief: Although a million people would die in the Irish Potato Famine, “that would scarcely be enough.”
Read where we went from there, here. And note the morality; without keeping track of what has been thought, let alone the data, how can we identify extremes? Easy to see how philosophy as a rational discipline gets so easily on the defensive. When you hear that philosophy is just an opinion or that it isn’t relevant or that economics (basically the study of survival) is boring, check your purse or wallet!
Here’s the article we’ve been waiting for: How Austerity Kills (NYT). And here’s the book! The Body Economic: Why Austerity Kills by David Stuckler, a senior research leader in sociology at Oxford, and Sanjay Basu, an assistant professor of medicine and an epidemiologist in the Prevention Research Center at Stanford.
More: Austerity: The History of a Pernicious Idea by Mark Blyth, reviewed by Ruy Teixeira in The New Republic.
Yet more evidence of the incredible unwisdom of European economic policy
Paul Krugman presents: Paul De Grauwe and the Rehn of Terror
“Nobody has taught me as much about the euro crisis as Paul De Grauwe, who brought to the fore a crucial point almost everyone was overlooking: the importance of self-fulfilling debt panics in countries that no longer have their own currencies. Now he has a new paper with Yuemei Ji following up on that insight, and offering yet more evidence of the incredible unwisdom of European economic policy.” –Paul Krugman