Friday, November 28, 2008

Good Op-eds on Economic Policy & My Take

There have been quite a few excellent op-eds on economic policy over the past few days, due in large part to Obama announcing his economic team.

Paul Krugman on financial crises and the need for regulation: Lest We Forget

David Brooks on forcing stimulus to have a long-term strategy: Stimulus for Skeptics

Dean Baker on the selection of the current economic team: Geithner at Treasury: Can He Learn?

For a bit more innuendo on why this economic team might be suspect, see this article in the Washington Post: Familiar Trio at Heart of Citi Bailout

My Take:
On the one hand, I am somewhat heartened to see that Obama seems to have something of a long-term strategy attached to stimulus - green technology, infrastructure, and patching the holes in the safety net. I will note one caveat there - he has also mentioned "aid to local and state governments" but has not mentioned what the aid would be used for. Might I suggest local public transit initiatives as an excellent option? Connected with a real rail infrastrucure (at least in California and East of the Missisippi), a good network of local public transit would do a lot to solving energy problems and building integrated markets. There are still a number of major cities that lack a real metro system, for instance (Philidelphia is but one example).

On the other hand, I am worried that Obama has been so cautious in his selection of his economic policy team. I expected to see a few old hands in top policy positions - particularly Geithner. But I was also hoping to see Obama do a little reaching out to the left - the source of his core support. In fact, his economic team is arguable more conservative than Bill Clinton's - after all, Clinton had Joeseph Stiglitz has his chairman of the Council of Economic Advisors. Christina Roemer is a solid choice, giver her expertise on the Depression, but having all of the other top positions held by centrist figures (Summers, Voelcker, Geithner, and Goolsbee) makes one wonder exactly how much debate there will be on economic policy.

Furthermore, all of these gentlemen (excepting Goolsbee), have had a hand in serious policy blunders. Summers is well-known for his part in the deregulation leading to this crisis - he was Treasury Secretary when the bank holding provisions of Glass-Steagall were repealed, and when the SEC avoided regulating credit default swaps (at the behest of Hank Paulson when he was at Goldman Sachs, among others). Voelcker spearheaded the end of stagflation, but he did so by strangling the US economy and raising interest rates to ridiculous levels. In doing so, he also sparked the debt crisis in the developing world, known as the "Lost Decade" in Latin America.

Geithner, on the other hand, was a member of the team that ensured IMF austerity conditions would be attached to loans in the 1997-8 Asian crisis. In essence, he forced countries facing an outflow of investment capital to spend less on their economies and to raise their interest rates... and these were countries that had balanced their budgets for years (unlike the US). These policies are known as "pro-cyclical" in economics jargon, and they have the effect of exacerbating a pre-existing crisis. In fact, the country that recovered most quickly from the crisis was Malaysia, who ignored IMF advice and imposed controls on capital flight, cut interest rates, and increased spending. This is exactly the opposite of what the US is doing now, and the exact opposite of what economists recommend should be done in a crisis.

Whether these gentlemen have learned from the past twenty years of supposed "consensus" that led to this fiasco remains to be seen. Until I see proof that they have, however, I worry that any response to the current crisis will be luke-warm - too small and too short-term. That was the mistake FDR made in the Depression, and if we learn from history, we should not make the same mistake again.