Time flies on the Ron Smith show… it was supposed to be one hour, but he asked me to stay for two. The topic of conversation changed as well; we were going to talk about Greenspan’s editorial and how economists did not like Obama and Geithner’s performance so far. Instead, because the Madoff news broke, we talked about that and a flurry of other issues in our broken economy.
It was fun, and Ron is a very bright guy. We seem to have good chemistry, and that is one reason that I go to the studio rather than do it by phone. Eye contact is worth a lot; it aids our ability to interact. I will also say that our conversations off the air are very stimulating.
But that brings me to tonight’s topic. We did talk about Greenspan’s editorial briefly, but we never got to talk about the WSJ article, Obama, Geithner Get Low Grades From Economists. That’s what I would like to address now.
Geithner and Obama got scores of 51 and 59 from the economists on a scale of 100. Why might they have scored them this way?
- The response has been slow.
- The proposals are vague.
- The proposals aren’t big enough.
- The proposals are too big.
- The bills are a crazy quilt of misbegotten earmarks.
- The White House/Treasury hasn’t appointed the undersecretaries necessary to help Geithner. What kind of incompetence during a crisis is this?
- The effects of these proposals are too uncertain.
Now, Ben Bernanke received a much more favorable reception from the economists, with a score of 71. Why the higher and different score?
- Economists favor other economists — there is a bias toward those that understand the profession, whether they are competent or not.
- They believe that Bernanke understands the Great Depression well, so he must have the right answers.
- Bernanke is basically following the lead of Friedman and Keynes as he approaches these problems. His actions are a test of neoclassical and Keynesian macroeconomics.
- He acted quickly, even if it had no significant effect on the crisis.
Economists are loath to repudiate themselves. They defend their discipline, even when it is tough to do. Americans, by their nature, prefer action to inaction. It is one of our failings. So it is with the economists, and even more so. They presume that some level of action with monetary or fiscal policy will get the economy out of the jam that we have self-manufactured.
Now, there is a broader question to ask, and it is, “Should economists be questioning Obama and Geithner, or should it be vice versa? After all, the economics profession has not distinguished itself in the last two years. Those that have gotten it right (like me and others) have been fringe elements in economics. The Neoclassical school is in shambles, and now the Keynesians take the field in an effort to prove that they are right. Both will fail, in my opinion.
Neoclassical economics, the dominant paradigm, does not understand how financial markets affect the economy. The Keynesians assume that financial markets affect the economy, but that the effects are haphazard due to the “animal spirits” (irrationality) of businessmen. With all of the advice from economists, you would think we would be closer to a solution by now, but due to disagreements, that is not the case.
As it is now, those that voted for Obama wanted change, but have ended up with an economic approach to the crisis that is basically Bush-plus. Do everything that the Bush, Jr. Administration was doing, but do it bigger, with many earmarks peripheral to economic stimulus, but dear to Democratic constituencies. Much of that money will be wasted and do little good for the economy.
But if only Nixon could go to China, if only Clinton could do NAFTA and welfare reform (with his arm twisted), if only Bush, Jr. could promise compassionate conservatism and deliver the Iraq war and spend like a maniac, then perhaps Obama could surprise us too. I don’t care for his policies, but he is a bright guy. Perhaps he could see past the the Neoclassical and Keynesian economists and choose something totally different. Unlikely, though, because of all the economists appointed to different areas of his administration, many of whom have big reputations and egos.
This piece from the Washington Post spells out the situation well. It looks like a “too many cooks spoil the broth situation,” where heavyweights neutralize each other, pulling in different directions favoring their own personal theories. Odds are that leads to delay, and compromise solutions that do little good for the economy.
So, watch the current melange of policies continue, generating little positive effect on the economy.