Thursday, October 30, 2008

Paradigm Shift

It has been easy to mock Sarkozy in recent weeks for his battlefield conversion to dirigisme, state ownership, job subsidies, and so on, but even presidents are playthings of the gods, and the gods seem to have struck awe into minds far more consistently free-market-oriented than Sarkozy's. Witness this "remarkable" (to borrow Sarko's favorite adjective) article by Martin Feldstein in today's Washington Post. Feldstein not only calls for a stimulus package larger than the one proposed by the Democrats but also foresees a need for government intervention to put a floor under declining housing prices lest the unabetted free market "overshoot" on the down side.

We are all Keynesians now.


Unknown said...

perhaps more to the point, we need to recognize that this global financial crisis is so different from what we experienced in past decades that we cannot be sure that we know enough at this time to have a decent sense of what the future holds. Is world GDP growth going to be +3% or -3% in 2009 ? It is hard to tell as events here and there seem to be mutually self-reinforcing. Kudos to Prof. Mankiiv of course on this one.

Incidentally, neither Sarkozy nor Brown invented the bank bailout. Without even going back to the Swedish bailout in the early nineties, it was of course the Belgian PM (but is there one right now?) and the Dutch PM who did with the Fortis operation. The chronology is pretty clear.

Unknown said...

Prof. Mankiw? Are you referring to his piece in the Business Section of last Sunday's Times? He seems inordinately fond of his little joke that neither Harvard nor Yale predicted the last Depression and believes that this should lead us to some healthy skepticism about the wisdom of heeding the advice of economic theorists as to the future course of this one. Skepticism as to the relevance of economic theory is of course always welcome, but I wish that Mankiw didn't apply it so selectively. For instance, he was less skeptical when calculating on his blog the likelihood that Obama's tax program would result in a disincentive to work on the part of well-to-do "Greg the Economists" like himself. Yet he seems quite willing to propagandize gratis on behalf of the Republicans, demonstrating yet again that lucre isn't man's only motivation and that the behavioral economists who surround Obama might have something to teach even the profession's right wing.

Unknown said...

Somehow, I had a hunch that mentioning in a nice light Greg Mankiiv might provoke a furious reaction. I was indeed referring to the piece in the NYT. And I am well aware of his political views, which I do not share at all (and am often "amused" these days by what he writes on his blog).

The point remains, though, that too many people are trying to sound too assured pinning down some number for 2009, when the reality is that this crisis is moving in ways that really surprise observers.

Take the latest consumer survey and expectations of the results of this survey. Further, do people for instance realize that a substantial part of international trade is at the moment largely blocked because importers cannot obtain letters of credit from any bank? Do people realize that economies have not therefore ground to a halt because producers have been drawing down inventories for the time being (and this will show up in 4th quarter GDP: imports and inventories down)?

I have actually been in the forecasting business for 30 years and I would say that uncertainty in forecasts is at the present time doing precisely the same as VIX (volatility measure on market index), but that most economists do not seem to acknowledge that we might not know enough. And it is extremely important at the moment to take into account this uncertainty in the design of stimulus etc. packages. Thus my kudos to Mankiiv who had the guts as a professional economist to come out with it.

As for the behavioral economists surrounding Obama, I have lots of respect for them, they are giving him cutting edge advice. Though, as an economist, I am unsure that everything we thought prior to the birth of behavioral economics must be recanted!

As for the lucre motive and behavioral economists, I am not sure that we should go there. You see, I seem to remember someone - was he originally at MIT? - who was able to combine both in his advice on east european reforms fifteen years ago. I suspect that lost him permanently chances at Bates and other Krugman-style been there done that.