Tuesday, March 17, 2009

Europe Needs More Economists

Charles Wyplosz thinks Europe needs more economists, especially of the "saltwater (pro-fsical policy) macro" variety:

Why, then, the growing divide between the US and Europe on how to respond to the recession? The size of public debts is one answer. Another answer is that the hallways of power in Washington (both in the Fed and the Treasury) are peopled with first-rate economists who happen to be of the saltwater variety who believe that fiscal policy works and have developed a clear view of what they want to see done. Several of them are also economic historians who have studied the Great Depression in great detail and concluded that, maybe, policy actions did not do as much good as is sometimes asserted, but that inaction under the Hoover administration transformed the financial crash into a full-blown recession.

Now look at the hallways of power in continental Europe, and you will not find many economists, even fewer first-rate economists, and certainly no one who can claim any in-depth knowledge of the Great Depression. Confused policymakers cannot develop a macroeconomic strategy on their own. On the other hand, microeconomic policies are more reassuring, because they do not seem to involve general equilibrium reasoning. Policymakers like partial equilibrium reasoning – because it is easier but mainly because they can believe that they understand what they do. Of course, we know that partial equilibrium is dead wrong and that you never get what you expect.

All this is true enough, but it's also true that one of our saltwater macroeconomists, Larry Summers, was deeply involved in removing and limiting the regulations on banking and financial markets. The remedy may thus lie in the malady, but I wouldn't say in this case that it's a blessing in disguise (I allude to Jean Starobinski's Le remède dans le mal, my English translation of which was published under the title Blessings in Disguise).

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