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Jeff Sachs is Right! (at least about one thing)

When the global economy is in free fall and everyone else seems ready to throw each and every Econ 101 principle out the window, we economists – including some previously heterodox – get desperate to save the core principles that lead to prosperity and development.

See Economists Go Back to Basics at Forbes.com.

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9 Comments

  1. I’ve been complaining (a lot!) on various blogs that US economists only look at two data points when discussing what policies “worked” in getting us out of the Great Depression. The two points are ~1933 and ~1942.

    Wednesday CATO ran a full page aid, signed by dozens of true believers asserting that government spending by FDR didn’t work and the New Deal was a failure. This seems to me more about pushing their ideology than actually making any claims about economics.

    Those who study global development know that there have been dozens of downturns in various parts of the world since WWII and that a variety of techniques have been tried to bailout these various countries. It seems to me that this provides much additional data that can be used to test the theories as to what works.

    I’m not an expert, but if I remember correctly the IMF imposed solutions of cutting government spending, raising taxes and paying off foreign banks had the worst outcomes. There were rises in unemployment, poverty and riots in the streets. Economic growth lagged as well.

    Those countries that ignored the IMF and pushed internal spending tended to do better and pull out of slumps quicker. I think S. Korea was such a case.

    So, it would be useful if those with the relevant experience could cite some of the data as a way of contributing to the current stimulus debate. More information and less ideology would be refreshing.

    Posted January 30, 2009 at 9:58 am | Permalink
  2. Ben wrote:

    I believe that it is now generally accepted that the only thing which works macroeconomically is cutting interest rates, and it is generally accepted even by the IMF that most of the advice formerly given by the IMF was wrong.

    The problem is one of adjustment. Resources including labour have to be re-allocated to efficient uses, which is very painful if you are that labourer.

    However the best cure is to stop putting obstacles in the way of putting people to work. Obstacles like payroll taxes on low-income jobs, registration requirements and minimum wage laws.

    Posted January 30, 2009 at 11:53 am | Permalink
  3. “There are variations around these core ideas of course, but the variations are always grounded in a home of sensible economics 101. In the midst of the scariest crises of our lifetimes, economists are coming home.”

    I’m trying to understand this statement logically. In a crisis, economists go back to textbooks. How then do textbooks change, or is economics a set of simple truisms like Poor Richard’s Almanac?If I understood Kuhn correctly, it is crises during which science advances. Perhaps I’m wrong about Kuhn, or economics isn’t a science.

    Sadly,for some at least, life and science are full of paradoxes and violations of common sense. It might well be, for example, that, in our system in the US, the only way to enforce moral hazard is to take over some banks, and then return them to the private sector scrubbed clean. Paradoxically, you might have to nationalize in order to keep our welfare state functioning. Why? Because that’s what the banks fear most.

    You say go back to basics. I agree. Try Walter Bagehot and Irving Fisher and Adam Smith for starters. Keynes is good as well, also Hayek, because economists were still then practitioners of political economy. My personal favorite has always been Jevons, even though I haven’t read him in years. Skip the current textbooks.

    Will they help us? A little. We’ll solve this mess in our own way and in our own time, and people will still be arguing about it forever. I’ve generally found in life that I end up saying “Why wasn’t this in the textbooks?”

    Posted January 30, 2009 at 8:25 pm | Permalink
  4. qt wrote:

    Good column. One doubts, however, that Paul Krugman and Alan Blinder were members of this cotterie of economists.

    The more one considers the idea of stimulus, themore one wonders about the long term consequences. The present crisis is extremely complex and difficult to solve as amply demonstrated by the Fed & the Treasury. There is a tremendous danger of public policy based upon a rising tide of protectionism, and anti-globalization and anger.

    Rather than trying to figure out how we ended up with a perfect storm, people look for someone to blame. It is, of course, easier than trying to get one’s head around the nature of the problem and how to solve it. Milliken Institute helped to sort out some of these issues

    One doubts, however, that Paul Krugman and Alan Blinder were members of this cotterie of economists.

    Posted January 31, 2009 at 7:27 am | Permalink
  5. tkn wrote:

    Sachs isn’t right, and the Washington consensus was a power play and a scam.

    Perhaps it reflects why economics is barely a science… an attempt to impose ideology on the world rather than explain natural phenomena is a common failing in the field. Feinman is right – why are the best examples of developed nations ignored – e.g. South Korea and Japan. Could it be because they both involved extensive government intervention?

    “Our prior prosperity” ignored the widening wealth gap, the corrosive rent-seeking by industries which had grown into oligopolies, the gutting of the manufacturing base on the promise of comparative advantage, the externalities of environmental damages, and the fact that in the end a lot of the gains were at-risk monoculture – made in “paper” volatile financial instruments of little practical value.

    Posted January 31, 2009 at 10:39 am | Permalink
  6. qt wrote:

    There seems to be a confusion between political philosophy and economics. The U.S. & Europe are examples of mixed economies (ie. they have a mixture of private and public management of the economy). Europe has a tendency towards public ownership whereas the U.S. tends to favor government regulation.

    When one considers the political left and right, it is clear that Democrats & Republicans have no consistent philosophy whatever. How is it possible for the Republicans are the party of Lincoln & emancipation as well as the party that supported Southern segretationists? The Republican Party, which purports to believe in small government and fiscal restraint has presided over massive government expansion and profiligate spending under both Reagan & more recently Bush (can it get much more invasive than Homeland Security and warrantless wiretapes?).

    By contrast, the Clinton years ushered in lowered taxes, balanced budgets and welfare reform. (to be fair, one has to concede that the house which comes up with the budget was controlled by the republicans and that welfare reform was supported by both parties). It was Nixon not Jimmy Carter who said “We are all Keysians now”. So neither of these political parties is consistently associated with any recognizable school of economics (Austrian, classical, macro, micro, whatever). Politicians blow the way the polls blow.

    The last 8 years of GWB have left the U.S. bitterly divided between 2 partisan factions spilling over politicizing issues in many other areas like economics, education, religion, medical research, etc. Economics, however, would seem to be more than just another branch of politics.

    The idea of Adam Smith’s invisible hand was a startling and revolutionary idea like Newton’s theory of gravity. The thought of a force at work in the decisions of consumers, and small businesses rather than just multi-national corporations or billionaires working across all socio-economic, religious, political and demographic barriers. It was neither a liberal nor conservative idea but an idea that had never been considered before.

    Economists consider massive amounts of raw data, and research conducting by thousands of researchers studying highly complex phenomena and coming to all kinds of different conclusions. Such activities cannot be distilled into 2 monolithic, simplistic ideologies of liberal and conservative.

    Reducing the world to simple soundbytes and slogans is the purview of politicians and journalists not economists.

    Posted January 31, 2009 at 6:43 pm | Permalink
  7. e-dawg wrote:

    The Forbes piece contains the following:

    “Rapid deregulation has its risks, which we have learned that financial regulators should manage carefully, but too much regulation is far worse.

    I think it’s actually pretty difficult to justify this statement in any way. The hypothetical risks of “too much” regulation might mean marginally slower growth. We now know that the very real risks of inadequate regulation can set off a global economic panic and bring us to the brink of a global depression. Which is worse?

    If you could offer a clear choice between policies that resulted in two outcomes: (a) a reduction of, say, half a percentage point in GDP growth but much lower risk of experiencing a crisis like the one in which we currently find ourselves and (b) slightly higher growth but a much greater risk of crisis, I think it would be foolish and irresponsible of any government to choose (b).

    Posted February 2, 2009 at 3:23 am | Permalink
  8. BudaFriend wrote:

    The flight to ‘timeless’ principles in times of crisis is not limited to economists. (German/Jewish) political philosophers who laid foundation for the post-modern relativist philosophies in 20s, turned objectivists in 30s in a desperate hope to sustain an argument against Hitler’s claims. We are all Platonians now to preserve the ‘indisputable’ basics of development economics.

    BTW: Williamson formulated the Washington Consensus in 1989 (not 1980 as mentioned in the Forbes column)

    Posted February 2, 2009 at 7:45 am | Permalink
  9. Enrique wrote:

    Going along with the sentiments of qt’s second post I believe that the 2 party divide and the polarization of views in America during recent times is too prevalent. Taking almost any issue and trying to file it under only two opposing stances will likely lead to greatly oversimplifying the issue and as a result I believe the most educated efficient courses of action on the issues are often missed. Here’s to hoping for a weakened left right divide in the future so that a more constructive and integrated course of action can be born.

    Posted February 2, 2009 at 9:55 pm | Permalink