13 October 2008

Krugman Wins Nobel Prize

Paul Krugman, has won the Nobel Prize in Economics. He is a fine choice. The announcement from his employer is here. You can find some posts from blogging economists here and here and here and here. I'm sure others will appear. Most of these provide useful links for those interested in sorting out what Krugman does when not writing for The New York Times. While each of the principals is congratulatory, the comment thread at Marginal Revolution, for instance, is full of right-wing banshees yowling that the award simply signals the politicization of the discipline. One whines that the prize should be abolished.

I have no doubt that political considerations entered into the award. The notion that economists are dis-interested scientists or engineers is silly. No, it is sheer ideology. Indeed, Krugman's column today on differential responses to the financial crisis across countries is spot on in this regard.

"What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis (stress added)."

For those worried about the politicization of economics, the big danger, in my view, is not the award committees; the problem instead is the way politics has infiltrated economic policy in intellectually indefensible ways. Krugman points to two important things here. First, the homogenization of economic advice belies what the models and studies actually show. So, some diversity among advisers would be useful. Second, ideology - blind commitment to privatization and deregulation - has driven economic policy making in the U.S. over the past three or four administrations. I posted on that train wreck yesterday. That ideology has drive the world economy into the ditch.

Economists too readily pontificate about all that they "know" and many pretend that there is a consensus on that putative knowledge. That this largely is self-deception I recommend an only somewhat dated book: William Keech, Economic Politics: The Costs of Democracy (Cambridge UP, 1995). Keech, a self-described conservative, deflates the overly confident claims of economists in a useful way. Among the important things Krugman has done is to underscore that there are real, systematic difference among economists and that those difference have political consequences.

Labels: ,


Blogger AMEN said...

I would recommend reading The Shock Doctorine by Naomi Klein for a better understanding of the current Friedmanomics that is plaguing our world.

18 October, 2008 00:17  

Post a Comment

Links to this post:

Create a Link

<< Home