Saturday, October 11, 2008

Asking the Wrong Questions 

One thing that has been bothering me of late in the Presidential debate is how the press and the public are asking the wrong questions of the candidates about the economy. While part of it may be symptomatic of a general lack of understanding as to what is going on, it also betrays an intellectual laziness in those covering and discussing the campaign. Wedded to tired lines of debate, these questions rehash what we think is important and distract from the development of an understanding of the current state of affairs which has very little relationship to the ancien regime.

Two general areas of inquiry really stand out.

The first is the "How are you going to pay for this?" bit. Lehrer asked a version of this in the first debate. The set-up goes something like this: We've spent $300B on Fannie and Freddie, authorized $700B for the TARP bailout/rescue, have 2 wars, and you want to cut taxes. So, clearly something you are promising will have to go. What promise are you going to break?

Here's the problem with that answer: It assumes that the government is going to have the luxury of choosing among its spending programs as this economic crisis deepens. The old-school view is that government debt is part of the problem and steps must be taken toward a balanced budget. But, in a matter of weeks, several decades of economic orthodoxy has fallen by the wayside as the Administration reaches deeper and deeper into the government's interventionist toolbox trying to find something that works. In one day, Paulson spent as much money as the Wars cost in a year on a government take-over of AIG. Former Bush-
Administration officials are calling for faster government action, picking winners and losers from among US financial institutions. As Brad DeLong points out, the pendulum has swung back toward (if not past) Keynes.

What Keynesian economics calls for is counter-cyclical government spending to mitigate the effects of an economic downturn on a society. We're well into the crisis, but have yet to see a real move toward counter-cyclical spending. We've seen all kinds of other ad-hoc government intervention in the economy in the financial sector, but little for "main street."

What this question overlooks is the fact that the government probably ought to be spending on all of the candidate's priorities, and maybe then some. Does it drive up the deficit? Sure. But that's the Keynesian point--increased government debt now to avoid a deeper recession later. Given the potential severity of the economic downturn, all this spending and more might be necessary. Yet, asking the question as posed--what will you cut--frames the discussion in the old and now discredited economic context. It makes it harder for the next President to spend what he'll need to in order to help the nation as a whole.

The second question that bothers me is "What's your plan" to solve the crisis. This question has both a flawed premise and produces a counter-productive discussion.

The flawed premise is to realistically expect these two campaigns to come up with a silver bullet before they have the full resources of the US government at their disposal. Obama and McCain have a team of very smart economic advisers working for them from their current jobs. The Treasury and Fed have full time staff who have spent a career working on issues just such as this. They have legal authority, resources, and expertise to gather information, devise plans, and map out potential consequences. They also have the ability and responsibility to consult and coordinate with allies in the G-7 and international institutions like the IMF. And, despite all these advantages, they still have not come up with anything that seems to work.

This question also produces a counter-productive discussion. This crisis is moving with such velocity that any plan seems outdated days later. The $700 Billion TARP that just had to pass? Already obsolete, as Paulson has moved on to directly injecting capital into banks--something that wasn't even in his original plan. Does anyone think that either a McCain or Obama plan would still be relevant by Election Day, let alone Inauguration Day? Neither candidate can do anything now--what we want is what they will do once they get into office--but no one has any idea what the financial markets will look like in mid-January.

Asking the wrong questions generates tremendous amounts of heat with little light to illuminate any useful understanding of the issue.

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Wednesday, October 01, 2008

Leadership in times of Economic Crisis 

The current economic crisis has quickly become a global crisis. Banks around the world are teetering on the edge of failure and governments and central banks are stepping in with as much financial ammunition as they can to bolster the world economy. Despite these actions, and calls for a financial summit by France's President, the world still is looking to the United States Government as the only actor capable of stemming the growing credit crunch and financial panic.

The Washington Post gives a survey of the reaction from bankers and officials around the world. The lede, says it all:
Central bankers and elected leaders around the world acknowledged Tuesday that they lacked a comprehensive strategy to protect their countries from the global financial crisis and were as dependent as ever on Washington to come up with a solution.
Even the EU is sidelined in the current crisis. While the economy of the EU rivals the US and its central bank is strong, it lacks the fiscal tools and policy coordination mechanisms among member states to convincingly act to shore up financial markets. An EU spokesperson said:
"The United States must take its responsibility in this situation, must show statesmanship for the sake of their own country and for the sake of the world," Johannes Laitenberger, a spokesman for the European Commission, told reporters.

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