On Monday, I was on Leonard Lopate’s WNYC radio show talking about my recent article on John Maynard Keynes. (The piece is no longer behind a firewall. You can read it here, and listen to the interview here.) At the end of the show, Leonard asked me an interesting question: Has the financial crisis and Great Recession produced any big new economic ideas? My immediate response was that it hasn’t, or, if it has, I wasn’t aware of them. After the show, I thought about the question a bit more.
I still think the answer is no. There is nothing to compare with Keynesianism or Monetarism or even the so-called Washington Consensus of the nineteen-eighties and nineteen-nineties. Certainly, there is no new Keynes. But I do think that some important ideas have been discovered—or, rather, rediscovered. Here are six of them, together with some tips for further reading, one of which is rather self-serving:
1. Finance matters. This lesson might seem obvious to the man in the street, but many economists somehow managed to forget it. Two who didn’t were Hyman Minsky and Wynne Godley, both of who were associated with the Levy Institute for Economics at Bard College. Minksy’s now-famous “Financial Instability Hypothesis” can be found here, and one of Godley’s warnings about excessive household debt can be found here. (It is from 1999!)
2. Credit busts are different from ordinary recessions. On this, the most widely quoted work is Carmen Reinhart and Ken Rogoff’s historical survey, “This Time is Different: Eight Centuries of Financial Folly,” which details how debt overhang in the public and private sectors tends to produce “lost decades.” For an old but still very readable account of how debt overhang can create deep recessions, I would recommend Irving Fisher’s famous essay from 1933. For something more recent, I recommend this essay by Ray Dalio, the head of Bridgewater Associates, the world’s biggest hedge fund.
3. Positive feedback and multiple equilibria have to be taken seriously. With the rise of rational expectations theory, the idea that financial markets and entire economies can spiral into bad outcomes—and for no very good reason—was relegated to a mathematical curiosity: so called “sunspots.” Now, the notion is back, and for good reason. It appears to describe the world pretty well.
The role positive feedback played in amplifying the credit crisis of 2008 has been studied extensively, and this article by Princeton’s Markus Brunnermeier provides a good survey. Turning to what is happening in Europe, Paul De Grauwe, of the Brussels-based Center for European Policy Studies, and <a href=”http://krugman.blogs.nytimes.com/2011/08/08/wonking-out-about-the-euro-crisis-very-wonkish/ Read the rest of this entry »
There is no need, however, for Israel to wait on the PM’s panel. The process of reform can be undertaken immediately, and on a non-partisan basis. At this very moment, a viable right-left social justice bloc already exists in the Knesset. It would be composed of the major opposition parties Kadima and Labor, along with large sections of the Likud and the religious parties.
Because of their small size and multi-party system, Israel would have a much easier time forming a Radical Centrist political movement than most other countries. But who will step up and make it happen? Read the rest of this entry »
Fiscal Reform From the Radical Center
October 20, 2010
It’s crazy, I know, but imagine that U.S. political leaders after the midterm election called a truce in the partisan tong wars to work out a compromise solution to the nation’s fiscal dilemmas. The result would probably look a lot like a new fiscal reform blueprinted rawn up by two canny policy veterans, Bill Galston and Maya MacGuineas.
Americans Elect, which is inviting the public to a virtual primary, faces daunting hurdles. But dissatisfaction with the partisan gridlock in Washington creates a favorable political climate.
With the dysfunction of Washington on full display as the nation inches toward defaulting on its debt, a coalition of American centrists has launched a bold gambit to nominate a third-party ticket for the 2012 presidential election.
Make Way for the Radical Center
DID I mention that I’ve signed a pledge — just like those Republican congressmen who have signed written promises to different political enforcers not to raise taxes or permit same-sex marriage? My pledge is to never vote for anyone stupid enough to sign a pledge — thereby abdicating their governing responsibilities in a period of incredibly rapid change and financial stress. Sorry, I’ve signed it. Nothing more I can do.
If this kind of idiocy by elected officials sends you into a hair-pulling rage and leaves you wishing that we had more options today than our two-party system is putting forward — for instance, a party that would have offered a grand bargain on the deficit two years ago, not on the eve of a Treasury default — not only are you not alone, but help may be on the way.
Thanks to a quiet political start-up that is now ready to show its hand, a viable, centrist, third presidential ticket, elected by an Internet convention, is going to emerge in 2012. I know it sounds gimmicky — an Internet convention — but an impressive group of frustrated Democrats, Republicans and independents, called Americans Elect, is really serious, and they have thought out this process well. In a few days, Americans Elect will formally submit the 1.6 million signatures it has gathered to get on the presidential ballot in California as part of its unfolding national effort to get on the ballots of all 50 states for 2012.