Monday, September 21, 2009

Has Krugman found a flaw in Keynes?

In the grim period that followed Lehman’s failure, it seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world’s financial system to the edge of collapse. At the very least, one might have thought, they would show some restraint for fear of creating a public backlash.

But now that we’ve stepped back a few paces from the brink — thanks, let’s not forget, to immense, taxpayer-financed rescue packages — the financial sector is rapidly returning to business as usual
. Paul Krugman

One of the tenets of Keynesian response to crisis, as his letter to FDR makes clear (excerpt below) is recovery first, reform later. Thus, it seems, Paul Krugman's amazement that the financial sector is dragging its feet on reform.

Letter to FDR: You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement.

As I noted over the weekend, the time to implement change is when things are grim, as the Bush team did, pushing the Patriot Act through Congress (this is not an endorsement of the legislation, just an acknowledgement of tactical success) while smoke was still rising from Ground Zero. This seems consistent with my own experience- the mind is most open to change when times are tough.

This is not to argue that the reforms themselves must be hastily conceived. Just as the Bush team, as has been amply demonstrated, came into office with an agenda of foreign policy reform and jumped on the chance, the Obama team should have been ready with their reforms so they could hit the ground running to improve their chances of success. Given the nature of populist politics I would even think holding the Congress hostage, in a sense, by withholding recovery money until reform was passed, might be a useful tactic.

Tactics aside, I find Krugman's amazement at this turn of events funny coming so soon after his Keynesian chest beating.

But, this essay isn't a dig at Keynes, but at disciples more generally. I find Keynes work interesting, Keynesianism much less so. I find Mises work interesting, Misean work less so....etc., etc.

Carl Jung once remarked, "Thank God I am Jung and not a Jungian," which captures the essence of my point. Jung could be human. He could err. He could learn, adapt and improvise his views to the given context. Disciples, awed by their God, tend to be less flexible.

I think, in final response to Krugman's essay, the economics profession could be of more service in the current situation if they stopped rooting for the respective home teams and started working on the problem at hand- dealing with the rent-seeking financial sector.

2 comments:

Hombre said...

It seems to me that policymakers have a Catch 22 with regards to reforming the financial sector. Put in enough regulations to 1) restrict "predatory lending" and other avenues for easy credit to be created, 2) reduce, in aggregate, pay for workers in financial services, 3) encourage more due diligence/bureauracy/redundancy on the part of bankers and you'll likely slow credit growth, and hence economic growth, enough to ensure that we're stuck in deflation for years.

However, let the game continue as it had from 2003-2007 and the next credit crisis will threaten the public balance sheet in addition to the private one.

What's a room full of economics PhDs and presidential advisers to do?

Tom Hickey said...

"I think, in final response to Krugman's essay, the economics profession could be of more service in the current situation if they stopped rooting for the respective home teams and started working on the problem at hand- dealing with the rent-seeking financial sector."

Maybe someone should explain to the government that financial rent-seeking is in competition with the government's ability to tax.