Cyclical or Secular?

Once in awhile, the boys at South Park, crass as they are, really knock one out of the park (yes, that's a baseball metaphor and baseball season is looming; our middle school team is 3-7 so far this season, but we're just sandbagging with an eye to the playoffs). Their latest episode, Margaritaville, pretty much nails it. If you have the patience to deal with all the slow-loading features at their website, you can watch it online. In sum, Randy Marsh becomes a bit of a Jeremiah, chiding the citizens of South Park for letting "the economy" down, not worshipping it properly. The conceit is that the economy is like the jealous god of the Bible.

Now, Matt and Trey not economists, nor am I; but a number of really smart economists have been saying something similar: Stiglitz, Galbraith, Krugman. Hell, even that non-economist gadfly, Chomsky has weighed in on this issue. What they are saying is that the Obama administration and the Congress— and,in fact, pretty much every other government in the world—is treating the current crisis as if it were merely a cyclical event. As the conventional wisdom has it: "They don't call it a cycle for nothing;" the economy will eventually right itself and we will return to previous levels of employment, GDP, etc. The point of Galbraith, et al., is that this could be a true sea change and needs to be treated as such. Are they right? Who's to say? But, as Don Corleone says about Virgil Solozzo, these are serious men, and they deserve to be respected.

Stiglitz made news recently by saying that the current bank plan is tantamount to "robbery" of the American public. [That may be, but where was he when the taxes of the wealthiest in the country plummeted and the prices we all paid for oil and gas and other commodities held by these same plutocrats skyrocketed and oil company profits reached historically unprecedented levels? That wasn't robbery?] And he has called for a complete "overhaul" of the international financial system.

Galbraith frames the peril like this:

"The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama's economists lean left. Hence the priority they gave, in their first days, to the stimulus package.

But did they get the scale right? Was the plan big enough? Policies are based on models; in a slump, plans for spending depend on a forecast of how deep and long the slump would otherwise be. The program will only be correctly sized if the forecast is accurate. And the forecast depends on the underlying belief. If recovery is not built into the genes of the system, then the forecast will be too optimistic, and the stimulus based on it will be too small."

Krugman keeps beating this drum on his blog:

"The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved."

"It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess."

Chomsky, in this interview, brings up an idea I floated some weeks back: the notion that all the interests of all the stakeholders in the economy (as well as the individual corporation) should be taken into consideration in formulating plans:

"CHOMSKY: For a start, corporations, banks, and so on should be, I think, responsible to stakeholders. That's not a huge change. In fact, it's even been brought to the courts. It was an important case, highly relevant now. About 30 years ago, when the major steel companies wanted to destroy the Youngstown steel plants—major part of the steel industry, you know, the core of the community had been built up around it, and so on—and they wanted to move it or get rid of it. And the workers and the community wanted to keep it and felt they could run it privately. And in fact they brought a case up through the courts, arguing that the management rules ought to be changed so that stakeholders, rather than just shareholders, would have control over the corporation. Well, it lost in the courts, naturally, but it's a perfectly feasible idea. It could be a way to keep communities alive and the industry here.

JAY: So if you're looking at the financial system now and you take this principle, the representing the interests of all stakeholders, not just shareholders, what would that look like in terms of policy?

CHOMSKY: First of all, to begin with, it would mean that the government would not just bail out the banks, pour capital into them, but would exercise control. And control begins with inspection. So we find out what they're doing. And then you keep the viable parts. And if they're viable, they might just vote it into public control. I mean, the government could probably have, you know, bought AIG or Citigroup for far less than what they're paying them now. I mean, in a democratic society, the government would meet the public, and then there should be direct public engagement in what these institutions ought to do and how they ought to distribute their money, what the terms ought to be, and so on. I mean, they could be democratically run by the workforce, by the community."

Now, the reason I'm not a pundit is because I don't have a ready-made answer to this question—or, for that matter, a whole host of other questions. I don't even have an opinion. I do think it is an important question. And I do hope serious people—people with power and brains—are addressing it seriously.

Maybe it's the agnostic in me, the skeptic, but I don't believe the market—or the economy—is a god: Moloch, Baal, whatever. Or even godlike. I'm not so sure I even buy the hocus-pocus of Adam Smith's 'invisible hand'. The myth of the self-regulating market economy has informed our politics and even our culture for who knows how long, centuries perhaps. It has certainly been the prevailing ideology since the fall of communism. Communism's fall, I might add, led proponents of free-market ideology to, perhaps, overreach, and we're just now seeing the results of that hubris collapse all around us. As an ideology, though, the belief in the market and its magical, invisible self-regenerative powers is, by definition, irrational. And it seems to me that any true fix (whether the crisis is cyclical or secular) must be based on a rational analysis of the problems, and not on a set of fixed beliefs—even if that system might have had some explanatory power in the past.

------------------
UPDATE: Lest we forget, Alan Greenspan earlier admitted that his entire professional life had been lived in the thrall of this "flawed," irrational ideology.