Discussion of Economy, Take II
March 31st, 2009Tonight’s on-campus discussion about the economy seemed to go pretty well. The crowd was quite a bit thinner than round one in the fall semester, but we still had over 100 people in the audience (thanks to my colleagues who may have offered extra credit inducements!).
Our finance colleague was unable to participate as planned, so it was just me, our senior economics professor Richard Schatz and our vice president of academic affairs Michael Le Roy who served as host and moderator.
Michael set the format (this was part of his “Dean’s Dialogues” series). He asked Rich and me to each make a brief opening statement, then he posed a series of questions to us, then the audience (mostly students) asked a few questions.
To begin, I simply observed that although I didn’t know everyone in attendance I could, based on macro conditions, predict several things about them:
- their parents’ investment accounts (or their own) have lost about 30% of their value from November 2007;
- the value of their parents’ house has declined vs. this time last year;
- if they are graduating, they are worried about finding a job and are exploring alternatives like staying in school longer;
- [and I meant to add that they are spending less, saving more and generally being more cautious about money;
- and that they know someone who has recently been laid off or is worried they soon may be]
I then offered the list of five questions we used to organize my Jan. term class on the financial crisis. Those questions I think still help frame the sprawling issues clearly and place a number of interesting matters on the table for discussion. I offered a few comments and observations with respect to each question.
After that, I sketched some possible responses to our situation. I said these range from abandoning capitalism in favor of central planning (not seriously on the table) to following a radically pro-market libertarian prescription which, I argued, would mean, in its full-bore version, eliminating: the Federal Reserve (which intervenes in markets through monetary and fiscal policy to “guide” the economy and contributed to the problems we face by keeping interest rates artificially low for decades), Fannie & Freddy (which encouraged risk taking by lenders and distorted markets by adding yet more capital to the housing boom), the FDIC (which removes banks from market discipline and insulates consumers from failing to do due diligence on those they trust with their money) and the popular mortgage interest deduction and capital gains exemption for home sales (policies which most students as renters don’t benefit from, and which also, we must admit, further encourage home ownership, distorting the natural workings of an ideal free market). I confessed I am sympathetic to this critique but don’t think politically anything so radical is yet on the table, either. Then I said there is a vast range of policy options between these extremes.
That teed up Rich who argued in favor of the Obama measures, predicting they will work. He also distinguished what he called our current “Great Recession” from the Great Depression, explaining how much worse things got then and listing a number of reasons why he thinks things are unlikely to get as bad this time. He claimed the insights of Keynesian economics are among the assets that will help us do better this time. (He did not appear to be joking.)
A few points from the subsequent discussion and Q&A:
- Rich distinguished the financial institution bailouts (which he was skeptical about the last time we had a panel discussion on the financial crisis, back in the fall semester) from the stimulus package he praised tonight, saying the stimulus package will produce “real, lasting” assets, whereas the financial institution bailouts were good for stockholders but not so clearly helpful to ordinary folks.
- Rich confessed he thinks Krugman is right that much more money will likely be needed to prop up banks and provide further stimulus (which of course somewhat undercuts his argument that the Obama stimulus package “will work,” but I think in so arguing he was intentionally being provocative for our mostly conservative group).
- Rich acknowledged growing protectionist pressure but said he thinks the G-20 will work to avoid a harmful re-enactment of Smoot-Hawley type protectionist wars. I hope he’s right about that.
- I argued all our efforts to re-inflate the housing asset bubble are likely to be ineffectual, that we can’t quickly put Humpty Dumpty back together again but that trying is surely going to add national debt and that the increases in the monetary supply will later add inflationary pressure.
- I argued the Bush administration should not have intervened massively to save financial institutions, claiming that doing so has simply set us up to pour more good money after bad (citing AIG as exhibit 1) and that I am skeptical that they were actually too big to fail (they may be too big to save, though). Clearly, too, we have rewarded bad behavior and not let hard budget constraints work their magic.
- In response to a question, I said having the President fire a CEO of a major corporation is not anti-market under the circumstances (not an inappropriate invasion by government of the private sector). Rather, the indicia of a march towards state socialism were most striking when, under Bush, the auto industry got a $14 billion life line, and that Obama now firing a CEO who brought a great franchise to its knees and stiff-arming the bond holders (I think I actually used some circumlocution for “flipping off” the bond holders) and imposing a no-more-bailout-money threat is actually pro market.
The time flew by; there is lots more we could have talked about, but on the whole I think it was a pretty good hour. A wonderful thing about a liberal arts institution like Whitworth that focuses on undergraduate education is that these discussions often bring together a broad and interesting group of non-specialists. I enjoy that (explaining credit default swaps to a theater major and helping them care about them is an intriguing professional challenge). But a trade-off of our broad, inter-disciplinary and quite often basic approach is that sometimes we do not focus exhaustively on details. Tonight we easily could have spent the whole hour (or more) talking just about the Treasury Dept.’s outline for reform of US financial sector oversight!
Acoustics are bad in the Robinson auditorium, so probably it was hard for some people to hear everything said (unless the microphones and speaker system were better than I sensed).