The Guardian Unlimited, July 5, 2011
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Two prominent medical researchers reviewed hundreds of thousands of records on infant and childhood mortality dating back over the last eight centuries. They discovered that over the vast majority of this 800-year period, only around half of newborns survived to adulthood. They concluded that we should not expect our children to live to adulthood.
Anyone reading this paragraph should be fuming at the absurdity of this sort of extrapolation. Almost everywhere in the world in the 13th-19th centuries people lacked the health care advances that we take for granted. They lacked modern sanitation advances, like sewage disposal and clean drinking water, their diets were often grossly inadequate, and they didn’t have the benefits of modern medicine, like antibiotics. The enormous differences in these and other areas make it absurd to extrapolate about health outcomes from prior centuries to the present situation.
While the absurdity of such extrapolations on health outcomes should be immediately apparent, for some reason those in policy circles think it is perfectly reasonable to make the same sort of extrapolations when it comes to economic outcomes. Two prominent economists, Ken Rogoff and Carmen Reinhart, did an extensive examination of financial crises over the last eight centuries. They found that the after-effects of these crises tend to be long-lasting, with economies often taking a decade or more to get back to normal levels of output.
This is an interesting and worthwhile historical exercise. But why would anyone think that this past history any more condemns economies to suffer prolonged downturns from the recent financial crisis than the past history will condemn our children to an early death? Just as we have made enormous advances in public health and medicine, we have reason to believe that we have made enormous advances in economics as well.
The most obvious advance was the writings of Keynes in the 30s, who explained how an economy could endure a prolonged downturn like the Great Depression. He also explained how the government could provide the boost necessary to get an economy back to normal levels of employment and output. There of course has been much work subsequent to Keynes that builds on his basic insights. In principle, this work implies that there is no reason that economies should ever again be forced to endure long periods of high unemployment, just as there is no reason for us to expect 16th century mortality rates for our children.
However, many in the media and policy circles insist in telling us that we are doomed – we just have to accept that it may be close to a decade before we get back to normal levels of unemployment. In the meantime, tens of millions of people around the world will be condemned to unemployment or underemployment, because the folks responsible for managing the economy messed up.
It’s worth asking what this view tells us about the economy and economists. As far as the former, this view of the economy takes on an almost mystical aura. The sins that led to the financial crisis leave us with no recourse; "we" simply must accept that there is nothing that we can do. (The people saying this are never among the unemployed.)
The proponents of the predestination view often point to the large amount of debt that was accrued in the boom that led to the bust. And of course there is a vast amount of debt, especially among households, but this also implies that there is a vast amount of wealth corresponding to this debt. One person's debt is another person's asset. The role of economics is to devise ways to ensure that those with the money either spend it, or that wealth somehow shifts from those who have it but won’t spend it, to those who would spend it, but don’t have it.
This might be difficult, especially given the politics, but what makes it impossible? In principle there are an infinite number of ways to increase spending (e.g. government stimulus, expansionary monetary policy, a lower valued currency). Each of these routes has drawbacks, but how can anyone rule out the possibility that any such policy will work?
This brings up the second point about economists. We can point to the success of modern medicine in improving and extending our lives, so we know why we have doctors. But if the economists really want to tell us that there is nothing that they can do about the worst downturn since the Great Depression, then it is not obvious why we would need them.
After all, economists are not cheap. They often get six-figure salaries. In addition, their pay packages can be the models of bloated benefit structures. Many of the IMF economists who were telling the Greeks about the need to raise their retirement age to the late 60s will have the option to retire with six-figure pensions in their early 50s.
If economists could show great things that they had done for the world economy then perhaps such generous pay and benefits could be justified, but if they really want to tell us that they can’t do anything, why not just save the money? After all, would we be paying doctors so generously if their answer to every problem was to apply leeches to bleed the patient?