Wednesday, January 7, 2009

Serious ideas about fixing the economy

On Tuesday night, Charlie Rose again showed he is getting first class economic advice. I’m not a big Charlie Rose fan – particularly when he shows great deference to insipid movie stars and other celebutards — but here he is showing the strength of his format.

He had two big names, right and left, who are both academic economists and also veteran government economists. From the right:

Martin Feldstein is the George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. He served as President and CEO of the NBER from 1977-82 and 1984-2008. From 1982 through 1984, Martin Feldstein was Chairman of the Council of Economic Advisers and President Reagan's chief economic adviser. He served as President of the American Economic Association in 2004.
and the left:
Joseph E. Stiglitz ... is now University Professor at Columbia University in New York and Chair of Columbia University's Committee on Global Thought. He is also the co-founder and Executive Director of the Initiative for Policy Dialogue at Columbia. In 2001, he was awarded the Nobel Prize in economics for his analyses of markets with asymmetric information. ... Stiglitz was a member of the Council of Economic Advisers from 1993-95, during the Clinton administration, and served as CEA chairman from 1995-97. He then became Chief Economist and Senior Vice-President of the World Bank from 1997-2000.
Some of the exchange, paraphrased:
Charlie Rose: why isn’t the TARP causing banks to lend more money?

Martin Feldstein: The numbers are too small. If Citibank got $25b, what good is that if its balance sheet is $2 trillion?

Joseph Stiglitz: I agree, but there’s another problem. We had the tech bubble, followed by the housing bubble. But once we fix the recent mess, what will replace these bubbles as the engine for the economy?

Feldstein: What will replace the consumer spending bubble?

(Both men): We run the risk of the economy becoming depend on constant stimulus to replace these bubbles.

Stiglitz: I worry that after two years of stimulus, that the economy won’t be going on its own, and then what will we do?
They also agree that it’s necessary to deal with mortgages still under water, to reflect the current market value of the houses. Here they differed, where Feldstein wants the loans written down and converted to full recourse loans — while Stiglitz wants to help homeowners walk away that airlines walk away from debts in Chapter 11.

While I don’t agree with all of Stiglitz (or many) of his policy recommendations, I think he was dead right on how the various parties (such as banks) are likely to game the next round of “stimulus” (aka “rescue” aka “bailout” aka “tax cuts”) negotiations.

Given the differences on policy and ideology, at least the two sides seem to share a common perspective on incentives and how that skews the activity of various actors working in their self-interest. Perhaps there will be enough consensus among respected economists (who’ve gotten their hands dirty in the real world) that some of the solutions will be clear.

Of course, that still leaves the question of whether politicians vote to save the economy or spread pork throughout their district. The crisis seems to the final blow to whatever (minimal) restraint Congress had on deficit spending.

1 comment:

Anonymous said...

If this year's budget deficit is already 1.2 trillion (before the big pork bill), that is 1.2 trillion of stimulus (borrowed, not produced) that is already flowing thru the economy. Can another 750 billion over 2 years make any difference? And what about an exit strategy?

Disaster in the making.