Wednesday, September 30, 2009

Economic ignorance is an expensive thing

It appears that economic ignorance will cost the American people hundreds of billions if not trillions of dollars. The NY Post explains:

In the depths of the financial crisis last year, people like Morgan Stanley's John Mack, BlackRock's Larry Fink, Greg Fleming (then of Merrill Lynch), JP Morgan's Jamie Dimon and Goldman Sachs' Lloyd Blankfein were telling everyone that candidate Barack Obama was a "moderate," and moderation was what this country needed.

What a difference a year makes. They won't admit it in public -- but in private conversations, the top guys on Wall Street are feeling burned.

I'm told that Treasury Secretary Tim Geithner and chief economic adviser Lawrence Summers have both complained to senior Wall Street execs that they have almost no say in major policy decisions. Obama economic counselor Paul Volcker, the former Fed chairman, is barely consulted at all on just about anything -- not even issues involving the banking system, of which he is among the world's leading authorities.

At most, the economic people and their staffs get asked to do cost analyses of Obama's initiatives for the White House political people -- who then ignore their advice.

As one CEO of a major financial firm told me: "The economic guys say that when they explain the costs of programs, the policy guys simply thank them for their time and then ignore what they say."

In other words, the economic people feel that they have almost no say in this administration's policy decisions.
Columnist Charles Gasparino contrasts this to the relatively economically savvy Clinton administration.

After the Berlin Wall fell, and Clinton defeated once of the most experienced foreign policy presidents ever, the political establishment suddenly took economics seriously. If the Federal government didn’t have to fight the Russkis or Nazis or otherwise keep Americans safe, then what remained was to assure the economic well-being of its citizens. In the pantheon of American politics, instead of the “guns and butter” campaign issues, only butter mattered.

Bill Clinton ran on the (internal) slogan “It’s the economy, stupid” and latter bragged about achieving historic levels of economic growth. He had smart liberal economists working for him, he appointed one of his highest profile supporters as Commerce secretary, he staked his political capital on key trade policies and (as Gasparino argues) listened to the advice that he got. Except for taxes, Clinton was a moderate on economic policy (although perhaps after 1994 he didn’t have a lot of choice).

As a consequence, political science and international relations schools started paying more attention to economics, trade, economic development. Even if the faculty didn’t catch the trend, the students certainly did, and economics or business minors became common among poli sci or IR majors.

Now Gaparino implies that a bunch of economically illiterate lawyers are in charge of economic policy. Are they too old to have learned about economics as students in the 1990s? Or does law school emphasize controlling society through legislation and the courts — rather than the traditional role of government in a market economy as defining the rules of the economic game.

Whatever the reason, let’s hope that the lawyers and political scientists in future generations actually paid attention during economics class and will realize the futility of fighting the invisible hand.

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