As a unique way of noting the one-year anniversary of the collapse of Wall Street, a grand fight has broken out among economists, with fingers wagging in pointed essays, scholarly journals, blogs and national magazine pieces.
Everyone blames each other for not predicting and therefore preventing the Great Recession and the Panic of 2008. The assumption being that either or both were predictable and preventable.
(For the record: the recession began in December 2007. The panic that froze credit markets hit in September 2008. While connected, they aren’t the same.)
This economic slugfest will surely produce a 10-year supply of Ph.D.s. and perhaps a Nobel Prize or two.
To which you might say: Who cares?
But know that these economists – those present and those to come – write Washington’s fiscal policies and guide the Fed’s monetary course of action, not to mention decisions by banks and investment houses.
And those actions help determine interest rates, taxes and the price of just about everything.
I’ll do what economists do: I’ll oversimplify the divide.
There’s the managed economy crowd – those who believe fiscal policy (federal spending) and/or monetary policy (the Fed’s control of interest rates) can keep growth steady, prices stable and unemployment low.
Within this group, some are more fiscally inclined and others are noted monetarists.
Then there’s the markets crowd, which believes that the managed folks should just set their operations on automatic pilot and leave the rest to the people. This group views fiscal policy cynically and monetary policy as best when formulistic. They believe markets reward and punish appropriately. In other words, are self-correcting.
To which almost everyone says: Yeah, except when they aren’t.
Russell Roberts, professor of economics at George Mason University and the author of one of the best explanations of the myriad forces on the economy, “The Price of Everything,” says we have a better understanding of how monetary policy affects the economy than we do fiscal.
“But our understanding is not good enough to engineer the economy,” Robert said.
Likewise, understanding what happened doesn’t mean you can predict what will happen.
Roberts has grown used to great minds disagreeing on such fundamental economics issues. Recalling the debate over the $787 billion stimulus, he remembers Nobel Prize winners who said it should be twice as much, while other noted economists said it should be zero.
And then there are the noted fiscal economists within the administration who said if we didn’t pass the stimulus, unemployment would reach as high as 8 percent.
Whoops.
While the predictive nature of economics is obviously deficient, it remains a powerful way of thinking about tradeoffs, particularly at the microeconomic level, where the individual consumers and companies live and operate, Roberts said.
It is much of what is shaping the debate over health care.
“Without economics,” Roberts said, “you might think there is such a thing as a free lunch.”
Thomas Oliver writes a business column. He can be reached at toliver.writeright@gmail.com
