Thursday, September 10, 2009

Paul Krugman and the Politics of Reform

Before I get to Krugman, I've been thinking about the person who shouted, "You lie!" to President Obama when he was giving his health care speech last night. For a moment, I assumed the person calling out was probably in the gallery above the members of Congress. I was wrong. A Republican representative from South Carolina did the shouting. It's apparent that 90% of the Republicans in Congress these days have nothing to contribute on any number of fronts concerning the problems our nation is facing.

By the way, it's generally accepted that if you like what the president is saying, you applaud and maybe cheer. If you don't like what he says, you sit quietly and glower. Republicans know this and the representative was dealt with, even if people like Limbaugh are too ignorant and authoritarian to understand.

I don't know how relevant it is, but it's been pointed out that the conservative representative who did the shouting is from a safe district. Safe? As in what? Is ignorance now safe? Is being politically safe supposed to be a good thing? The problems facing our nation face everyone, not just people outside of 'safe' districts. Republicans unable to face our problems only aggravate those problems.

In a roundabout way this is all relevant to Krugman's long magazine article in The New York Times; in a sense, Krugman's point is that the old economics was never as sound as many had led themselves to believe and the proof was the failure to foresee last year's meltdown of the economy. Here's an excerpt: the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. [Economist Robert] Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.

I remember an article from two to four years ago that discussed how certain types of fancy equations didn't last very long in the investment sector. Nevertheless, for more than a decade a class of fancy equations would sometimes prove useful for around a year or two and were lucrative for big firms like Goldman Sachs. Eventually, though, the equations begin to break down, partly because competitors can figure out the same formula, thus taking a slice of the pie until there isn't much money for anyone to make; sometimes conditions simply change until the formulas break down. So the financial whizzes are busy all the time coming up with new formulas. Some formulas work well. Some don't. But the general trend in the last few years is that the fancy equations work for shorter and shorter periods of time. If that wasn't a danger signal, I don't know what is. We're facing several dangers but one of the dangers that these fancy formulas point to is a growing complexity to the world economy that no one seems to fully understand. One way to get the world economy to be a little less complex is to rein in people like Goldman Sachs who have so much activity going on that is hidden from the public. The sliced and diced mortgage derivatives were a classic example of increased complexity that was dangerous and unnecessary. But that requires reform.

So that brings us to the health care issue which is simply just one of the pressing issues that are being handled at the moment. As I've been watching developments over the past few months, my biggest concern is not how much health care the government can somehow bring to the American people, but whether we can truly have reform in the first place. So far, I don't see all that much reform coming out of Washington on any front. I see adjustments. But adjustments are not reforms. We can adjust goal posts, change the uniforms, get better clocks but that's not reform. In many ways, the same games are still being played. It's business as usual. If too many blue Democrats, or weather vane Democrats fail to see the need for reform, we have a problem. It's a problem the progressives might overcome, if they understand how badly we need reform. But if there are too many compromises and the 'reforms' are too watered down, the next Republican president will be free to push the reforms aside. In some respects, that's what George W. Bush did on a number of policy fronts.

In the end, even the Republicans have to come to grips with the fact that their economic policies of the last thirty years have fundamentally failed. We can no longer count on cheap energy and we can no longer afford to believe that the Saudis, Japanese and Chinese, along with others, will prop up our economy looking for safe havens for their dollars.

Health care will make sense only if everyone has to have health care and if every business is somehow involved with providing health care. Businesses need to be put on an even playing field. At the same time, however, health care will still remain an expense for corporations so we need to make sure jobs aren't outsourced as a way of avoiding health care payments. There are a number of ways to deal with both problems, but the only solution that I know of that will work for sure is national health insurance that simply bypasses corporations. Insurance companies might still have a role but that route is only likely to work if we have something that's set up like medicare. So the health care debate, while not a final view of things to come, may say a lot about reform across a wide spectrum during the next couple of years.

If the American people think turning to Republicans is the way to deal with our nation's problems, the United States will probably begin an economic slide that will be difficult to stop. Actually, we've been sliding for most of the last thirty years.

The curious thing about Krugman's study of the current state of macroeconomic theory is that he notes most of the neoclassical economists come from the Midwest. Let's see, Republican governors appoint college heads or create an environment leading to more conservative college heads. Those who lead colleges start looking for economists who fit their own economic views or at least economists who seem to be in their ballpark. Suddenly we have too many economists quoted by journalists who scratch around Washington in places that find jobs for those economists who leave the Midwest: the Heritage Foundation, the Cato Institute, etc. Oh, and as Krugman noted, the Hoover Institute. Hoover was a nice guy who used classical economics to deal with the Great Depression. As my grandfathers taught me, one Republican and one Democrat, that didn't work out too well.

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Blogger webberpa said...

The republicans have once again proven themselves to be real idiots, incapable of administering anything harder than a balony sandwich. I hope and pray that something gets done for the sake of those Americans who are left out of the health care sysytem.

2:03 AM  

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