Whither Stabilization?
A recurring meme in the mainstream bailout chatter is the idea that the government should intervene to "stabilize" the financial system. After all, the odious piece of legislation rammed through Congress last week was titled the "Emergency Economic Stabilization Act of 2008." Today, the AP reports, "President Bush's top economic advisers vowed to work with their counterparts around the world to restore confidence and stability to financial markets roiled by tight credit and worries about a global economic slowdown." The Treasury Department is even calling its new bailout czar, introduced today with great fanfare, the Interim Assistant Secretary of the Treasury for Financial Stability. (Oh, he happens to be a former Goldman Sachs executive, but never mind.)
The larger context is the long-held, Keynesian belief that government intervention through monetary and fiscal policy, combined with a massively regulated and subsidized banking sector, reduces the "natural" volatility of the free market. One analyst I heard on NPR last week said something like this: "I'm confident we won't have another Great Depression, because back then, no one knew what was going on, but now, the government knows exactly what's happening and is ready to step in and fix the problem." From the 1950s to the 1980s it was an article of faith among the cognoscenti that business cycles were much less severe than before the mid-twentieth century when both discretionary and "automatic" stabilizers (like unemployment insurance) became embedded in national policy.
However, even mainstream macroeconomists are unsure that the economy is any more "stable" today than in the days before Keynes. The Keynesian consensus was challenged by Christina Romer (and others) in the 1980s, and 1990s, particularly in Romer's "Is the Stabilization of the Postwar Economy a Figment of the Data?" (American Economic Review, June 1986). She attributes the perceived smoothing of the business cycle to changes in how output is measured, not any structural change in the economy. You can read more in Romer's summary article in the Spring 1999 Journal of Economic Perspectives and her entry on business cycles in the Concise Encyclopedia of Economics.
Of course, doubts about the effectiveness of Keynesian stabilization policy have not dampened most macroeconomists' enthusiasm for, well, Keynesian stabilization policy.
Comments (9)
Why don't I ever see Mises Institute fellows on TV or hear them on the radio (like NPR)?
Published: October 6, 2008 5:54 PM
“I'm confident we won't have another Great Depression, because back then, no one knew what was going on, but now, the government knows exactly what's happening and is ready to step in and fix the problem."
Really? If the government and its brilliant mainstream economists know “exactly what's happening” how did they let the crisis happen in the first place? The truth is they do not know what is “going on” and will not be able to “fix the problem” because their Keynesian theories are flawed to the core. And since many of them are blinded by a strong ideological predisposition to ever larger and more controlling government, correct theory will be all the harder for them to grasp.
However, the widespread implementation of Keynesian policy has provided many economists, talking heads, bureaucrats, and politicians with well-paying jobs, power, and influence.
Published: October 6, 2008 6:34 PM
Krazy Kaju,
Austrian economics is not state aggrandizing, as such it will always be viewed with disfavor by the powers that be. It states that the market knows best and that governmental intervention, governmental actions are detrimental to the health of the economy. It does not call for massive governmental spending to fix recessions, it does not call for state power to fix the markets. As such Austrian economics are not appreciated by the media and the government. The media has a bias to get interviews with power players and Nobel Laureates. The Nobel Prize in economics is awarded by a central bank. How likely is it for an Austrian to receive that award when Austrian theory indicates that central banks are counter productive to market ends. How likely is it for an Austrian to be selected to be an economic advisor for the state when he points out that the emperor wears no clothes, that the policies of the state are counter to freedom and efficient markets. I am actually quite astounded that Hayek received his shared Nobel Prize.
Published: October 6, 2008 7:39 PM
You are about to witness the greatest economic experiment to ever be allowed in history. It will be disastrous for all the governments involved. Fiat currency will enter it final phase where it ultimately reaches its true value. The founding fathers learned from experience what the value of a paper writ was actually worth. We are about to be re-educated in that experience, and it will be a painful lesson for most who place their faith in the government.
Published: October 6, 2008 7:50 PM
I was listening to Michael Medved's radio show, and a caller was voicing his opposition to the "bailout" bill. Medved said that although it was a bad bill, it was necessary to save financial markets (big surprise). The caller said that he sided with the 180 or so economists that signed a petition stating their opposition to the bill. Medved replied, "But none of the 'leading' economists oppose it." So, according to Medved, "leading" economists know all, and since they favor the massive handout, it must be necessary. What are leading economists anyway?
Published: October 6, 2008 7:59 PM
Richie,
the leading economists are those who advocate a position that calls for governmental intervention and a greater role for the state in the market. They typically come from a background in the Keynesian and Monetarist schools of thought. They provide the intellectual clothing that covers the naked destructive power of the state. Tenured professors at state sponsored universities, employees of the state itself (presidential council of economic advisors and the treasury et. al.), employees of quasi-state apparatus at the Federal Reserve and its regional banks. Those are the leading economists. They all appear to have a conflict of interest in favor of more state. You may say that I am a conspiracy theorist, but I would ask, "cui bono"? Follow the money.
Published: October 6, 2008 8:13 PM
Krazy Kaju,
The Ludwig von Mises Institute is an academic research institute, not a policy think-tank. As such, it is less focused on current affairs than places like the Cato Institute. For this reason, its staff don't get interviewed by the mainstream media as much.
Published: October 7, 2008 1:39 AM
I motion to rename it, "The Department of Goldman Sachs".
Published: October 7, 2008 1:51 AM
Stanley,
You are right exactly.
Published: October 8, 2008 9:30 AM