This past Friday I saw The Other Guys, the new Will Ferrell-Mark Whalberg buddy comedy. I really enjoyed it for what it was - a light-hearted send-up of the buddy cop genre. What bugged me was that the closing credits were accompanied by a bunch of "shocking" financial statistics: the growing gap between CEO pay and employee pay; the size of Bernie Madoff's ponzi scheme; the amount of TARP money that went to AIG. Fine statistics all of these, but like any numbers, they require context - none of which was provided in the closing credits. In fact, it seemed like something of a non sequitor (despite the rather loose connection to a plot point of the film).
Across town, people from all over the country were gathering to hear Glenn Beck and Sarah Palin preach one form of populist economics, certain that our nation is sliding down a path towards dirigisme or worse.
The truth is, the economy has been bad for a couple of years, and it remains in pretty fragile shape. As for whose fault that is? To quote every lawyer in history: "It's complicated."
Thankfully, Raghuram Rajan provides a grown up and serious perspective on the causes of and solutions to the present economic crisis. His latest book, Fault Lines, explores what led up to the recent economic meltdown, and identifies hard decisions that will have to be made if we're going to get through it intact.
The central theme of the book is that big economic shifts such as we saw around 2007 are much bigger than any hedge fund manager banging the close or any disaffected worker exploiting unemployment insurance. The tectonic plates of the global economy shift when the entire system gets too imbalanced - when certain nations become too reliant on domestic consumerism or exports to fuel economic growth, or when social welfare programs are misaligned with the domestic economies that they're meant to support.
These imbalances and misalignments can be corrected through a series of modest policy changes, stabilizing the economy and preparing us for the next phase of growth in the world. But the proper policy corrections require political will, and too often political will lags behind economic reality. Blaming greedy CEOs or irresponsible mortgage holders may be cathartic, but it won't get the economy back on track. It's time to stop bickering and start looking at serious solutions.
Rajan's book has been praised by pundits on the left and the right both, making it something of an anomaly in popular economics - and one that we might want to pay attention to. The Wall Street Journal's David Wessel and FT's Martin Wolf both found the book thought-provoking. I recommend you check it out as well.
Whose Fault Is It Anyway?
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Books,
Economics,
Raghuram Rajan
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4 comments:
I utterly love this post! Keep up the good work my friend!
Hello. NextBlog brought me here. You write:
The truth is, the economy has been bad for a couple of years, and it remains in pretty fragile shape. As for whose fault that is? To quote every lawyer in history: "It's complicated."
The truth is, the economy has been bad for four decades. And, since the purpose of economic policy is to guide economic performance, policymakers are at fault. But the problem is not government spending.
The problem is the excessive accumulation of private-sector debt.
Art
@Arthurian. Interesting suggestion. Some might question how an excessive accumulation of private-sector debt qua debt is responsible for the economic downturn when U.S. companies are holding more cash in the bank than at any point on record.
Hi, SCO. It's a timing thing. Companies holding cash is a response to "the deepest financial crisis in decades," as your link has it. The crisis came before the cash-holding. (And the excessive accumulation of debt came before the crisis, sez I.)
It may be that companies went into debt to get the cash they want to hold. Again, your link: "While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash..."
Also, all those people who took out mortgages that became unaffordable when the economy went south... Those people owe a lot of that private-sector debt.
But I don't blame borrowers. I don't even blame lenders. I blame the policy-makers who spent the last 60 years taking money out of circulation (to fight inflation) with one hand and with the other, encouraging credit-use to help our economy grow.
I was having a rough day at work, but at break time I saw your reply to my remark and it cheered me up. I am always ready to yak about the economy.
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