Friday, September 30, 2011

A crisis for whom or what?

As much of the developed world, particularly the US and the eurozone, struggle with prolonged economic stagnation (and looming worse), who or what is this a crisis of or for?

Not capitalism as such. This is not remotely the worst "crises of capitalism". Indeed, in much of the world, capitalism is doing just fine, thanks very much. People are continuing to move out of poverty at record rates (pdf). Even within the OECD, some countries are doing just fine.

So, not a crisis of capitalism but a crisis for some (important) capitalist economies.

It is a crises of cheap credit (or, more precisely under-priced and over-extended credit). Nothing particularly unusual in that, had them in the past. The perennial issue of appropriate prudential regulation thereby yet again becomes salient. With, as is normal, issues specific to this particular credit bust (notably land rationing encouraging housing booms which busted).

It is a crises of bad monetary policy. Also had them in the past, but the similarity between current failures by the Fed and the ECB and past failures by the Fed and the Bank of France raise issues about institutional incentives and corporate memory for central banks.

Which leads into the crises for macroeconomics. Macroeconomists have not collectively shone: those with public profiles have shown a marked tendency to lapse into political partisanship. The discipline clearly lacks analytical resilience. Too much fairly basic stuff is simply not agreed upon.

It is a crisis for the EU (or at least for the European Monetary Union): the euro has failed for much the reasons that Milton Friedman predicted it would in 2000 (pdf):
… the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now.
If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.
To the extent that it is a crisis of public debt, it is also a crisis for poorly managed social democracy/welfare states. With Greece as the cautionary worst case.

So, a crisis of poor or problematic public policy and its mainstream analytical support. But not of capitalism, as such.

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