Blame the Economists, Not Economics

By Dani Rodrik

CAMBRIDGE – As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. Rightly so: economists have plenty to answer for.

It was economists who legitimized and popularized the view that unfettered finance was a boon to society. They spoke with near unanimity when it came to the “dangers of government over-regulation.” Their technical expertise – or what seemed like it at the time –gave them a privileged position as opinion makers, as well as access to the corridors of power.

A Global Green New Deal

By Achim Steiner

NAIROBI – With unemployment soaring, bankruptcies climbing, and stock markets in free-fall, it may at first glance seem sensible to ditch the fight against climate change and put environmental investments on hold. But this would be a devastating mistake of immediate, as well as inter-generational, proportions.

Far from burdening an already over-stressed, over-stretched global economy, environmental investments are exactly what is needed to get people back to work, get order books flowing, and assist in powering economies back to health.

Coming Soon: Capitalism 3.0

By Dani Rodrik

CAMBRIDGE ­– Capitalism is in the throes of its most severe crisis in many decades. A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the world’s advanced economies has deeply unsettled the balance between markets and states. Where the new balance will be struck is anybody’s guess.

Those who predict capitalism’s demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself. Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on. The real question is not whether capitalism can survive – it can – but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament.      

The Case for Fiscal Stimulus

By Martin Feldstein

CAMBRIDGE – Governments around the world are now developing massive fiscal stimulus packages that will cause unprecedented peacetime budget deficits. The fiscal deficit in the United States this year is likely to exceed 10% of GDP. A substantial part of the increased deficit will be due to a wide range of new government spending.

Under normal circumstances, I would oppose this rise in the budget deficit and the higher level of government spending. When an economy is closer to full employment, government borrowing to finance budget deficits can crowd out private investment that would raise productivity and the standard of living. Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt. The resulting higher tax rates distort economic incentives and thus weaken future economic performance.

Of course, some government spending is desirable or necessary. But an increase in government outlays often means wasteful spending that produces less value than consumers would get from those same dollars.

The Climate Change Safari Park

By Bjørn Lomborg

COPENHAGEN – As Barack Obama prepares for his inauguration, it is worth contemplating a passage from his book Dreams from My Father . It reveals a lot about the way we view the world’s problems.

Obama is in Kenya and wants to go on a safari. His Kenyan sister Auma chides him for behaving like a neo-colonialist. “Why should all that land be set aside for tourists when it could be used for farming? These wazungu care more about one dead elephant than they do for a hundred black children.” Although he ends up going on safari, Obama has no answer to her question.

That anecdote has parallels with the current preoccupation with global warming. Many people – including America’s new president – believe that global warming is the preeminent issue of our time, and that cutting CO2 emissions is one of the most virtuous things we can do.

The Rocky Road to Recovery

By Joseph E. Stiglitz

NEW YORK – A consensus now exists that America’s recession – already a year old – is likely to be long and deep, and that almost all countries will be affected. I always thought that the notion that what happened in America would be decoupled from the rest of the world was a myth. Events are showing that to be so. 

Fortunately, America has, at last, a president with some understanding of the nature and severity of the problem, and who has committed himself to a strong stimulus program. This, together with concerted action by governments elsewhere, will mean that the downturn will be less severe than it otherwise would be.

The United States Federal Reserve, which helped create the problems through a combination of excessive liquidity and lax regulation, is trying to make amends – by flooding the economy with liquidity, a move that, at best, has merely prevented matters from being worse. It’s not surprising that those who helped create the problems and didn’t see the disaster coming have not done a masterly job in dealing with it. By now, the dynamics of the downturn are set, and things will get worse before they get better.

China and the Global Financial Crisis

by David Hale

GENEVA – Is China an island of stability in the midst of the gathering global financial storm, or will it, too, soon be sucked into the vortex?

Chinese officials have said that the crisis that began in the United States will not slow down long-planned reforms in China’s financial markets. They insist that China will go ahead with plans to introduce margin trading, short selling, and futures contracts on share prices. But China slowed capital-account liberalization after the Asian financial crisis ten years ago, so it is possible that America’s troubles could make China more cautious.

China has played an important role in financing the US budget deficit in recent years, thanks to its effort to manage the renminbi’s exchange rate against the dollar. China does not want its large current-account surplus to cause the currency to overshoot on the upside, and it may now want to slow the renminbi’s appreciation because of concern about the global economic slowdown.

The Way Ahead on Climate Change

by Gro Harlem Brundtland, Ricardo Lagos, Festus Mogae and Srgjan Kerim

NEW YORK – The financial crisis has been uppermost in the minds of most world leaders. Yet, however high the price of a global bail-out, we know one thing: it pales next to the enormous costs – and profound human consequences – of delaying action on climate change.

There is a sort of beauty in this predicament: if we act wisely, we can tackle both crises at once. Climate change negotiations over the next year offer an unprecedented opportunity to build a more profitable, safer, and sustainable global economy.  

Today’s challenges – finance, food, and energy, for example – are many. Yet they share a root cause, whereby speculative and often narrow interests have superseded the common interest, common responsibilities, and common sense.

The Triumphant Return of John Maynard Keynes

By Joseph E. Stiglitz

NEW YORK – We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.

For those of us who claimed some connection to the Keynesian tradition, this is a moment of triumph, after having been left in the wilderness, almost shunned, for more than three decades. At one level, what is happening now is a triumph of reason and evidence over ideology and interests.

Economic theory had long explained why unfettered markets were not self-correcting, why regulation was needed, why there was an important role for government to play in the economy. But many, especially people working in the financial markets, pushed a type of “market fundamentalism.”

From Neoliberalism to No Liberalism?

By Mitchell A. Orenstein

WASHINGTON, DC – The era of free-market capitalism launched in the 1980’s by Margaret Thatcher and Ronald Reagan – often called “neoliberalism” by its opponents – is over. This ideological wave has crashed with the ongoing financial market crisis, but its decline was a long time coming. In the last few years, while American leaders continued to ride the neoliberal wave, much of the rest of the world was already standing on the shore.

Disenchantment with “neoliberal,” pro-market ideas began in developing countries that had once been their ardent admirers. Latin American countries that embraced free-market policies in the 1990’s rejected them in the mid-2000’s, as a new wave of left-leaning leaders came to power. Russia, which adopted market-oriented reforms in the 1990’s, moved to a managed form of state capitalism in the 2000’s with “oligarchs” forced to submit to state control.