“What would you call a group of economists who are skeptical of regulating mortgage markets, who think unemployment insurance and unions increase unemployment, who say that tax hikes retard economic growth, and who believe that the recovery from the Great Depression was a monetary phenomenon rather than the result of New Deal fiscal policy?
No, it is not a right-wing cabal. It's Team Obama.
Here's the evidence:When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.....Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.
--Austan Goolsbee
Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.
Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions.
--Larry Summers
Tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.
--Christina Romer (writing with husband David)
Given the key roles of monetary contraction and the gold standard in causing the Great Depression, it is not surprising that currency devaluations and monetary expansion became the leading sources of recovery throughout the world....the new spending programs initiated by the New Deal had little direct expansionary effect on the economy.
--Christina Romer
All points well taken. Indeed, quotations like these make me pleased with recent economic appointments. I just hope that the above lessons make their way into the President-elect's briefing memos and that he is persuaded by them.
These quotations also make me a bit surprised we have not heard more complaining from the left-wing of the Democratic party. But that may be still to come.”
Greg Mankiw, “The Next Team”, Greg Mankiw’s Blog (30 November 2008).
http://gregmankiw.blogspot.com/
N. Gregory "Greg" Mankiw (1958-) is a professor of economics at Harvard University. From 2003 to 2005, he was the chairman of President Bush's Council of Economic Advisors. Professor Mankiw is among the most influential economists in the world. His text on economics is used in classes at Regent University.
Let me add that others on the Obama Team, such as Timothy Geithner, Jason Furman and Peter Orszag, are not as centrist as the three mentioned above, and they have been placed in the “operational” positions of the Obama Administration rather than the “thinking” positions of Summers and Romer. Austan Goolsbee, Obama’s economic advisor during the campaign, was also on the left side of the intellectual spectrum. Obama’s Team, taken as a whole, is a mixed bag, and frankly more dangerous for the fact that the advice of the centrists is like to be ignored in the actual implementation of policy.
As mentioned before, we are in an unprecedented situation. I don’t think anyone has a good grasp of the problem before us or what to do about it. I am sure the incoming administration will do something -- they have to do something -- but one would hope that they would be willing to be flexible and willing to change policy directions if the measures they take do not work. Right now, the guess is they will try to prop up spending by a massive Keynesian spending program. I for one am doubtful that a fiscal stimulus will work in the present circumstances as the real economy is not yet in such distress that it could benefit from an injection of additional aggregate demand.
To me, the problem is people now have tremendous liquidity preference, that is, they want to hold money rather than bonds or equities. They do not want invest and they do not want to spend. They want to hoard. Pumping more money into the economy or increasing government spending is not going to help. People don’t have confidence in the economy or the policy makers.
What will help is for people to regain confidence that the financial system is sound. The must feel that the investments they make will not melt away because of irrational rules imposed by the government or insane bets made by money managers, that the job they have will not disappear because the exchange rate or taxes drove their firm out of business, that the tax rates they have to pay will not constantly change on a politician’s whim, that the taxes and regulations they must pay and conform to when operating their businesses will not suddenly change and destroy their livelihood, and that the trade and budget deficits be addressed so the exchange rate doesn’t collapse and interest rates don’t skyrocket. In a word, people want the economy and government policy to be stable so they can plan their own futures with confidence.
First and foremost, this means stable economic policies that create a stable macroeconomic environment. No more of this today we’re going to increase your taxes but tomorrow we’re going to lower your taxes. No more of this today we’re going to expand energy production in the U.S. but tomorrow we’re not going to do a thing about energy. No more of this today we’re concerned about the twin deficits but tomorrow we’re going to spend like there’s no tomorrow. No more great swings in interest rates and no more great bailouts.
Let us hope that the new economic team will emphasize simple prudence and stability in economic policy. Then the financial system and the economy will recover by itself.
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