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The economic crisis of 2008-9 will no doubt spawn dozens of books. Here are two good early ones.
Many economists hate to admit it, but today's economic turmoil shares some uncanny -- or downright scary -- similarities with the prelude to the Great Depression. Many policymakers seem to have unlearned the basic lesson of that calamity: boost demand in the face of an economic slowdown and reduce the volatility of capital flows. Rigid adherence to anti-inflationary policies will only deepen the crises in emerging markets. As the IMF continues to insist on fiscal austerity and many governments instinctively resist capital controls, a wider recession looms. With a distinct whiff of the 1930s in the air, we had better refresh our memories and relearn the basics of Depression economics.
Only a few years ago pundits were sure that the United States was losing to Asia and Europe and had to emulate their more state- directed economies to remain competitive. Now the conventional wisdom is that America is number one and that the rest of the world should adopt its more laissez-faire approach. In fact, neither caricature is right. Asia was booming and now it is slumping, but it will be back. Europe's underlying ossification will persist. But most important, while the U.S. economy is in a period of robust growth, nothing fundamental has changed. Its long-run growth rate has not accelerated, productivity has not risen, and the structural unemployment rate has fallen by one percentage point at most. Come the next recession, all this triumphalism will seem silly.
Lionel Jospin recently took power in France with a promise to reduce the workweek from 39 to 35 hours. Why? Because of the latest popular economic fallacy: the theory of global glut, or the belief that there is too much output and not enough work to go around in today's hyper-efficient economy. But productive capacity in the advanced nations is not growing much faster than it was during the last two decades, and more slowly than in the 1950s and 1960s. People will always find new wants, and the newly industrializing countries are consuming even more than they produce. As Marx could have told you, capitalism can go on accumulating capital -- and producing more goods and services -- forever.
David Hackett Fischer's theory, in The Great Wave, of inflation followed by a long equilibrium is a quick sell with businessmen who want to believe we have reached the Promised Land. But history shows that change is a constant.
Yes, workers are hurting, as Ethan B. Kapstein has observed, but New Deal spending today would only spark inflation, argue economists Paul Krugman and Robert Z. Lawrence. Thomas Donahue applauds Kapstein's compassion, and Hilary Barnes and Steve Forbes caution against excessive social welfare. Kapstein replies.
Pace Paul Krugman, emerging markets have not been oversold, despite the crash in Mexico. The roots of economic change are deeper than any "Washington consensus," and foreign investors will reap the profits. Krugman responds.
After the Cold War, everyone believed the world was going capitalist in a hurry. Developing countries followed America's advice to them--"free your markets and strengthen your money." In fact, the gains from both free trade and sound money were overstated. But the force of conventional wisdom ostracized cautious voices. The result was a speculative binge in emerging markets. With the Mexican crisis, the bubble has burst. Politicians in developing countries could continue their reforms only so long as investment poured in. Sooner or later, a reality check was inevitable. Disappointing growth and statist retrenchment may lie ahead.
Pundits point to the awesome growth of East Asia's economies and fret that the West cannot compete. But there is nothing miraculous about the successes of Asia's "tigers." Their rise was fueled by mobilizing resources - increasing inputs of machinery, infrastructure, and education - just like that of the now-derided Soviet economy. Indeed, Singapore's boom is the virtual economic twin of Stalin's U.S.S.R. The growth rates of the newly industrialized countries of East Asia will also slow down. The lesson here for Western policymakers is that sustained growth requires efficiency gains, which come from making painful choices.
The view that nations compete against each other like big corporations has become pervasive among Western elites, many of whom are in the Clinton administration. As a practical matter, however, the doctrine of "competitiveness" is flatly wrong. The world's leading nations are not, to any important degree, in economic competition with each other. Nor can their major economic woes be attributed to "losing" on world markets. This is particularly true in the case of the United States. Yet Clinton's theorists of competitiveness, from Laura D. Andrea Tyson to Robert Reich to Ira Magaziner, make seemingly sophisticated arguments, most of which are supported by careless arithmetic and sloppy research. Competitiveness is a seductive idea, promising easy answers to complex problems. But the result of this obsession is misallocated resources, trade frictions and bad domestic economic policies.
To the United States, the labor and environmental costs of NAFTA would be minimal and the economic benefits real, but small. The trade agreement is really about helping a friendly and important neighbor in its yet uncompleted economic and political reform.