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March 4, 2009
Leaders Go Left, But Economists Get Back To Basics
William Easterly, Forbes, January 30, 2009
The conventional view at Davos is that a previous consensus in favor of free enterprise has taken a huge beating from the Great Crash of 2008-2009. What is much less known is that many economists are not willing to play along.
Instead, the crisis seems to have scared many economists of all kinds--including some previously heterodox--to reassert the orthodox recommendations of Econ 101.
I knew something very different was going on among economists when the world's leading trade skeptic, Dani Rodrik of Harvard, the intellectual protector of protectionists, said on his blog on Dec. 31 that protectionism would be catastrophic right now.
A very diverse group of leading economists of all ideological stripes met at a preparatory conference for Davos in Dubai in November 2008. They said in a formal statement that one of their chief tasks is "advocating against the deregulation backlash." An update right before Davos by this same group stressed the importance of "openness to trade" and "competitive markets."
Then there's another school of thought that asks WWJD? What would Jeff do? Jeffrey Sachs has spent more than two decades calling for the U.S. government to spend huge sums on anything that moves, from Bolivia to Poland to Russia to global health to Africa to global warming. But on Wednesday, Jan. 28, as Davos opened, Sachs suddenly announced that he is now a U.S. deficit hawk.
"Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package."
He sounds like one of those IMF fiscal austerity priests issuing a stern reprimand to some benighted land--like those that prior to Wednesday he derided at every opportunity. But on today's deficit dangers at home, I had to agree with Jeff Sachs for the first time in over a decade.
Until recently, there had been over two decades of economists flogging a dead horse called the Washington Consensus, which was an economic policy view summarized by John Williamson in 1980.
That consensus included guess what: deregulation, openness to trade, competitive markets and fiscal austerity. It was bad that these ideas had a "Washington" label attached, because the World Bank and IMF often forced such principles--and very specific reforms that they thought, often erroneously, followed from such principles--down the throats of poor country governments. Such coercion violates democratic rights of poor people, but it doesn't mean the original Consensus principles were bad in of themselves--they were mild assertions of mainstream economic ideas.
What is going on? I think we economists love to speculate about heterodox theories when times are good and we feel free to discuss experimental alternatives to economic orthodoxy (and nobody is paying us much attention during good times anyway). But when the global economy is in free fall and everyone else seems ready to throw each and every Econ 101 principle out the window, we get desperate to save the core principles that lead to prosperity and development.
Free trade does create opportunities for firms and workers doing what they do best. The government can't forever spend money it doesn't have. Competitive markets reward innovation and efficiency and punish customer-abusing would-be monopolies.
Rapid deregulation has its risks, which we have learned that financial regulators should manage carefully, but too much regulation is far worse. This is what the Principles textbooks teach us. These ideas made their way into Principles textbooks by some process of natural selection--they were the ideas that stood the test of time in economics, because they were associated with the steady climb toward prosperity of the rich countries and, in the last half century, of the global economy.
There are variations around these core ideas of course, but the variations are always grounded in a home of sensible economics 101. In the midst of the scariest crises of our lifetimes, economists are coming home.
William Easterly is an economics professor at New York University and the author of The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good.
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