The Bankruptcy of American Economics

It is not just the American economy that is bankrupt, but the profession of economics as well. It is partly the interaction of these two that has led to the collapse of the American economy and the huge economic hole we find ourselves in.


Paul Krugman provides a devastating critique of his own profession in the Sept. 6 New York Times Magazine , in an essay entitled “How Did Economists Get it So Wrong?” Krugman, a Princeton economist, New York Times columnist and Nobel prize winner, believes that

American economics, as a field “got in trouble because economists were seduced by the vision of a perfect, frictionless market system.”

The profession was blind to the possibility of catastrophic failures in a market economy, he asserts.

In a June lecture at the London School of Economics, Krugman argued that most

macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst.”

Others besides Krugman are dissecting the economics field, and finding serious problems with it. Britain’s influential Economist magazine had a cover story (7/18) on “Modern Economic Theory: Where it Went wrong—and how the crisis is changing it.” They quote the LSE’s Willem Buiter saying that a training in modern macroeconomics was “a severe handicap” at the onset of the financial crisis. The main problem was that in many macroeconomic models, insolvencies simply cannot occur.
So much for those models.

The problem of economics is even worse, I think, because the discipline has been so intolerant of dissenting views. Modern economic theory is as much an ideology as anything else, with a faith in the market that ignores both reality and those who challenge the dominant paradigm. As the New York Times put it in a story last March:

“For years, economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect.”

I saw this firsthand at my university a decade ago, when we were attempting to create a department of economics within the college of liberal arts and sciences. I was on the search committee to hire an economics professor to begin building that program. But it soon became clear that there was a basic inconsistency between the goals of the liberal arts curriculum—free inquiry, critical thinking, competing ideas—and that of the economics profession. The candidates we considered most interesting , with provocative ideas and wide-ranging interests, were largely outcasts in their own discipline, which favored narrow specialties, and strict adherence to the free market ideology. “They got no respect” from the economics discipline, so didn’t have the necessary credentials, and couldn’t be hired. Eventually, the university gave up on trying to create an economics department in the liberal arts college.

Not only is the narrow ideology of modern American economics inconsistent with the traditions of critical thinking, it has proved totally incompetent at predicting the crisis, or figuring out how to get out of it. There are a few exceptions, like Paul Krugman, Yale’s Robert Schiller, and Columbia’s Joseph Stiglitz—all Nobel laureates—and some economics writers like the New York Times’ David Leonhardt. But until now, most of them have been voices in the wilderness, trying unsuccessfully to point out the problems of mounting debt, growing inequality, and neglect of economic and social infrastructure.

President Obama , I believe, recognizes the problems and is trying to remedy them, but he is caught in a vise between huge accumulated needs of the U.S.—for example in health care and education—and the unprecedented level of government and consumer debt.

From an outsider’s perspective—that of a non-economist—it seems to me that the problem is pretty obvious and simple, and the solution is equally obvious and simple, but horribly painful. The problem is that for a generation, American government and citizens have both been living well beyond their means, borrowing to pay for the plethora of consumer goods most of us enjoy. But in the meantime, we have neglected the poor, the schools, the health care system, infrastructure, the environment, and most of the rest of the world. We have lots of goodies, but the society is ailing, and we have passed the buck to the next generation.

The painful solution is that Americans will have to spend and consume less, pay more in taxes, and be prepared for a long-term contraction in the economy. There is evidence of this already, with people finally beginning to save, and to practice “consumer thrift.” But more saving and less spending simply contributes to a contraction of the economy. Banks, retailers, the service and entertainment industry have all depended on people borrowing to spend. As this changes, all these industries will decline, and the economy will decline.

Most American economists, including those with the President, are predicting an imminent end to the recession, and a relatively quick economic recovery. So far, virtually all such predictions have proved overly optimistic and wrong. I think those predictions are based on flawed economic models, and do not account for the depths of the hole we have dug ourselves into. We are in for a very long slog.

While I agree with President Obama and Professor Krugman on most things, I disagree with them that the solution is more spending, by government and consumers, to prime the economy. What we need now is belt-tightening, and a return to a more modest standard of living—perhaps comparable to what we had in the 1970s. This will entail a continuing and severe contraction of the U.S. economy, to return to equilibrium. In the long run, though, it will be best for both the U.S. and the rest of the world.

But you won’t hear this from many economists

Entering A Systemic Revolution

The collapse of the United States as the global hegemon constitutes a “systemic revolution” that will transform both the U.S. and the rest of the globe. Such a revolution is different from “normal” political revolutions, which entail an overthrow of the government. A systemic revolution ushers in even broader and more enduring changes in economy, society and culture, and it also transcends national boundaries, affecting other countries and the global system itself. It is a global paradigm shift, and we are right smack in the middle of it.

This is the opening paragraph of my article "Entering a Systemic Revolution" which appears in the online journal Logos: A Journal of Modern Society and Culture (volume 8, issue 2). The article can be accessed here through my Selected Works page.

The article is a revised version of a lecture I gave in March at a conference on "The Past and Future of Revolutions" at Northeastern Illinois University.

In the article, I compare the current global situation to previous "systemic revolutions", among them the French Revolution of 1789, the Industrial Revolution, the Darwinian Revolution, and the anti-communist revolutions of 1989. Like those epochal changes, the domestic and international decline of the U.S. will affect both the United States and the rest of the world, and will bring fundamental and global changes in politics, economics, culture, and ideology.

Ovation, Inc.: Speakers on Issues That Matter

I am now involved in a speaker's agency, Ovation, Inc., that is "a small but highly selective agency representing an array of affordable speakers addressing pressing issues of our time." Many of the issues raised in The End of the American Century, and on this blog, are topics available for lectures, classes, workshops, etc. by me and other experts on the Ovation roster. Take a look at the site at www.ovationagency.com.

Can America Fail?

In its spring 2009 issue, The Wilson Quarterly featured a series of articles entitled "Decline or Renewal?" addressing the "scenarios for postcrisis America." The lead article, "Can America Fail?" was written by Kishore Mahbubani of the National University of Singapore, and the author of The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (2009). The subtitle of that article is "A sympathetic critic issues a wake-up call for an America mired in groupthink and blind to its own shortcomings" which, in my mind, is also a pretty accurate description of yours truly!

Mahbubani believes that the U.S. has been "engulfed by a culture of individual irresponsibility" and sees many of the country's policies as deeply injurious to the rest of the world. Our policies on the Middle East, the invasion of Iraq, our double standard on nuclear proliferation, and our policies (or lack of them) on global warming "have injured the 6.5 billion other people who inhabit the world." Mahbubani thinks Americans need to be able to see our country the way others see us, to recognize and address our own shortcomings, and to be prepared to work harder, consumer less, and--especially--to sacrifice.

The two other essays in the Wilson Quarterly are a counterpoint to Mahbubani's article, but also illustrate exactly the problem Mahbubani addresses: Americans "mired in groupthink" and blind to their own shortcomings. The article by Tyler Cowen, Professor of Economics at George Mason University, asserts (without any evidence provided) that "today, the rest of the world is looking to the United States to pull it out of a recession." He also asserts, astoundingly, that the current financial crisis "has underscored the continuing strength of American global influence." Equally questionable, and more fodder for Mahbubani's observations, is Arthur Herman's assertion that "America is still the most innovative and creative economy in the world."

The editors of The Wilson Quarterly invited me to submit a response to these three articles, and a version of the following appeared in their "Letters" section in the Summer 2009 issue (page 6).

.............................
On the question of U.S. decline, Kishore Mahbubani hits the nail on the head by pointing to the inability of American thinkers and policy-makers “to listen to other voices on the planet.” Indeed, his point is illustrated by the contributions by others in the same issue who seem to assume that other countries want the U.S. to lead and who believe that the American economy is still the most dynamic in the world.

If one simply asks other people in the world what they think, these casual assumptions wither away. Global opinion surveys conducted by Pew, BBC and others show little enthusiasm in other countries for “American-style democracy,” for American ways of doing business, or for the spread of U.S. ideas and customs. Though global opinion about the U.S. has improved somewhat with the election of President Obama, far more people worldwide continue to see U.S. influence on the world as “mostly negative” rather than “mostly positive.” On this scale, among 15 countries, the U.S. ranks 10th, below Germany, Britain, Japan and China, according to a recent BBC poll.

It is difficult to see how the U.S. economy could be seen as so vital, innovative and creative at a time when the core parts of it are collapsing under the weight of innovative stagnation and stupefying levels of incompetence, greed, corruption. Manufacturing has steadily declined as a component of GDP, replaced increasingly by financial services. The U.S. does not actually produce much any more. Now the financial sector has proven a hollow shell, after fostering and encouraging record levels of both consumer spending and debt. This can no longer be sustained, so the U.S. economy is bound to decline, and probably by a lot. As Professor Mahbubani astutely points out, “the time has come for Americans to spend less and work harder.”

New Global Powers Emerge From Crisis: Shanghai Daily Interview

I was interviewed in Shanghai by Joyce Pan for The Shanghai Daily, an English-language newspaper in China's largest city. Entitled "New Global Powers Emerge From Crisis," the interview focussed on the impact of America's economic crisis on China and other "rising powers." On the same page is an interview with French actress Isabelle Huppert, which should add to the number of hits that this blog gets!

Shanghai Daily Interview

American Values Contextualize Decline

Caleb Hamman
chamman@butler.edu

Amidst national debate on healthcare, foreign policy, and economics, with news outlets devoting coverage to pundits, officials, and political processes, it is easy to overlook the role of the American citizen in shaping public policy—the popular culpability in US decline.

To the extent American democracy functions democratically (see my earlier post and EAC chapter five), public opinion is an important variable in the furthering or the mitigating of growing challenges. Troubling trends in the American psyche are among the results of the newest study released by the World Values Survey.

The research, spanning more than fifty countries during the past four years, shows considerable divergence between American and world opinion on issues of importance.

Reaffirming The End of the American Century correlation between religious fundamentalism and rejection of science, the survey found that Americans were nearly twice as likely as non-Americans to be active in churches or religious organizations; simultaneously, Americans were 11 percent less likely to consider global warming “very serious” and three times more likely to consider it “not serious at all.”

Gaps also existed in attitude toward security and conflict resolution, reflecting a continued embrace of “hard power” in American political thought, with Americans placing more confidence in the military than non-Americans and placing less confidence in international organizations like the United Nations.

By far, the biggest gulfs between US and global attitude were in the area of economic policy. Here, Americans were much more likely than others to be tolerant of inequality, to disfavor government intervention in the economy, and to believe in the wealth-accumulating potential of hard work and individualism.

The contrast of attitude was particularly striking between the United States and the fifteen European countries surveyed. Europeans were almost twice as likely as Americans to strongly agree that incomes should be made more equal. They were also more likely to view circumstantial factors like luck and wealth as important to getting ahead, and they were much more likely to consider economic redistribution an “essential characteristic of democracy.”

Perhaps the most poignant aspect of the survey results is that they highlight an American disregard for problems the United States is uniquely victim to. Among advanced, industrialized countries, US levels of economic inequality and economic immobility are among those of the worst (see post referenced above, this post, and EAC chapter two). Despite the myriad social and political consequences of US economic problems, Americans appear remarkably misinformed and unconcerned. Meanwhile, the egalitarian measures used elsewhere to alleviate economic ills are revealed by the survey to be anathema in American thought, underscoring the difficulties faced by the current administration in its efforts to restructure the economics of health, taxation, and market regulation.

In discussion of issues like these, and in wider discussions about the rise and fall of international powers, the role of the public consciousness should not be overlooked, for particularly in democracies, popular attitude not only shapes the spectrum of debate, but is itself shaped by the institutions of policy and reform.

Russia Hosts and Promotes Emerging Power Groups

This month, Russia hosted back-to-back meetings of two organizations representing “emerging powers” on the global scene. The first of the two, both held in Yekaterinburg, was a meeting of the heads of state of the Shanghai Cooperation Organization, which is made up of Russia, China and the four central Asian states (and former Soviet republics) of Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan. In 2006, Iran, India, Pakistan and Mongolia were inducted as observer states and expected to become full members soon. The presidents of the four observer countries, including Mahmoud Ahmadinejad of Iran, were all in attendance at the Yekaterinburg meeting. (When the U.S. originally applied for observer status at the SCO, it was turned down).

As I mention in Chapter 9 (“America’s New Rivals”), the SCO is nominally an alliance of “good neighborliness and friendly cooperation” but many observers see it as a counterbalance to NATO and perhaps to the EU. In 2003, Chinese Premier Wen Jiabao proposed a long-term goal of turning the organization into a free trade area, reminiscent of the early phases of the EU.

The alliance already includes countries occupying three-fifths of the Eurasian landmass, and an expansion that would bring together China, Russia, India and Iran would be an imposing global force. Furthermore, it would bring together some of the world’s major oil reserves in Iran, Russia and the Caspian Sea. Some analysts see a strategic and economic effort among these countries to reduce the U.S. hold on the region’s energy resources. China and India, as the world’s fastest-growing energy consumers, may want to secure central Asia’s energy resources for their own economies. Iran and Russia, two of the world’s largest energy suppliers, want to reduce their dependence on sales to the West.

The idea of challenging Western (and especially U.S.) global dominance was evident in the communiqué from the meeting—The Yekaterinburg Declaration—which proclaimed that

“the tendency towards true multipolarity is irreversible. There is a growing significance of the regional aspect in settling global problems.”

Russia’s long-expressed opposition to “unilateralism” and “unipolarity” is a not-so-subtle swipe at the United States. Moscow’s preference for alternate configurations was evident in a second meeting in Yekaterinburg, right after the SCO assembly. This was the inaugural summit of the so-called “BRIC” countries—the emerging economic powers of Brazil, Russia, India and China. Russian president Dmitry Medvedev was perhaps guilty of hyperbole in calling the summit “the epicenter of world politics” but there is no doubt this is a formidable foursome. According to The Economist, the BRIC’s share of world output leapt from 16% in 2000 to 22% last year. For the last decade, GDP growth in the BRICs has outpaced that of the world, and of emerging and developing economies (see The Economist charts above). These four countries alone control about 40 percent of global currency reserves.

During the summit, the leaders talked about assuming more say in global policy-making; reforming the International Monetary Fund; and a plan to switch some of their foreign currency reserves out of dollars and into IMF bonds (an idea which is also the subject of much discussion in China). As the New York Times observed, the BRIC summit was

“intended to underscore the rising economic clout of these four major developing countries and their demand for a greater voice in the world. And Russia, the group’s host and ideological provocateur, is especially interested in using the summit to fire a shot across Washington’s bow.”