Talking Points on the Obama Economic Team
By Arnold Kling
For a possible appearance on a Richmond radio program this morning.
–best academic credentials of any economic team in history. Focused on economic growth, not redistribution, suggesting that Obama shares that focus and takes economic policy very seriously
—Larry Summers is brilliant. Peter Orszag (OMB) is very bright and very focused.
–But, at the margin, how much do these folks add to Geithner and Bernanke?
–Academic economics has ignored important real-world developments, such as the change from a manufacturing economy to a service economy, and the rapid growth and evolution of the financial sector.
(not for the radio, but Baily, Litan, and Johnson have a chart showing that credit default swaps went from under $1 trillion in 2001 and less than $10 trillion in the second half of 2004 to over $60 trillion at the end of 2007. Larry Summers might call me a Luddite, but I just cannot believe that it’s a good thing for a market to grow that quickly to that size. I do not believe that the economics profession understands credit default swaps. In my opinion, we do not know whether they serve to genuinely increase financial efficiency or whether they serve primarily as vehicles for regulatory arbitrage–I suspect the latter.)
–Because the economics profession has been out of touch, policy is risky. Can we put laid-off bankers to work doing highway construction? I understand what Summers is thinking when he says that policy needs to overreact, but that could be a real “uh-oh.”
A major puzzle is how the markdowns in financial wealth came to be such a multiple of the decline in housing wealth. Looking at that multiple, I tend to think that overreaction is what got us where we are today.
Thanks to Mark Thoma for the Summers video and the Bernanke pointer. Thanks to the WSJ blog for the “overreacting” post.