Morning Commentary, Hubris Edition
The foreign policy establishment and intellectual world are much the same. They fully supported intervention in Vietnam, mostly supported intervention in Iraq and fully supported the war in Afghanistan — until the wars got hard, or embarrassing and difficult to defend in polite company. Then they bailed, desperately trying to cover their tracks along the way, and offering reassuring images of what losing would look like.
I’ll plead guilty on Iraq. However, my perspective is the opposite of Kagan’s. The problem for intellectuals is not that they lack the persistence to stick with these sorts of wars. It is that they lack the wisdom to avoid them.
Even if one accepts the nationalistic case for war (which many libertarians do not), plain pragmatism would say that you stay out of wars that you can only win by remaking another society. The fact that some intellectuals only appreciate this after the war is underway is a sad commentary on our hubris.
If the FOMC made materially better decisions because of the Fed’s role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don’t think they will be able to do so.
Ben Bernanke thinks that bank supervision goes along with monetary policy, because the functions are linked. Reinhart disagrees. I would say that monetary policy is over-rated and that supervisions and regulation are under-rated in terms of their importance to the economy.* The synergy between the two comes from the fact that people expect the Fed Chairman to be the “maestro” who conducts our economy and keeps everything steady. If you made me the Fed Chairman and gave me that mission, I would want regulatory authority, too. You need all the power you can get.
[*For an illustration of this thought, see James MacGee on why things worked out better in Canada than in the U.S.
The Canada and U.S. housing market comparison suggests that relaxed lending standards likely played a critical role in the U.S. housing bust. Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust. A likely candidate is cross-country differences in the structure and regulation of subprime lending markets.
Pointer from Mark Thoma.]
But the “maestro” mission is another example of hubris. Instead, to come up with a sensible institutional structure for monetary policy and financial regulation, I think it would help to drop the assumption that there is a single person or agency that can stabilize the whole economy.
3. Robert Reich endorses the Recalculation Story.
The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that’s been going on for years but which the Great Recession has dramatically accelerated.
Thanks to Mark Thoma for the pointer. Reich then goes on to propose massive investments in education in order to enable people to be productive in a changing economy. The intention is fine, but there is a lack of evidence that massive investments in education will produce the desired result. Hubris again.
4.Jeff Sachs writes on the Copenhagen climate summit. His article is entitled
Enough posturing politics. Time to let the experts lead
Pointer from Mark Thoma. No comment necessary.