History And The White Swan
Eric and bluemeanie have kicked off a terrific thread, and in so doing have underscored a key question that has resonated throughout this week's discussion: How can the past inform the present?
History rarely repeats. But to borrow the apocryphal Mark Twain line, sometimes it does rhyme.
I would argue that there are a large number of rhymes between the past of the New Deal and our present moment. Indeed, to a great extent the economic downturn we are experiencing today is not a "Black Swan" event, in the mode of Nick Taleb. Rather, in many respects our economic crisis might better be viewed as a White Swan: we've seen a great deal of this before, right?
Now, to be sure, there are some important differences between the past and present. For instance, economic downturns in the post-1945 era have occurred less often and have been less severe than was the case in the century before World War II. But why is this so?
In large measure, the institutional framework constructed by the New Deal has been responsible for making economic crises a less-common occurrence. And this, I think, is the key insight that the past offers us today: in response to the Great Depression, Americans created the "mixed economy," legitimating the role of government in the nation's life. Confronted with the failures of capitalism, New Dealers responded by "mixing" public authority into the private market economy. Government spending could stabilize and stimulate the economy, smoothing out the business cycle. Federal regulations could help create functioning capital markets, providing stability. And a social safety net could reduce unemployment and poverty, taming the perennial gale of creative destruction that defines the essence of capitalism.
There are some conceptual problems with the "mixed economy." It is all too easy to criticize this set of institutional arrangements for its theoretical incoherence. But as historian Thomas McCraw has pointed out (in a wonderful essay you can find here) what the mixed economy lacks in doctrinal purity it has made up for with sheer performance: it really worked.
The mixed economy constructed by the New Deal helped to foster tremendous economic growth. Between 1940 and 1973, U.S. GDP grew, in real terms, at an average annual per-capital rate of three percent a year--and, for a generation of Americans, this growth and prosperity validated the New Deal in a real and powerful way. Faced with a crisis in capitalism--at its core, a crisis of confidence--New Dealers found a way to restore a widespread faith in a functioning economic system.
It is up to us to come up with particular solutions for our moment. What I've learned from this week's discussion is that we have--both in Eric's book, but also in the ways that so many of us are thinking about these connections between the past and present--a rich set of ideas that has the potential to help us improve the world that we live in today.
Ironically, many of the mixed-economy institutions and policies created during and after the New Deal may have contributed to the current debacle. In retrospect, it seems clear that a lot of people relied explicitly or implicitly on government guarantees (and on the central banks' reputation for keeping economies on an even footing) to do things that non-cultists recognized almost instantly were stupid and dangerous.
Perhaps one of the things that's needed to keep a mixed economy working is a way to generate lack of confidence when appropriate, as well as confidence when needed.
February 13, 2009 1:38 PM | Reply | Permalink
Nice point. Taking a safety net for granted is a bad idea when your own vigilance is part of what maintains the net should you even need it. This is part of the problem of moral hazard.
I cannot accept your blanket judgment in your first sentence. All players "contribute" to play. It was abuses of the institutions and policies which are the proximal players, not the institutions themselves. Too-easy money, irresponsible tax cuts, unsound Ownership Society policy, and welcoming overleveraging blindly, these are my main targets outside of criminal fraud and the like.
February 13, 2009 3:38 PM | Reply | Permalink
Between 1940 and 1973, U.S. GDP grew . . . .
Better, the actual dates are 1949-1973.
During this quarter century the American economy adjusted itself to the rules and regulations the New and Fair Deals had put in place. And then, it crashed and burned.
Rampant inflation, minimal productivity growth, and three recessions in nine years. America's industrial economy was on its back and the practices which had supported it were no longer relevant.
We now live in an information age with economies that span the globe. The New Deal has virtually nothing to teach us.
February 13, 2009 3:35 PM | Reply | Permalink
Blah, blah blah.
Another interesting point about that exogenous-shok-omitting chronology is that the 70s were when "deregulation", aka regulatory capture, gained steam. So many of our current troubles can be traced at least in part to regulators who believed their job was to make things easier for the industries they regulated.
I wonder if anyone has a moral-hazard index -- certain kinds of transactions and instruments pretty clearly increase moral hazard, but something quantitative would be nice.
February 13, 2009 10:15 PM | Reply | Permalink
Doctrinaire fibbertarians like Ellen always ignore the real causes of things, because the real causes of things don't fit into the narrow unworkable framework of fibbertarian fantasies, such as their primary fantasy gospel that FDR's New Deal didn't work.
Throwing unconscionable amounts of money down the rathole of the Indochinese War for a decade is what threw the United States economy into a dive in the era she addresses, with the addition of higher oil prices afterward. Wars don't add enough to the economy to warrant the gross misinvestiture that war wastes, not to mention waste of lives.
Why are wars such a blind spot for some people?
February 13, 2009 11:18 PM | Reply | Permalink
Nag, nag, nag -- NewsNag.
February 13, 2009 11:24 PM | Reply | Permalink
Nag, nag, nag
Now, come on, E., what the fuck are we supposed to do with that?
February 13, 2009 11:36 PM | Reply | Permalink
I maintain that we basically have two finacial crises: one, a crisis caused by housing, mortgages, over-consumption & under-savings - anything you want to throw in that pre-dated September 15th, all "white swan" - predictable: profligacy, moral weakness,political pandering, etc.etc. That crisis phase began early in 2007 or even 2006 - I took a trip to Ireland in the summer of 2007 and couldn't believe the excessive building - small cottages for $1 million Euros on the desolate coast of rainy, windy Connemara (at the same time people here were flipping condos in Miami and Las Vegas) and with Dell and others leaving Ireland and no one coming in, the future was predictably questionable. And Iceland's banks doing what they were doing. There's no black swan there.
This was the stuff of predictable recession, what we can call Financial Crisis 1, worming its way through the global economy.
The black swan was the unexpected and unpredictable destruction of faith and confidence in the markets and financial panic that followed the bankruptcy - or rather the murder - of Lehman Brothers by Secy. Paulson (and maybe Geithner)on September 15th. What we are facing since then is a depression - now still small "D" - which is Financial Crisis 2.
Fin'l crises 1&2 are running concurrently. In a recession, monetary and fiscal policy usually work over time, and the waiting time is painful, but not panicked. In our mini-d world, no one has any idea of what will work and the waiting time is excrutiating and catastrophic.
Fear has obliterated faith and hope and even charity. No one knows if stimulus 1 will work, or stimulus 2 or 3. Stimulus package 1 certainly has things in it which would normally be expected to work, but with the emotional overlay of FC 2, may not. But government has to try something to allay fear and provide monetary aid. What the Republicans want to do is just not to do, to refuse to do anything.
So, New Deal or raw deal or let's make a deal, all that anybody can do is keep fingers crossed and hope that new ideas can be incorporated into stimulus package 2 when it comes and they can get 60 votes.
February 14, 2009 10:55 AM | Reply | Permalink
prmco notes:
I agree with prmco's assessment, but I take a broader view of the cause. Taleb's Black Swan has four attributes:
There is no doubt of the impact of this crisis, which is global in scope and, I believe, unprecedented in its severity. Or of evidence that we are seeking explanations and solutions from historical antecedents. Our discussion here is a case in point.
But is it an outlier? Prmco's analysis is accurate, but it doesn't go far enough. The answer, I believe, lies in the overweening hubris of investment bankers, who generated immense profits by convincing themselves -- and the rest of us -- that they had discovered a way to make risk disappear.
Audacity and swaggering self-confidence are as much a part of the human condition as our tendency toward retrospective analysis. But the tools that precipitated this crisis are without precedent.
Based on arcane models concocted by theoreticians in an insular and rarified world, their quadrillions of calculations executed by computers with processing power unimaginable even a decade ago, they are too complex for even the specialists who created them, much less the bankers who sold them. Or the investors who ate them up, lured by the false promise of endless upside potential with no downside risk.
Black Swan? After a year of effort by our brightest financial minds we don't even understand the scope of the problem, much less the collateral damage. I believe it will precipitate profound structural changes in our economy. Looking to the past is useful and instructive, but it will not point our way out of this mess.
February 14, 2009 2:28 PM | Reply | Permalink