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Politics and the economist as hero

by Robert Teitelman | Published June 13, 2011 at 2:29 PM

Felix Salmon offers up two posts that further point out the absurdities in some of the regulatory backbiting that has now erupted. On Friday, Salmon pointed out the similarities between statements in Timothy Geithner's speech last week about big regulation and that of Jamie Dimon, in the J.P. Morgan Chase & Co. chairman's little to-and-fro with Ben Bernanke. Salmon goes on to argue that Geithner is a big-bank guy because of the time he spent at the New York Fed, which is owned by the big banks. Perhaps -- although the New York Fed is also part of the Federal Reserve System, headed by Bernanke, Dimon's current target. So how does that work? Salmon also comments today on Bank of Israel Gov. Stanley Fischer, a World Bank veteran and No. 2 at the IMF during the Asia Crisis, who threw his hat in the ring for the top job, vacated by the housebound Dominique Strauss-Kahn. Fischer is an extreme long shot for a variety of reasons. Salmon points out that while Fischer's technical expertise is world class (he was Bernanke and Greg Mankiw's thesis adviser at Harvard), and France's Christine Lagarde's is not, much of what the IMF faces is profoundly political in nature, a strength of Lagarde's and not particularly an asset Fischer brings to the table. Obviously, the optimal solution here is to have someone with both strengths. But the deeper question is whether most of the challenges facing the fund -- notably, but not exclusively, what to do about the euro zone -- are fundamentally political or economic issues. Can they be resolved by sheer knowledge of economics, or will they require some serious political horse-trading? This question has long dogged both the World Bank and the IMF.

Two op-ed columns in the Financial Times illuminate this dichotomy. The first brings former Clinton Treasury chief and Obama uber-briefer Larry Summers back to the FT, where his columns during the financial crisis were must-reads and helped renovate a reputation sullied by his messy tenure running Harvard and retroactively battered by his service in the Clinton years. Summers tackles the subject of how the U.S. can extricate itself from its Japanese-like, post-crisis malaise. He rattles off the economics of the situation with alacrity, focusing on the lack of demand in the equation. "After bubbles burst," he writes, "there is no pent-up desire to invest. Instead there is a glut of capital caused by over-investment during the period of confidence -- vacant houses, malls without tenants and factories without customers." Given that situation, he notes in his very Leninesque way: "What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best." Summers goes on to argue for continued stimulus in a play for "near-term growth."

All very sensible -- and all offered up with Summers' usual brisk confidence. But what's noteworthy here is his passing dismissal of "traditional political agendas" in the face of obvious economic imperatives. Contrast that with Clive Crook's column on the same FT page with the eye-catching headline: "America prefers fiscal idiocy to framing intelligent choices." It has been a common theme of Crook that both parties in the U.S. seem to be careening toward fiscal disaster with a kind of blithe ignorance of what the long-term consequences could be, particularly if something isn't done with the debt ceiling. Crook's argument may be overstated -- or it may not. We shall, unfortunately, see over the next few weeks. But Crook has a clear-eyed view of politics that Summers would like to sweep away with a brush of rational argumentation. He understands that on both the debt ceiling and on long-term fiscal health issues the imperatives of economic "truth," as articulated by Summers, Fischer, Geithner, Bernanke or Paul Krugman, take a back seat to the fumes and vapors of politics. Only when a crisis comes crashing down will politicians check their instincts for self-interest, demagoguery and short-term maneuvering, mostly because they know they will lose if they get blamed for shoving the nation off the cliff. That's really not a comfortable place to perch, but it is what it is.

That's not to say we don't need technical economists -- despite their spotty record in the past. At the very least, they provide some check on the more extreme fantasies and inanities concocted by retail politicians. But for all their credentials, for all their skills, and for all their considerable egos and self-belief (any number of big-name -- what the FT calls A-List -- economists display the outsized grandiosity of famous modernist architects, like Frank Lloyd Wright, a theme Ayn Rand tapped into years ago), they tend to be viewed by the political classes as annoying carpers, overeducated intellectuals without a clue of the real world or comprehensible only as the instrument of some large special interest, the banks, say, the corporations, the unions or (not many here) the poor. This is a poisonous relationship just at a time when, as at the IMF, we really need all the help we can get. - Robert Teitelman

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