...is the name of my new book on the economic crisis, just published by Harvard University Press. Of course the book covers some of the same ground as my previous book on the crisis, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (Harvard University Press 2009), but it is longer, more detailed, more scholarly, but above all more focused in the events of 2009 rather than of 2008. The first book was completed (beyond possibility of substantive change) on February 2, 2009, less than two weeks after Obama's inauguration. The second book was completed on January 4 of this year. Much of note happened in 2009 with reference to the crisis, including not only the enactment and initial implementation of the $787 billion stimulus (which turned out to be an $862 billion stimulus) (including "cash for clunkers"), the stress tests of the banks, the mortgage-relief programs, the public outrage over bankers' bonuses, the GM and Chrysler bankruptcies, and the Treasury's proposals for financial regulatory reform, but also the growth in concern over soaring federal budget deficits, which in turn have implications for the position of the United States in the global economy, as well as for the continued prosperity of the nation. I share the concern with our fiscal improvidence; we seem unable to close the gap between public expenditures and tax revenues--or even to keep it from growing ever wider.
These are matters of emphasis in the new book, along with a deeper exploration of the causes of the economic crisis and the mistakes of economists, which I describe compendiously as "forgetfulness of Keynes."
The second book was completed, as I said, on January 4 of this year, more than two and a half months ago. And the world has not stood still. I have blogged about the new crisis-related issues that have surfaced since then, both in this blog and my blog with the great economist Gary Becker (now at a new Web address, http://uchicagolaw.typepad.com/beckerposner/). Today Becker and I blogged about the Greek crisis; our previous blogs since January 4 have included pieces on the President's quixotic promise to double U.S. exports within the next five years, the President's job-subsidy plan (another sure loser), the problem of long-run unemployment (some 40 percent of the current unemployed have been unemployed for more than half a year), the pluses and minuses of the stimulus plan, and consumer financial protection.
I want to make a small addition to my piece on the Greek crisis, and a correction to my piece on the Presidente's job-subsidy plan.
What makes the Greek crisis particularly acute is that Greece does not have its own currency, and hence it cannot inflate or devalue its way out of its crushing indebtedness resulting from its fiscal improvidence (which resembles our own!). Devaluation would help, as I mentioned, because it would make Greek exports cheaper and imports more expensive, and this would either reduce its trade deficit or create (or increase) a trade surplus, and either way would reduce the gap between income and expenditures. But in addition, to the extent that Greece has euro reserves, it could by devaluing (if it had its currency, the drachma--its currency before it became a member of the European Monetary Union) use its reserves to repay its drachma-denominated debt cheaply, since by devaluation the euro would buy more drachmas.
The correction is in the example I gave of why the job-subsidy plan would not add jobs. Here is the example: "The job-subsidy plan is not demand-focused, and so is unlikely to contribute to the economic recovery. Suppose a firm in a depressed economy sells 100 earth-moving machines a year, and employs 200 workers. If the government tells the firm it can save $5,000 on its taxes by increasing its work force to 201, the firm's total costs will increase (by the wages and benefits of the additional worker less $5,000), but its revenues will not increase because adding a worker does not increase the demand for its product." The misake in this passage is in failing to acknowledge the possibility of substitution of labor for capital inputs. The job subsidy makes labor cheaper than it was before, and this may induce an employer to hire more workers, as substitutes for machinery or other capital inputs. I don't think this is very likely, but I should have acknowledged it as a possibility.
In this blog (my Atlantic blog), I began the year with criticism of a major speech by Fed chairman Bernanke, who, echoing Alan Greenspan, argued--unconvincingly in my view--that the Fed's drastically low interest-rate policy of the early 2000s was not a significant factor in the housing bubble and resulting economic collapse. I later discussed with strong disapproval the apparent "deal" between Bernanke and Senator Reid in which, as the price of his reappointment as chairman of the Fed, Bernanke seems to assure Reid that the Fed would continue its "easy money" policy, and not raise interest rates. I don't know whether there really was such a deal; I hope not; but there is little doubt that the controversy over Bernanke, more broadly over the causes of the economic crisis, has undermined the political independence of the Federal Reserve. Politicians look one election ahead and hence favor short-term stimulation of the economy, even at the price of future inflation.
I discussed a couple of proposals that seem to have turned out to be nonstarters: the bank tax and the Volcker Plan. My other posts have centerd on further discussion of the stimulus, but have included further criticism of Paul Krugman and some concrete proposals for increasing the rate of economic growth--as it seems to me that growth is the only way we'll reduce our growing public debt burden