Call in the Economists
It may not be everyone’s cup of tea, but at least for professional economists and financial analysts, the opportunity to hear not one, but two of the world’s top economists speak in Israel on the same day, at the same place, is a rare treat. This opportunity was available on Wednesday, when the Israel Economic Association held its 28th annual conference in Tel Aviv.
The conference kicked off with an hour-long review of the state of the global economy, from the sources of the current crisis to the long-term issues facing individual countries and the entire world, by Professor Jeffrey Sachs. The keynote address at lunch was delivered by Professor Stanley Fischer, who based himself on remarks he had given at the IMF conference last month. Both men, as usual, gave very clear, compelling analyses, focusing – inevitably, in light of what has been happening this week and for the last two years – on the sovereign debt crisis in Europe.
Together, they conclusively proved how right Harry Truman was, when he cried out in exasperation “Give me a one-handed economist! All my economists say, ‘On the one hand, on the other’”. Two of the world’s leading economists are unlikely to agree about much, especially if they are Jewish and talking to a Jewish audience. That, however, is why it was such a fascinating experience.
Fischer, unusually – since he is a central bank governor and hence charged with the formulation and execution of monetary policy – chose to speak about fiscal policy. His main thesis was that fiscal policy, in both the developed and developing worlds, had played a crucial role in stemming the crisis of 2008/09 and had thus demonstrated its relevance and indeed centrality. For Fischer, the crisis and its aftermath serve as testimony to the validity of the Keynesian approach to macro-economic management – although one doubts that he would be as extremist a Keynesian as, say, Paul Krugman. Nevertheless, he did go so far as to approvingly quote Ronald Reagan – another, this time Republican, American president – who said in the 1980’s “we are all Keynesians now”.
Fischer noted at the outset that he did not know what Sachs had spoken about earlier in the day – which was probably just as well. For his part, Sachs probably had to restrain himself from shouting in response to the claim that “we are all Keynesians now” – “I’m not!” He had devoted part of his lecture to deconstructing the Keynesian claim that fiscal policy had been instrumental in “saving the world” after the Lehman Brothers crash. In fact, he went further and said that an expansionary fiscal policy has limited impact in the short term and is counter-productive in the long-term. He specifically slammed the Keynesian view that the long-run is not important – crystallized in the quote attributed to Keynes that “in the long run, we are all dead”.
For Sachs, the key factor in stopping the impending global depression that the world economy was plunging into in late 2008 was the aggressive monetary policy adopted, first and foremost, by Federal Reserve Chairman, Ben Bernanke. This position, too, is open to debate – to say the least – and many economists would either dispute the central role that Sachs awards monetary policy, or even say that his critique of aggressive fiscal policy applies to monetary policy, too. Fischer himself would not be critical of monetary policy – but these two hardly span the spectrum of views on the causes of the crisis and how it should have been dealt with. Indeed, despite their differences, they are relatively close together on the full spectrum, with far more extreme views available, especially to their ‘right’.
The real split between them, at least on the basis of their lectures on Wednesday, is with regard to something more fundamental than fiscal or monetary policy, and that is the question of macro-economic management in general. Sachs made it quite clear in his lecture – and far more so in his recent book, The Price of Civilisation – that one of the key lessons from the crisis is how limited a tool macro-economic management is, on its own. Sachs now believes that – and practices, in his role as head of the earth Institute at Columbia University – a much wider, multi-disciplinary approach than ‘mere’ macro-economics is needed to manage and develop the economic resources of a nation, let alone the world. Although he would certainly reject the notion that economists ‘don’t know nuffin’, he would equally certainly disqualify the counter-view that economists know it all — or even enough to direct the economy on their own.
In the same way that, as the French president Clemenceau said, “war is too important to be left to the generals”, it is now clear that the economy is far too important to be left to economists and, for that matter, bankers too.