Wednesday, June 07, 2006

Yes Please

Angelica titles one of her posts "We need a hippocratic oath for economists", and needless to say I agree. Not least because the post in question happens to be about NAIRU, what James Galbraith calls "one of the worst ideas in the modern history of economics." Brief lesson: the concept of "natural unemployment" was used in North America - and is used in Europe today - to restrict inflationary pressures. It deliberately privileges inflation over employment. That is, it privileges accrued wealth in the hands of the few, rather than the working class.

Here's the thing - there's no evidence that economists can even define what NAIRU would be, or even if it exists at all. Nevertheless, this idea - again, totally fictional - motivated central bankers to keep interet rates high throughout the 1980s and 1990s, until US unemployment fell though what had been seen as the employment floor faster than Greenspan could raise rates.

It's important to note that Greenspan was as much an acolyte of NAIRU as anyone else, he was just blindsided by the sucess of the US economy. Greenspan deserves credit for not insisting that NAIRU still held and trying to strangle the US economy. This was a test that our own central banker in Canada, John Crow, failed.

Dean Baker - my favourite economist, as regulars will remember - has repeatedly shown that the biggest differential between European "struggling" economies and the US has nothing to do with "over-generous pensions" or strict labour codes, but is simply due to the fact that German bankers now control the monetary policy for the entire continent minus the holdouts. Germans are not known for their loose-money policies. (Anymore.) Talking about how the EU countries need to "liberalize" without recognizing this basic fact is an act of immense stupidity.

NAIRU in particular - and right-wing monetarism in general - is also largely responsible for the sordid state of our infrastructure, which I posted about recently. High-interest, low-spending policies do not lend themselves to large infrastructure projects. And of course, it's diametrically opposed to actually having the government employ people to do useful things.

So yes, please, let's have a hippocratic oath for economists. Of course, if we did then Jeffrey Sachs would lose his license and be shunned in polite company.

1 comment:

Ronald Brak said...

I think governments should look after the welfare of their citizens, not look after the welfare of their currencies. However, the welfare of citizens is connected to the welfare of currencies. High inflation rates are not helpful. Personally I'm a fan of inflation targeting. I think that both Europe and Japan would benefit from an inflation target of 2.5 to 3 percent.