Tuesday, October 16, 2012

REVIEW: Prof. Smeaton's Analysis of the Great Recession

I must confess:  I have half a dozen good books sitting on my shelf that haven't quite gotten around to reading yet. It is probably no accident that most of them deal  largely with economics. Jeffrey Sach's The End of Poverty, Crowley's Fearful Symmetry,  Halpern's The Hidden Wealth of Nations, Loxley's Public Service, Private Profits, even Tim Harford's Undercover Economist  have all  fallen victim to the scarcity of time and stand in a queue that has yet to even reach my bedroom table.

That is why it is a treat to find a book in which the author says what he has to say in a slim volume (only 60 pages) that can be read in a day and which only costs about ten dollars. And despite its brevity, it raises two HUGE considerations that are often overlooked in discussions of the current crisis: (1) The importance and contingency of oil price shocks in triggering  economic crises and the concomitant ideological shifts that we have witnessed since the 1970s; and  (2) the policy inertia of our longstanding commitment to fighting inflation, which also dates back to the 1970s in North America (and, I would add, the late1940s in Germany). There is an almost Kuhnian attitude to economic paradigms that lies behind this work that adds much in terms of perspective.

Deflated: Causes and Cures of the Great Recession of 2009 is a useful supplement to the literature on the financial crisis and its aftermath. The latter describes in detail growth of shadow banking, the un-wisdom of Bush-era de-regulators, the sub prime bubble and the people determined to ride it for their own enrichment. Smeaton, an economist with experience in both academia and the private sector, probes beyond these factors to  examine the statistical record of both the 1929 and 2009 crises and discovers  "an overly restrictive monetary policy incapable of funding the productivity-driven growth which was underway in 1929" and that "fighting inflation was the key policy error" in both cases. Correcting this bias amongst the key players is a crucial part of correcting our course today: so too are a shift toward consumption taxes, a more accurate understanding of what Keynes said about deficits, and "the seeds of a new economics" better suited to a post oil-crisis, post-inflationary environment.

While no substitute for lengthier studies of the Great Recession by Krugman, Roberts, Rosenberg and others, this breezily-written book offers something even more valuable: an ability to think outside of the box. 


Anonymous said...

Hi Mark,

Two thoughts.

It’ll never be the “post”-oil crisis. The age of cheap energy is over, in the absence of a technological breakthrough. And that’s part of the biggest problem the world faces – scarce resources. I don’t believe those you say we do have them because of the way they talk about oil. They don’t make a distinction between the easily available oil we used to have and what we have left, which is very difficult to get at.

Also, consumption taxes are regressive.


Anonymous said...

Disagree somewhat:

1. Cheap is a relative term - must put it into inflation perspective... I think real prices of oil will go up, and down, for the foreseeable future
what with fracking and the like.

2. The problem is not cheap, or expensive, oil, but rather the time needed to adjust to new price regimes. Oil is key as it is so pervasive, but with time, the economy can and does adjust.

3. Can there be any doubt that there is tech progress on energy: both the conserving of it, and the finding new sources?

4. Consumption taxes put a levy on the use of 'common' resources - better than taxing productive saving/investment. And so what? Tax consumption then offset the sinful regression with income compensation.

Generally speaking this 'Club of Rome' mentality about scarce resources gives little shrift to role of prices in the dynamic balancing of 'scarce resources amongst competing ends'. Indeed, resources have always been



Mark Crawford said...

Interesting discussion. Perhaps my own phrasing of "post-oil crisis" was a mis-characterization of what Duncan said in his book. But the truth that jumped out at me was how an oil cartel -- OPEC--set in motion a series of political and ideological changes in the West. THere will continue to be oil-related shocks for the rest of my lifetime, no doubt.

As for consumption taxes--B. is right , ceteris paribus they are regressive. But that is not dispositive, when you consider that France and Sweden rely upon them for almost half of their revenue, and when you consider that consumption taxes likely (1) improve underlying trade-offs; and (2) help to shift us away from a debt-driven economy to one that rewards both effort and thrift better.