Tuesday, October 16, 2012
REVIEW: Prof. Smeaton's Analysis of the Great Recession
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.