Given how most economists failed to predict the crisis, getting the view of non-economists is probably a good idea.
There is a debate on at Vox1, in partnership with the UK government, where there is an open invitation to economists from across the world; the aim is to have opinions on handling the global crisis and present a collective agenda at the G-20 Summit to be held in April in London. As Editor-in-Chief of VoxEU.org Richard Baldwin explains, “Now more than ever, the world needs research-based policy analysis: i) to understand this global and insanely interconnected event, ii) to formulate plans for alleviating its worse effects, and iii) to fix the system so it doesn’t happen again.” There are five themes — macroeconomics, financial regulation, institutional reform, development and open markets, and more than 100 pieces have poured in during the last fortnight. So far, contributors have focused mainly on short-term remedies, but there is wide diversity of views, some ‘off-beat’ pieces and some very ‘off-beat’.
Axel Leijonhufvud’s piece “No ordinary recession” sees a bleak future ahead. He says this crisis is different because the problem lies in the state of balance sheets — the banking system is near insolvency, firms are stuck with short-term debt that cannot be rolled over and US households are heavily indebted. Standard solutions like fiscal stimulus will not be effective as long as the financial system is de-leveraging. Two policy moves are vital: Governments should work at recapitalising the financial system to remove pressure to deleverage. It should also spend enough to counteract falling incomes. There is a catch — if the government programmes do not succeed, there will be a long period of deflation, if they do, severe inflationary pressures can surface quickly. Add to that the global dimension, when foreign creditors begin to falter from holding dollars, inflation will be hard to contain. He ends saying, ‘There is much to fear beyond fear itself’.
On the other hand, life is simpler for Dani Rodrik, who offers a drastic solution — issue more Special Drawing Rights (SDR’s) from the IMF, which will at ‘one stroke of the pen’ create global liquidity. Though the counter argument to this remedy is a sure shot dose of inflation, according to him, that is just what the doctor ordered!
Under the theme of financial regulation, there are many practical solutions offered. For instance, to address the credit strike by banks, Colin Mayer (Oxford Saïd Business School) suggests bypassing the banking system and promoting industrial finance corporations and venture capital.
On trade and open markets, while there are a slew of articles calling for resisting protectionism, Duncan Green of Oxfam says that the arguments cannot be black and white — protectionism is bad for the North, true, but most developing countries could turn inward and no one would notice, and if China goes back to its old ways, the world economy will suffer. No easy answers here.
There is a consensus though on the need for reform at the IMF, it is obvious to many that we are heading for a New World Order with a larger role for developing nations. As Arvind Subramanian puts it, the G-20 should get a few things in place in April — decision-making should be more cooperative and transparent. The Eurocentric approach that applies different standards to different members in the club must go. But though the old order is fading, he is sceptical that the developing countries have it in them to get the new order going now.
The debate also includes sustainable options for growth and there are a few pieces that address these issues — Trevor Houser (Rhodium Group) gives ideas on a green stimulus and Gilbert Metcalf (Tufts University) writes about the need to spread the use of alternative sources of power through the existing grid.
In sum, what this debate does, is that it provides a single reference point for different views, a platform for economists who are prolific in the media and others who are not. The ‘Global Crisis Debate’ will continue for another month, so we can look forward to reading many more insights. But given the ‘dramatic failure of the economics profession’ to ‘predict the emergence and the gravity of the financial crisis’, as Biagio Bossone, an international financial consultant, puts it, ideally the debate should have been open to non-economists as well.
1 All articles referred to here, and more, are available at http://www.voxeu.org/index.php?q=node/2824
The author is chief economist at Indicus Analytics firstname.lastname@example.org