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September 6, 2009
David Warsh, Proprietor


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The Power of Self-Recovery

Barack Obama was elected president in the hope that he would create a new consensus about the sort of country that the United State is trying to be – to lead to the left, but relatively slightly, in such a way that a broad majority of voters would be satisfied that the nation remains on its long-term course.

How’s he doing? Everybody knows he’s had a rough summer. The 2010 elections are barely a year away. The polls suggest the Democrats’ majority in Congress may erode somewhat,

Still, if Obama can regain the confidence of the majority this autumn (and keep it), he has seven years in which to work. “Valor consists in the power of self-recovery,” wrote Emerson (in “Circles”), “so that a man cannot have his flank turned, cannot be out-generalled, but put him where you will, he stands.”

In those terms, then, sequence is all. Herewith a very quick look ahead – well ahead – as Washington goes back to work.

Whatever accommodation with the bitterly-divided Congress Obama adopts next week, it should be enough to make a start on a new level of government involvement in health insurance markets. Counselor David Axelrod told Politico last week, “It’s fairly obvious we are not in the second inning. We’re not in the fourth inning. We’re in the eighth or ninth inning here, and so there’s not a lot of time to waste.” This particular contest will have been decided by December; a pause; and then another season.

Plans for financial regulatory reform are picking up speed. They can be expected to eclipse expensive cap-and-trade legislation on the administration’s agenda, perhaps well into next year. The Treasury Department last week proposed new rules for stronger capital and liquidity standards designed to re-shape the banking industry, favoring smaller and more stable firms over larger ones. The decision to reappoint Ben Bernanke to a second term as chairman of the Federal Reserve Board means that the administration’s economic team has finally settled down, retaining Lawrence Summers as chief strategist.

The extent of the recovery (and the size of the deficit, which depends on it), though closely watched, will remain a mystery well into next year. Economic concerns, therefore, will dominate next year’s Congressional elections, but they will be short-term issues – jobs, unemployment, stimulus – and not the more serious matter of the broad tax increases that will be necessary in the next few years to pursue fiscal balance and price stability. That’s an issue for the second term.

The biggest problem, therefore, is the war in Afghanistan. If I am any judge, American opinion in the last few months has turned decisively against it, evidenced, for example, by testimony from opinion-makers George Will, Clive Crook and Garry Trudeau, and by this expert chronicle by a reporter and photographer for the Associated Press of The Death of One Marine. “We can still win a counterinsurgency, but not on the cheap,” exhorts the editorial page of The Wall Street Journal, one of the few remaining centers of enthusiasm for the war. Nor quickly, the editor might have added.

Alas, the problem of Pakistan must be solved some way other than by occupying its neighbor. The best Obama can do now is to opt for a short-lived “surge,” modeled on Iraq, designed to firmly signal US forces’ intent to leave the theater. But Afghanistan is not a relatively coherent political culture like Iraq, and the exit it permits may not be as graceful. The war there, as the British used to say, is a very sticky wicket. The Russians no doubt had a phrase of their own.

In short, the self-recovery that Obama must achieve will not be an easy matter. Emerson warned that a man can only accomplish it “by preferring truth to his past apprehension of truth,” by “alert acceptance” of the news from whatever quarter it may arrive, and by “the intrepid conviction that his laws, his relations to society, his christianity, his world, may at any time be superseded and decease.”

Things change, in other words, and leaders must change with them.

                                          xxx

Paul Krugman has a very interesting 6,700 word article in the Sunday New York Times Magazine, How Did Economists Get It So Wrong? It is an elaboration of the added chapter (“The Central Problem Has Been Solved”) that he wrote at lightning speed last autumn for The Return of Depression Economics and the Crisis of 2008.

Krugman reviews the rough convergence that emerged in macroeconomics over the past thirty years between the views of “New Classicals” (or “freshwater” economists, associated with universities in places like Chicago, Minnesota and Rochester) and “New Keynesians” (or “saltwater” economists, identified with universities such as the Massachusetts Institute of Technology, Harvard and Princeton). He examines some of the compromises that each side made. And he contrasts the professional consensus among macroeconomists with the more robust approach he ascribes to behavioral finance.

He doesn’t much credit the motives of those with whom he disagrees:

…[A]s memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Nor does he note that Princeton University, where he teaches in the Woodrow Wilson School, has been adding freshwater economists to the portfolio of its economics department for years, including two very senior figures, Christopher Sims and José Scheinkman. Indeed, Princeton just hired Patrick Kehoe, from the Federal Reserve Bank of Minneapolis, one of the better young freshwater economists around, and missed out on two other prominent freshwater economists to whom it had made offers, Martin Eichenbaum and Lawrence Christiano, both of Northwestern University.

Whatever his tendency to stack the deck of his arguments, painting the other side in a consistently unfavorable light, Krugman infuses the story of the search for the root causes of recessions and depressions with his customary clarity and verve. He is, to put it mildly, a very useful citizen.

But then so is Robert Lucas, of the University of Chicago, whose gloss on the the significance of crisis, In Defence of the Dismal Science, appeared in The Economist last month. More on these topics next week.

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