Thursday, August 02, 2007

Idiot Wind (don't cover up the truth with lies)

AAARGH!!! Foreign Policy, the People magazine of international affairs has produced a column entitled "5 Lies my Economist Told me". The problem is, they are either not really lies or else not really what a professional economist would say!!


1. High productivity and low unemployment make us all better off.

This is clearly false in the sense that not every single person in the USA is better off than they used to be, but it is bizarre. Would FP advocate lower productivity and higher unemployment as the key to personal improvement? They offer stagnant wage growth in the face of solid productivity growth as their evidence, but this ignores non-wage payments (health care!!) and the massive improvements in everyday life for even the poor in the US.

2.
It’s hard to grow without good banks and private property

I really don't get this one. It is clearly, obviously true!! FP gives China as the damning counterexample, but (a) China didn't grow before introducing a form of private property and (b) one country doing it doesn't mean it is easy, does it??


3.
Capital must always be let free to flow

If anyone flat out says or said this with no qualifications, then I guess it would be a lie, but economists pretty much never recommend corner solutions, most papers now are about under what conditions increased capital flows improve growth. FP gives the Asian financial crisis as the damning counterexample, but really, are those countries worse off than if they had never enjoyed capital inflows at all? Would you rather be S. Korea or say the Congo? I think there are a lot of countries in the world who'd be thrilled to have a financial crisis because it would mean they had experienced some foreign investment.

So, how about "its better to always have free capital flows than to always have total capital restrictions".


4.
The Euro will never work.

This is just confused. It depends how you define work. Compared to an optimal monetary policy for each country, the Euro clearly is not "working". If working = surviving as an institution, the Euro is working. FP quotes Friedman as saying that fixed exchange rates are a bad idea, not as saying that the Euro will become extinct. There are a lot of bad ideas with a long long shelf life (payroll taxes, the AMA....).

5.
Japan—no wait, China—is going to take over the world economy

This one is stupid and insulting. I don't know of a single serious economics paper arguing the truth of either of these positions. It is clearly true that a lot of people think (thought) like this and fear (feared) China (Japan) but the impetus is NOT coming from the economics profession. No way.

Hat tip to Dani Rodrik for the pointer.

1 comment:

Alejandro Moreno-Ramos said...

Good post!

One remark: "compared to an optimal monetary policy for each country", the USD probably is not "working" either, as many economists think that the United States should have more than one monetary policy.