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4.0 out of 5 stars
This should be the first of many informative policy volumes, December 8, 2008
This review is from: The Economists' Voice: Top Economists Take On Today's Problems (Hardcover)
The authors of The Economists' Voice are all fine economists with extensive policy experience in economic policy and a dedication to bringing serious economic analysis to the public. Stiglitz, who holds a Nobel prize in Economics, was the driving force behind the Journal of Economic Perspectives, which specializes in informing economists of the current state of research in the many highly specialized areas of economics of which the typical economists knows only one or two in any depth. The authors collaborate in editing the Berkeley Electronic Press policy-oriented journal, The Economists Voice, which also tends to outreach rather than in-depth, highly technical analyses.
This book is a real tour-de-force, bringing serious and compelling economic analysis to those not trained in economic theory, but who recognize the centrality of economic analysis to many social policy problems. In my ideal world, a new edition of this book would appear every few months, and it would be widely read by the interested public, as well as policy-makers in the public sector.
The volume, published early in 2008, has thirty-five chapters, varying from about seven to twelve pages in length. Some contributions, like the four chapters on global warming and the six chapters on the death penalty, the six chapters on the American welfare system, and the four chapters on social security reform, are of perennial interest and are highly informative without being in any sense definitive. Other contributions, including discussions of fiscal policy, the international economy, the cost of the war in Iraq, and tax reform, are highly enlightening, although somewhat out of date in light of the dramatic fluctuation of oil prices and the stock market in recent months.
Perhaps the most eye-catching topic in the book is the housing price bubble and its implications. I continually read in the newspaper that economists are to blame for not having predicted the collapse of the housing bubble and failing to comprehend the extent of the subprime housing stock in the United States. This is simply not true. Economists, including Robert J. Shiller and Dean Baker, who are included in this volume, have been issuing warnings since at least the year 2002, and Edward Gramlich published a full analysis of the problem shortly before his death, in a volume entitled Subprime Mortgages: America's Latest Boom and Bust (Urban Institute Press, 2007).
Here are the words of Dean Baker (p. 288), written at least a year before the bubble burst in October, 2008: "An unprecedented run-up in house prices is propelling the current recovery. Like the stock bubble, the housing bubble with eventually burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined house prices could fall, likely will face serious hardships."
Edward L. Glaeser and Dwight M. Jaffe address the future of Fannie Mae and Freddy Mac (F&F), which have since collapsed and have been taken over by the government. They note (p. 296) that the Office of Federal House Enterprise Oversight (OFHEO) in May 2006 published a paper warning of grave problems with F&F. "During the period covered by this report--1998 to middle 2004," they report, "--Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the Enterprise's senior management with the aid of inappropriate accounting and improper earnings management."
Of course, these warnings were not heeded by many investors and financial sector decision-makers, but this is no fault of the economists involved. I don't know of a single knowledgeable economist who did not have deep reservations about the housing market and incentive structure of the finance sector. Many level-headed firms and individual investors did quite well by abandoning the housing sector after the year 2005.
The situation leading to the collapse of the subprime housing bubble was one of (a) excessively short-term incentives for top management in the financial sector, (b) poorly constructed financial regulatory mechanisms, such as the implicit government guarantee extended to F&F investors; and (c) the web of special interest influence which was exercised by F&F, as well as other financial firms, who blocked all financial regulation reform over the period 2002-2008. Behind all of this was the general hubris concerning the operation of free markets promoted by conservative Republicans over the past two decades. The truth is that markets (including financial markets) work well when properly regulated, but not otherwise.
Even so astute an analyst of financial markets as Alan Greenspan was taken in by free market bromides. In Congressional testimony he recently confessed "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief." In fact, I am in no less shocked disbelief at his confession. Nowhere in economic theory does it say that self-interest is sufficient to achieve Pareto-optimality, except under the most arid and unrealistic of conditions.
The bottom line is that this book is a very fine instrument for disseminating economic information, and I hope it is only the first of many.
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