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April 25, 2009

Economist's View - 3 new articles

"Washington Consensus a Thing of the Past Now"

Is the "Beijing Consensus" on the rise, even within the U.S.?:

'Washington Consensus' a thing of the past now, by Jonathan Holslag, Project Syndicate: ...[T]he "Washington Consensus" about how the global economy should be run is now a thing of the past. The question now is what is likely to replace it.

Although China is often said to lack "soft power", many of its ideas on economics and governance are coming into ascendance. Indeed, in pursuit of national economic stability, the Obama administration is clearly moving towards the kind of government intervention that China has been promoting over the past two decades.

In this model, the government, while continuing to benefit from the international market, retains ... strict control over the financial sector, restrictive government procurement policies, guidance for research and development in the energy sector, and selective curbs on imports of goods and services. All these factors are not only part of China's economic rescue package, but of Obama's stimulus plan as well. ...

Rather than obsessing about elections, the US now seeks to build pragmatic alliances to buttress its economic needs. This requires, first of all, cozying up with China and the Gulf states – the main lenders to the US Treasury – as well working with Iran and Russia to limit the costs of the wars in Afghanistan and Iraq.

As the US backtracks on its liberal standards, it is flirting with what can be called the "Beijing Consensus", which makes economic development a country's paramount goal and prescribes that states should actively steer growth in a way that suits national stability. What matters in this worldview is not the nature of any country's political system, but the extent to which it improves its people's wellbeing. ...

This ... realism is ... a reversal of the neo-conservative muscle-flexing of the George W Bush years. ... For example, in times of crisis it is no shame for a government to be mercantilist, but by behaving in this way, the US has lost the moral high ground as a champion of free trade. ...

As we move from a unipolar international order to one with multiple regional powers,... [t]he result will be a new concert of powers... Instead of entrusting America with the arduous task of safeguarding international stability on its own, the BRICs (Brazil, Russia, India, and China) will assume a more prominent role in policing their own backyards. Russia can have its Caucasus, and if the generals in Myanmar should go mad, it would become China's and India's problem to sort out. ...

Whether America is able to strengthen its global influence in the future will depend not so much on its moral esteem, but on the extent to which it succeeds in revamping its economy and forging new alliances. The same will apply for other powers.

But this rising Beijing Consensus offers no guarantee of stability. A concert of powers is only as strong as its weakest pillar, and requires a great deal of self-discipline and restraint. It remains to be seen how the American public will respond to its national U-turn.

If one main player slides back into economic turmoil, nationalism will reduce the scope for pragmatic bargaining. ... And, if China comes out of the crisis as the big winner and continues to boost its power, zero-sum thinking will soon replace win-win co-operation.

I don't agree with every word of this, but I have to hit the road in a few minutes and will have to leave the response to all of you.

"Good Government and Animal Spirits"

Akerlof and Shiller say it's up to government to set animal spirits free, only then will they be maximally creative":

Good Government and Animal Spirits, by George A, Akerlof and Robert J. Shiller, Commentary, WSJ: The principal long-term result of the current financial crisis should be improved financial regulation. ...

An understanding of animal spirits -- the human psychology and culture at the heart of economic activity -- confirms the need for restoring the role of regulators... History -- including recent history -- shows that without regulation, animal spirits will drive economic activity to extremes. ...

At the end of the 1980s, our economic system was remarkably well-adapted to weather any storm. For example, massive numbers of S&Ls failed during the decade. But government protections isolated this collapse into a microeconomic event that, while it cost taxpayers quite a bit of money, only rarely cost them their jobs.

Then the economy changed -- as it always does -- challenging the regulations that were in place. ... And regulation did not adapt to reflect this change in the financial structure. The regulatory failure led to a profound systemic instability in our economy...

Public antipathy toward regulation supplied the underlying reason for this failure. The U.S. was deep into a new view of capitalism. Americans believed in a no-holds-barred interpretation of the game. We had forgotten the hard-earned lesson of the 1930s: Capitalism can give us real prosperity, but it does so only on a playing field where the government sets the rules and acts as a referee.

Contrary to a widespread impression the current situation is not really a crisis of capitalism. Rather we must recognize that capitalism must live within certain rules. ... It may be true that in the classical economic paradigm there is full employment. But with animal spirits, waves of optimism and pessimism cause large-scale changes in aggregate demand... When demand goes down, unemployment rises. It is the role of the government to mute those changes.

Moreover, entrepreneurs and companies do not just sell people what they really want. They also sell people what they think they want, and not infrequently what they think they want turns out to be snake oil. Especially in financial markets... All of these processes are driven by stories. The stories that people tell to themselves -- about themselves, about how others behave, and even about how the economy as a whole behaves -- all influence what they do. These stories vary over time.

Such a world of animal spirits justifies the economic intervention of government. Its role is not to harness animal spirits but really to set them free, to allow them to be maximally creative. A brilliant player wants a referee, for only when the game has appropriate rules can he really show his talents. ...American financial regulation hasn't had an overhaul in 70 years. The challenge for the Obama administration, along with the U.S. Congress and our SROs, is to invent a new and better American version of the capitalist game.

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