Reviewing Financial Fixes In 2009
With 2009 coming to a close, it's time to review the big economic news of this year. If 2008 was the year of crisis, what was 2009? Yoram Bauman, an economist at the University of Washington, and Ari Shapiro look back on 2009. One of the big debates: should the government play a role in managing the economy?
ARI SHAPIRO, host:
We're going to spend the next few minutes looking back on the year in economics. If 2008 was the year of crisis, what was 2009? We've called Yoram Bauman, an economist at the University of Washington to review the year with us. He joins us from Seattle. Welcome to the program.
Professor YORAM BAUMAN (Economist, University of Washington): Thanks so much.
SHAPIRO: So if you were writing a book on the history of economics in America, what would the chapter on 2009 be?
Prof. BAUMAN: Well, I think the answer to that has to go back to 2008 when, you know, we had the financial crisis at the very end there. And until that point, the economy was really cruising along there. If I had to pick an animal to describe the economy in 2009 it would be a hamster. But for the previous 20 years, things have been going great and a hamster was just churning around its wheel and then it sort of collapsed at the end of 2008, the beginning of 2009.
And then there was the big debate in 2009 about what do we do about this collapsed hamster and there was sort of a group that said, well, the hamster needs some rest. And then there was a group that said that the hamster needs some methamphetamines and...
(Soundbite of laughter)
Prof. BAUMAN: ...roughly, this...
SHAPIRO: Get the hamster back on the wheel.
Prof. BAUMAN: Yeah. We have to get the hamster back on the wheel and that's, you know, that's what the stimulus package was about.
SHAPIRO: But, you know, when you talk about giving the hamster a rest or injecting the hamster with amphetamines, injecting the hamster with amphetamines sounds like an inherently negative thing to the economists who say the stimulus is what was needed. This is not an inherently negative thing economically speaking.
Prof. BAUMAN: That's correct. I think that the overall sense is that the stimulus was a good thing for the economy, that it was something that we had to do, but it's also true that there's sort of the morning after and now we have the deficit and, you know, we're still sort of getting, there's the hangover basically.
SHAPIRO: And so is there any consensus about whether the right choice was putting the hamster back on the wheel or letting the hamster rest?
Prof. BAUMAN: There's rarely a consensus in macroeconomics. The old line is that if you put all of the macroeconomists and in the end they still wouldn't reach a conclusion.
(Soundbite of laughter)
Prof. BAUMAN: And I mean you still have this debate basically between folks saying well, you know, the stimulus was a good thing. We should have had more stimulus, and folks who argue that it would've been better to sort of let the market take care of things on its own.
SHAPIRO: Why don't we know who is right?
Prof. BAUMAN: Well, I think there's two things going on there: One is that it would be really nice if we had two planets, right, and we can do the stimulus on one planet and not do the stimulus on the other planet and then see which planet came out ahead.
SHAPIRO: Mm-hmm.
Prof. BAUMAN: It's a bit like climate change in that sense, because it would be really nice in the climate debate also to have one planet where we're pumping CO2 into the atmosphere and another planet where we're not and see the differences in global temperatures.
The challenge, I think, and the difference between those two cases is that with climate we have a really good theory about carbon dioxide leading to increased temperatures, and with macroeconomics, it's still really hard to get a theoretical basis for what's going on with the macroeconomy and what's driving it.
SHAPIRO: I've never been able to understand why with decades and decades of economic history to look at, economists still cannot agree on some of the most fundamental basic questions about the way economic systems work. Like whether you should stimulate an economy to get it back running or not.
Professor BAUMAN On the one hand, I'm a microeconomist so I tend to agree with you, right? The old line from P.J. O'Rorke is that microeconomists are wrong about specific things and macroeconomists are wrong about things in general.
(Soundbite of laughter)
Prof. BAUMAN: But the challenge is that the economy is always changing, right? If you - we might have a couple of decades but, you know, if we compare it again with climate science, climate science goes back hundreds of thousands of years and we have data over that span to think about things.
If you consider how long stock market has been around or the modern economy has been around, you've got a couple of decades, maybe a century or two, and the fact that things change so much, it makes it really hard to come to any, you know, any set conclusions that everyone's going to agree on.
So I actually think that there's a sense in which it was the consensus among macroeconomists that everything was going okay that led to some of the irrational exuberance, if you will, that prompted the current downturn. And then we totally missed the financial crisis, right? There's an economics joke that's sweeping England. Can I tell this joke to you?
SHAPIRO: Yeah. Absolutely.
Prof. BAUMAN: I have to put on a fake English accent, which is terrible.
SHAPIRO: Oh, please.
Prof. BAUMAN: I'm sorry.
SHAPIRO: Okay.
Prof. BAUMAN: Here we go. Knock, knock.
SHAPIRO: Who's there?
Prof. BAUMAN: Economist.
SHAPIRO: Economist who?
Prof. BAUMAN: Economist the financial crisis, but I promise I'll do better next time.
(Soundbite of laughter)
SHAPIRO: Yoram Bauman is an economist at the University of Washington and he is also known as the stand-up economist. He's co-author of the forthcoming "Cartoon Introduction to Economics." Thanks a lot.
Prof. BAUMAN: It's been my pleasure.
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