Economists are Loopy – And So Is the World!

By Shlomo  Maital    


 I regularly respond to a questionnaire sent out by Ifo, a German think tank, in collaboration with the Paris-based Chamber of Commerce.  They sum up the results in an interesting diagram. (See above).  The x-axis represents the current economic situation.  The y-axis represents expectations for the next six months. 

     What we see is this:  a huge clockwise loop, The Great Recession, initiated by the US financial crisis;    then, a second smaller loop, beginning in the 2nd quarter of 2011.   (First, the economy sinks and so do expectations; then expectatoins improve, and finally the wave of optimism helps the current economy improve too).  We are now in a very weak recovery, stronger in the US than in Europe, and much stronger in Asia than anywhere. 

     What happened to create the second loop?  Why did we have a second, smaller repetition of the Great Recession?

    Because of us economists, and because of the financial markets.  Both preached austerity – budget cutting,  spending cuts, tax hikes, tightened belts.  This, at a time, when neither businesses nor consumers are spending, and exports are flat,  so if the government stops spending, there is no demand to support growth.  Bad idea.  

     Fortunately, in America, political gridlock between Republicans and Democrats prevented sharp budget cuts.  This is the main reason why the US economy is doing better than the EU.  It may not last.  The mandated ‘sequestration’ cuts are already being felt in the US. 

     It’s bad enough when the whole world does a terrible loop owing to economists’ preaching of unfettered free markets, turning loose Wall Street’s criminal speculative financial gambles.  It is  double insult when we REPEAT THE WHOLE THING again, albeit on a smaller scale, this time for a different reason – reckless austerity plans, rather than financial gambling.   By the way: prepare for a new loop — because Wall St. lobbyists have persuaded the US Commodities Exchange Commission to weaken stiff planned regulation of derivatives trading.  As a Silicon Valley prayer bumper sticker says,  “Oh Lord — give me one more bubble.”  They may get their wish.   

     I’m embarrassed to be an economist these days, even a retired one.  When asked my profession, I might just say, serial killer.  It’s roughly on a par.