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Why Economists Failed to Promote Recovery from the Great Recession 2008-2014
Raymond Richman, 4/8/2014

Pres. Obama had some stellar economists serving as his advisers but they ended up giving him and his staffers bad advice as to how to promote an economic recovery  from the 2008-14 recession. (Most economists consider a recession to be taking place while economic growth is negative. We do not consider it ended until full-employment is regained.) Consider who they were. Prof. Lawrence Summer of Harvard was head of the National Economic Council, Prof. Ben Bernanke of Princeton was head of the Federal Reserve and had been Chairman of the Council of Economic Advisors in 2005-6, Prof. Christina Romer of Obama’s first Council of Economic Advisors (2009-10) was a professor of economics at Univerity of California at Berkeley. She was succeeded at the CEA by Prof. Austan Goolsbee (2010-11), of Chicago’s Booth School who received his Ph.D. in Economics at MIT. He was succeeded by another Princeton Professor, labor economist, Alan Krueger (2011-13). During the George W. Bush administration when the recession began, Prof. Edward Lazear, who had been a professor of Human Resources Management at Stanford University and chairman of the CEA from 2006-2009 and succeeded Ben Bernanke as chairman of the CEA. About Bush’s anti-cyclical policies, nothing good can be stated. Bernanke deserves double mention because he helped inflate the housing bubble and did nothing to prevent it during his tenure at the CEA nor during his tenure at the Fed beginning in 2007.

Bernanke’s predecessor at the Fed, Alan Greenspan who served as the chairman of the Federal Reserve Board from 1987 to 2006 must be deemed to have been the economist most responsible for the housing bubble. Greenspan’s great mistake was in continuing the inconsistent role of the Fed under the Community Investment Act of 1977. The Act was intended to ensure that black and poor neighborhoods were not discriminated against by the banks and put the Federal Reserve System in charge of administering the program. The Fed lowered the standards for making housing loans so much that it ended up contributing to the housing bubble that burst in 2006 ushering in the Great Recession from which we have not yet recovered. The huge number of subprime loans that defaulted is a convincing demonstration of the Fed's failure to perform its duty to prevent the banks from making sub-standard loans.

This tells us that economists at the top of the profession did little to prevent the recession and little to promote a recovery. They were rewarded handsomely in honors and funds in academia and by government and international agencies. The millions still unemployed after six years, employed part-time, or forced to drop out of the labor force were betrayed by what masquerades as a science. 

It is probably true that economics is not alone among the so-called sciences that have betrayed the public trust. Man-made global warming widely proclaimed as a scientific truth has been called by others claiming to be scientists to have been propagated as a hoax. Time, we hope, will tell if it is allowed to. But time has already proven that economics is no longer, if it ever was, a science.

Free trade is a policy which has been justified by the theory of comparative advantage. From the beginning of economics as a science, the classical school of economics argued that free trade was beneficial under the theory of comparative advantage; you know, if Portugal exported wines and England cloth, both countries would be able to consume a more valuable amount of wine and cloth. More than a decade ago, Profs. Baumol and Gomory demonstrated that comparative advantage in manufactures could be acquired if a country were willing to make the investment. And even Keynes pointed out that countries could use a variety of trade practices to acquire and perpetuate a trade surplus which enables a country to benefit from trade at the expense of its trading partners. Yet most students are still taught that free trade is an appropriate response to such practices notwithstanding the reality that millions of American workers lost their jobs as a result of such practices.

The problem of recessions and depressions has long been the subject of economic research. Amazingly, we ended up with two ideologies instead of a scientific solution. One, Keynesianism, that the government needs to jumpstart the economy, to which Keynes as a scientist would no longer subscribe and two, an ideology that the government should do nothing but let the free forces of the market achieve a solution. The former failed to consider the unintended consequences of deficit-spending and the latter that doing nothing leaves in place the forces that caused the recession or depression.

Economics as a science has identified the forces that cause growth and stimulate the demand for goods and workers. They are numerous but chief among them is the stimulation of investment to produce more goods and services; others include, adequate money and credit to restore diminished consumption and production, the production of new products and services, improved infrastructure, etc., etc,, and last but not least, dealing with the causes of recession or depression.

What characterizes all the economists enumerated above is they were all governed by ideology, not science. Politics set priorities, not economics. To make matters worse, the Keynesian ideologues did nothing or very, very little to correct the causes.

Among those causes, the Community Investment Act of 1977 is still the law, the FED is still administering it, our chronic trade deficit is still plaguing us while the administration wants to extend the free trade area, the government increased spending on unproductive things like wind and solar energy which is costly and produce nothing of value, a huge project called the Affordable Care Act which creates no new jobs except for unproductive bureaucrats, and discourages employing additional workers, increased environmental regulations causing layoffs, etc., etc. It is not that nothing has been done, some monetary easing was justified. But the conclusion can be drawn, for all practical purposes the Keynesian ideologues have practiced little economics but promoted a lot of worthless political spending. 

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]