Tuesday, August 05, 2008

Greenspan Professes Innocence

I see that Greenspan has produced yet another article where he tries to make us forget how he not only failed to identify , but more importantly caused the housing bubble. For examples of his dismal forecasting record see Krugman on this, for a refutation of his denial of guilt see my previous writings on this.

Greenspan is not all wrong in this new article. He is right that it would be wrong to try to solve the problems with protectionism (that will only make things worse)and he is right that in any economic system, there will exist poor judgements and excessive optimism and excessive pessimism. With regard to that latter issue however, he ignores of course that if the central bank subsidize overinvestments during periods of optimism and bails out failed investors during the bust (whish is to say, if central banks do what Greenspan did as Fed chairman), then this will create much bigger bubbles and much greater levels of overinvestments (malinvestments) than otherwise.


Blogger Jim Driscoll said...

Please keep in mind that, as Dean Baker argues, we already have quite a bit of protectionism.

Colleges, health care, highly trained workers, and intellectual property are all protected by highly protectionist policies. Not to mention agriculture.

It's not a coincidence that the highest rates of inflation have been in those sectors, either.

7:30 PM  
Blogger stefankarlsson said...

Except for agriculture, I'm not sure what protectionist policies you're talking about. But at any rate, protectionist policies in one area does not justify them in others.

9:18 PM  
Blogger Jim Driscoll said...

Check out Dean Baker's blog on any given day for a rant, but the upshot is:

Restricting the inflow of professionals like doctors is an example of healthcare protectionism. Or do you really think that Swedish doctors aren't the equal of US doctors? Yet recertification for them in coming here is, I'm told, nightmarish - and health care costs remain quite high in part as a result.

Additionally, draconian enforcement of IP rules (90 years for copyright? Ick.) is also a protectionist barrier, albeit one that also restricts internal competition as well.

Another example was members of the US federal government recently preaching that drugs imported from Canada were not as safe as US drugs - again, protectionism, and almost certainly the real reason for Medicare Part D, since seniors were leading that revolt.

There are other examples that are easy to find, once you're looking for them. Some (like copyright IP protection) are a harder case to make than others (like the drug restrictions), but they're certainly there.

No, one wrong doesn't make the other right, but it's important not to mistake current US policy as anything other than protectionism that benefits the rich and large corporations, at the expense of lower paid workers, and small, out of fashion businesses.

11:34 PM  

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