When she and her colleagues [on the Council of Economic Advisers] began work, she acknowledged, they did not realize “how quickly and strongly the financial crisis would affect the economy.” They “failed to anticipate just how violent the recession would be.”
On the one hand she admits that she and her government colleagues underestimated how bad the recession was going to be.
Even now, Romer said, mystery persists. “To this day, economists don’t fully understand why firms cut production as much as they did or why they cut labor so much more than they normally would.” Her defense was that “almost all analysts were surprised by the violent reaction.”
Yet she still thinks businesses were wrong to think it was going to be as bad as it was. She’s basically admitting that she was wrong and that business were right. She just doesn’t realize it.
Or maybe she’s not admitting that businesses were right that the recession was going to be severe. Maybe she thinks the recession was so bad only because businesses cut back on production and labor.
Good luck with that reasoning, lady. I agree with Friedrich Hayek – when lots of individuals make lots of small decisions in their self-interest they will come to a better decision than when a few people on a committee make a few large decisions.
Those business people saw the orders drying up, saw the business disappearing, saw their customers struggling to pay their bills. They responded to those signals by cutting back to save their businesses. Those business people have a better feel of the economic pulse than any Washington bureaucrat.
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So, where do you think we’re headed, inflation, deflation, or something worse?
In the short term, continued deflation in assets that have been subject to bubbles – real estate and stocks, for instance. Real estate is still overpriced and the price of stocks is way out of line compared to earnings.
Inflation in commodities like food and energy. As some people are putting it, deflation in what you have, inflation in what you need to live.
Every other fiat currency has inflated, so I don’t think we’ll be any different. The question is how much inflation and when.
Well, aren’t you the optimist. =P
A cheery world view it ain’t.
Where do failed government economists go when they retire? To Berkeley, to train up more of the same, of course.
I will always wonder if they honestly believe their failed economic policies will succeed, despite centuries of history showing that they won’t, or if they secretly know how it will turn out and just pretend to be surprised when it “doesn’t go according to plan.”
Business hates uncertainty re taxes and regulations. In Jan 2007 the Dems took over both houses, at that point they stated: 1) The Bush tax cuts would expire, 2)tax and cap was on the table 3)the Dems were discussing “Improving medical care,” adding to already out of medical control costs 4) business was threatened with punishment for “shipping jobs overseas” and 5)the mininum wage was going up (to ridiculous levels). That economist are too dumb to recognize these facts is why she is “mystfied.” The solution, reduce corporate taxes to at least 10% (zero would be better), but no tax on money brought back from overseas, cut government size/spending by at least 10% immediately and 10%/yr for the next 5 years(minimum). Do away with the minimum wage, do away with corporate health insurance(give employees the company’s contribution, buy your own!, of necessity repeal Obambicare, reduce all regulation, drill here, now (adding 2-5 million barrels per day over the next 5-10 years), build nuke plants and coal plants, stop wind and solar subsidies make these compete on price/value, do away with auto gas mileaage standards – and that’s just for a start. with just these steps growth and ewmployment would soar! (Probably too much so!)
I’ve heard, directly and indirectly, from several business owners who say they would like more inventory, more projects, whatever the case may be, but they can not get there because credit applications that were once routine now get rejected.
When you frame the problem as many small decisions vs. a committee, you are leaving out another possibility. Banks in the middle ground between government and business owners are making the crucial decisions. I don’t think drops in production and earnings are so much an expression of the market’s collective wisdom as an expression of the bank’s collective trepidation over whose assets (including their own) are exposed to risks.