(Princeton University Press, 2010)
“History teaches us that we rarely learn from history,” writes John Quiggin, Professor of Economics at the University of Queensland. This is an especially troubling cognitive tic for economists, who are often championed as soothsayers in our era. Despite the ravages of recent history, there are a large number of influential economists who spout mythic predilections, preaching a homily of theoretical fluff to a congregation of faithful policymakers. For market liberals, the big dream of the final years of the 20th century was the Great Moderation, the notion that the boom-and-bust volatility of the business cycle had reached its final terminus; that, by the end of the 1990s, the United States and other highly-developed industrial democracies would continue to enjoy long periods of economic expansion, interrupted only by brief, minor recessions, perhaps once a decade. This notionally-natural, hypothetically-perfected, false utopian state of economic security—bolstered by transient academic trends and buttressed by lawmakers—was attributed to the seeming-triumph of free markets, operating efficiently in a financial and business environment unburdened by government regulation.
Then came the Global Financial Crisis of 2008.
Sic transit gloria mundi.
Thus passed the Great Moderation from the earth. Or so we thought—for despite what ought to have been its painful demise, Quiggin alerts us in his new book, Zombie Economics: How Dead Ideas Still Walk Among Us, that it has reappeared to stalk academic and political debate as an undead idea, wielding influence that affects the lives of everyday people. Quiggin laments that the “Great Moderation vanished in 2008 and 2009, but the academic industry built to analyze it did not.” In the U.S. and other highly developed countries, policy infrastructure and regulatory regimes were attenuated to accommodate irresponsible ideas that provided the theoretical ambience for deregulation of markets and financial institutions, the effects of which having been to shift greater risk from corporations and governments onto individual workers and families.
Compounding the wrongs of The Great Moderation theory, Quiggin details a large mob of zombie ideas, which includes in its ranks theories of Privatization, Trickle-Down Economics, and the Efficient Markets Hypothesis—the last of which leads to the claim that governments are incompetent risk managers and that unregulated markets will value assets correctly at both the individual and the aggregate level. This is another idea Quiggin endeavors to debunk.
The Efficient Markets Hypothesis provides a case against public investment in infrastructure and implies that macroeconomic imbalances, such as trade and current account deficits, should not be regarded with concern and, provided they arise from private sector financial transactions, are actually both beneficial and desirable.
In broad historical strokes, with flashes of careful analysis, Quiggin charts the evolution of macroeconomic theory from the roots of the neoclassical economic tradition, stopping to take stock of income inequality, investor irrationality and the hubris that seems endemic to the business cycle. He details the 20th century’s tug of war between the Keynesians (pro-regulation) and the Friedmanites (anti-regulation), reminding his readers that our current systemic problems, including unemployment, require an honest brokering of econometrics and policymaking. Discussing individual versus aggregate volatility, Quiggin notes that while individual income stagnated for the 30 years since the 1970s, households could borrow on credit to maintain consumption levels, often without adequate capital requirements. Since consumption levels were erroneously inflated due to increased borrowing, there was no apparent increase in aggregate volatility. This, among other factors, helped perpetuate the myth that markets operate with close to perfect efficiency.
In 2011, now volatility hath made its masterpiece, we find legislative reactionaries calling for haircloth austerity measures and laissez-faire libertarians, like the infamous Koch brothers, contriving to summon the zombies of deregulation and privatization from their grave. While citizens of Wisconsin protest their union-busting governor, and joblessness helps incite revolution worldwide, where shall economic wisdom be found? Popular economist, New York Times columnist, and Nobel Prize laureate Paul Krugman was recently asked in an interview with Al Jazeera’s Riz Khan, whether it were important that people outside the realm of academia and finance, i.e. the average person, truly understand matters of economic interest. “You can get through your daily life,” Krugman said. “You can even become a multi-millionaire without understanding economics. But to be a citizen, to vote, you need to understand it…insofar as possible we want to get people past slogans.” Economic understanding as a core value of the democratic process is central to the mission undertaken by Quiggin in Zombie Economics, a workwhich narrates and contextualizes a century of economics, culminating in the Global Financial Crisis of 2008. With beneficence, seriousness, and humor, Quiggin fights the recrudescence of undead ideas—directing his argument not solely at policymakers and academes (who ought to read this book with great interest) but to democratic electorates worldwide—in pursuit of a synthesis of economic principles suitable for the twenty-first century.
Recently, I posed five questions to Professor Quiggin via e-mail.
Allen Wilcox (Rail): Generally speaking, how’s Australia doing economically compared to the U.S.?
Professor Quiggin: Generally speaking, Australia is doing very well in economic terms. We had a fiscal stimulus early and large enough to offset the impact of the global economic crisis. The recent weather crises have had a significant impact, particularly here in Queensland, but in economic terms, the effects are not large relative to the economy as a whole. However, the likely impact of climate change will be to increase severity (and maybe frequency) of severe climate events. We need to support a global agreement to limit CO2 emissions—as a coal exporter, Australia has been ambivalent about this.
Rail: Will you please describe the current financial regulatory environment in Australia? What are the most notable differences between Australia and the U.S. in this regard?
Quiggin: The management of the financial system as a whole is undertaken by the Reserve Bank of Australia (equivalent of the Fed). Most financial institutions are regulated by the Australian Prudential Regulation Authority, except for stockmarkets, which are regulated by the Australian Securities and Investment Corporation. The system is broadly similar to the U.S., but less of a patchwork. In particular, state-level regulatory powers were transferred to the federal government some time ago. The bigger differences though relate to more conservative attitudes on the part of regulators, dating back to our own close approach to systemic collapse in 1989 and 1990, the result of a massive speculative bubble. We are still debating the extent to which the stability of our financial system in the recent crisis is due to good luck or good management, however. Something that seems like luck to me is that house prices did not crash here, but seem to be slowly returning to more reasonable levels.
Rail: A key to the success of Zombie Economics is its clever and central invocation of popular horror mythology. You also engage your reading public via your blog at Crooked Timber. What are other methods of popularizing economics you’ve considered or that you think important? What else ought to be done to help clarify the debate and enlighten the electorate?
Quiggin: I’ve written a fortnightly column in the Australian Financial Review for the last 15 years, and I also do a lot of radio interviews. And now, I use Facebook and Twitter to redistribute blog posts. I see it as part of the job—it used to be expected of academic economists in Australia that they would have something to say about the big issues of the day, and I’ve tried to keep that tradition going. While there are some issues in economics that have to be left to the technical experts, the most important questions need to be publicly debated on the basis of a sensible understanding rather than slogans. And economists need to be honest about the fact that we don’t have all the answers.
Rail: The Dow Jones Industrial Average recently hit 12,000 points for the first time since 2008. For many commentators this achievement is significant because it breaks a “psychological barrier” with regard to investor confidence. What do you see as the value of this achievement on our broader economic predicament?
Quiggin: I’m not a big believer in particular numbers as “psychological barriers”. The big problem in the current economic predicament, particularly in the U.S., is that corporate profits have recovered well (most notably in the financial sector) while wages and employment have not, and show no signs of doing so. The return of investor confidence, in the absence of any serious reform of the financial sector, seems to me to lay the basis for a new crisis to emerge as soon as people have forgotten the old one. The zombie ideas I criticize in my book are being reanimated, most notably in the debate over budget cuts.
Rail: The world has been intently watching the series of revolutions in the Arab world, from those in Tunisia to Egypt to Bahrain and beyond. How will economic issues affect how these revolutions unfold?
Quiggin: The trigger for the revolution in Tunisia was the economic failure of the regime to provide jobs for young people, and this failure is common to most of the Arab world. The fall of dictators won’t necessarily change that, but it will at least impose some accountability on governments for their failures. One big implication for me is that the seeming stability of the Chinese government is conditional on the continuation of strong economic growth. A collapse in the construction boom that is driving much of the current Chinese prosperity would be very threatening to the system and could produce some disastrous consequences.