Wednesday, June 03, 2009

Ferguson vs. Krugman

Fareed Zakaria is still doing a marvelous job with his Sunday afternoon show GPS. This week, in addition to Henry Kissenger, he had Niall Ferguson on the show, talking about the economy. Mr. Ferguson is a noted historian and his latest book is The Ascent of Money. The Ascent of Money is the second book I’ve read by Mr. Ferguson and it, unlike Empire, was written for the general public. Don’t get my wrong, Empire was a great book. But unless you’re seriously interested in the subject matter, you aren’t going to read it.

Anyway, my readers know that Paul Krugman is my favorite economist. Niall Ferguson has a taken a couple of jabs at Mr. Krugman lately and he did so again on this edition of GPS.

”ZAKARIA: So, why do 90 percent of economists think things are getting better?

FERGUSON: Well, of course, they're economists. And they're trapped in Econ 101 land, like that "New York Times" columnist, Paul Krugman, who assured me only a month ago that there would be no upward pressure on interest rates, because there was a massive excess of savings in the world economy.

The Keynesian model actually didn't work terribly well, even when it was popular. And ultimately, it got us into the mess of the 1970s, a mess which, of course, produced double-digit inflation, and then required the Fed to produce double-digit interest rates to bring inflation under control.

So, I think one should take what the economists say with a very large pinch of salt these days. After all, very few of them anticipated this financial crisis, because their wonderful models didn't predict that either.“

Although it motivates some folks, the cat fight between two highly intelligent people isn’t important. The fact that there are serious disagreements is. Unlike most of the left wing vs. right wing sniping you hear regarding Mr. Krugman’s work, Mr. Ferguson’s objections (I believe) are non-political. Regardless, I find the disagreement between an economist and a historian -- about the future of the economy -- interesting and I thought you might too.

I am, however, not thrilled about the predictions of either.

FERGUSON: Well, I mean, I'm not sure that the fate of General Motors can be regarded as good news. But then, I'm from Britain, where we tried to take over the automobile industry in the 1970s, and that didn't end too well.

But the green shoots that are out there seem to me like tiny little weeds in the garden. And what's coming, it seems to me, in terms of the fiscal crisis of the United States, is a far bigger and far worse story. I think all talk of recovery or of end of the recession is wishful non-thinking.

Mr. Krugman, on numerous occasions, has warned that we are repeating the steps that led to Japan’s “Lost Decade”, in which there was very little growth in GDP for 10 years.

If you put their two viewpoints together, it spells trouble -- no matter how you look at it. I left out a piece of the puzzle though when I failed to quote the entire title of Mr. Ferguson’s book: Empire. The full title is Empire: The Rise and Demise of the British World Order and the Lessons for Global Power . I can never listen to Mr. Ferguson without thinking of that book.

Most Americans are uncomfortable with the thought that we’re an empire. Regardless, we’re the ones with the 11 aircraft carriers and the rest of military force to match them. We, just like the British before us, are the world’s de facto “policeman”. We ensure that the sea lanes stay open which ensures free trade. And whether you like or condone “globalization”, the cheap oil that allows us to live our lifestyles still has to traverse the Strait of Hormuz.

A “Lost Decade” for America would have implications far beyond having a hard time finding a job.

Don Brown
June 3, 2009

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