Reform of Financial Architecture

Simon Johnson has a very good column on the problems of the international financial system. His point is that the currency wars that are attracting so much attention are just a prelude to a bigger problem:

The “currency wars” themselves are merely a skirmish. The big problem is that the core of the world’s financial system has become unstable, and reckless risk-taking will once again lead to great collateral damage.

The key problem is that the international financial system has not been reformed significantly since 1944, but the global pattern of current account surpluses and deficits have changed dramatically. In addition to the risk aversion on the part of emerging market economies that Johnson talks about we also have the surpluses of the petro states. Meanwhile, the industrialized countries are net borrowers owing to political equilibria that make it difficult to pay for their spending.

The system needs reform. Attention has to be paid to the structural changes that have occurred. This is actually one of the key research areas of our CRIFES center at PSU.

Elizabeth Warren's Fallacy

The title says it all.

Democratizing Development Research?

A brawl has broken out over the call by World Bank President Robert Zoellick to democratize development research.

World Bank President Robert Zoellick challenged economists to take on tougher challenges in development economics and to consult a wider range of professionals in developing countries, opening a debate about how effectively economists have attacked problems in global poverty.

Dani Rodrik is happy but Bill Easterly is not:

"The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints...and focus on evaluation but not at the expense of the big questions," Mr. Rodrik said.

But the reaction wasn't unanimous. New York University economist William Easterly, a former World Bank economist who is skeptical about the value of foreign aid, called Mr. Zoellick's comments "amazingly presumptuous." He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them "to reach the 'right' conclusions," Mr. Easterly said—meaning that World Bank loans are useful and foreign aid is productive.

This has led to a debate between Bill Easterly and World Bank Chief Economist Martin Ravallion on Bank censorship of research. The debate is kind of unfair. How can you really be taken seriously in a defense of bank propriety if you are employed currently by the Bank?

The Cost of Health Care

This is an important series on the cost of health care by Aaron Caroll. It is especially good at debunking conventional wisdom on why our health care is so expensive.

Rajan's Reply

Ragu Rajan replies to Krugman and Wells attack on his book Fault Lines. The book is excellent, no time to discuss it now. The reply is devastating and valuable.

Here is a small taste (but important point):

Krugman starts with a diatribe on why so many economists are “asking how we got into this mess rather than telling us how to get out of it.” Krugman apparently believes that his standard response of more stimulus applies regardless of the reasons why we are in the economic downturn. Yet it is precisely because I think the policy response to the last crisis contributed to getting us into this one that it is worthwhile examining how we got into this mess, and to resist the unreflective policies that Krugman advocates.

Read the whole thing.

Historians versus Economists?

Gideon Rachman had a really abominable article in the FT. It is not his call for economists to become less vain that I have trouble with:

The vanity of economists needs to be challenged. Above all, their claim to scientific rigour – buttressed by models and equations – must be treated much more sceptically.

I am not really sure who is so vain. But the use of models and equations is of course misunderstood here. Models and equations are used to make arguments understandable, not to pretend. But this is not the worst. Rachman quotes Stiglitz calling for new paradigms in economics, and then argues:

For somebody educated as a historian, there is an obvious alternative conclusion to draw from Prof Stiglitz’s opening observation. And that is to conclude that the entire attempt to treat economics as a “science ... defined by its ability to forecast the future” is misconceived.

Economics is not about predicting the future. That is a straw man. It shows how little Rachman understands about economics. Fortunately, his FT colleague, Tim Harford has a good column that deals with this. Here is the money shot:

Historians deal in hindsight. It is a wonderful thing. But it is not the only thing. I wonder whether Gideon, intoxicated with a heady brew of Niall Ferguson and Herodotus, has forgotten that.

Tom Sargent Interview

Tom Sargent is interviewed by Art Rolnick on the state of modern macro. Very nice read. But the best part is this exchange:

Rolnick: I’ll come back to that in a second, but you haven’t said anything yet about what is to be gained in terms of understanding financial crises from importing insights of behavioral economics into macroeconomics.

Sargent: No, I haven’t.

Read the whole thing.