Three events shook the American economy to its foundations in the past two decades, all different in nature but with a common lesson for investors and policymakers: Listen to the skeptics.
China’s emergence as a trading power in the early 2000s; the global financial system nearly collapsed from bad mortgage debt in the late 2000s; and the post-Covid economic recovery: In each case, a reasonable voice warned ahead of time that problems were coming, and in each case the skepticism was widely dismissed by the economy etc. If these warnings were given more importance, the world might be a little different today.
The lesson emerged from a biography I wrote about Janet Yellen, the Treasury secretary, former chair of the Federal Reserve and former chair of the White House Council of Economic Advisers. No man has been on the bridge of a ship at more pivotal moments in the history of modern economics, making his work a unique window into a tumultuous era.
Consider the case of China, which was accepted by the US into the World Trade Organization in 2001 with strong support from the economic sector.
By the end of the 1990s, most economists were convinced by the theory of comparative advantage – the idea that both sides win in a free trade agreement – and the warnings of job losses. from trade that was threatened. The US opened trade with Mexico and boosted the economy in the 1990s, increasing growth, low unemployment, low inflation, record high commodity prices, accelerated labor productivity and spending.
Economists from both the right and the left of the political spectrum, including Yellen as CEA chair to Bill Clinton and as an economist, urged Washington policymakers to to conclude a treaty with China.
The skeptic on this issue, Harvard professor Dani Rodrik, wrote a book asking, “Is Globalization Too Far?” In it, he warned that free trade helped educate, mobile workers, but left unskilled workers behind and in the process created a dangerous divide.
In interviews and his later writings, Rodrik recalled that one of the famous preachers, Paul Krugman, refused to confirm the findings of the book because Krugman was afraid that the nationalists he saw as “strangers.”
“Businessmen became advocates instead of researchers,” Rodrik said later.
Studies since then have shown that the flood of Chinese imports has caused millions of American jobs and increased antitrust around the world. If Rodrik’s warning had been taken more seriously, the U.S. might have put in place stronger programs to help labor victims of trafficking, or perhaps stronger law enforcement. protect Chinese manufacturers from flooding the American market with cheap imports, or perhaps exist. the whole process is slowed down.
About ten years after Rodrik, the skeptic outside the International Monetary Fund’s chief economist, Raghuram Rajan, is also a business professor at the University of Chicago’s business school. He warned in a 2005 paper given to the central bank in Jackson Hole, Wyoming, that financial market reforms could threaten the world’s financial system by giving companies the opportunity to hide and increase risks.
The sermon was sacrilege at that time. He presented at a meeting to honor Fed chairman Alan Greenspan, whose idea of banks to regulate themselves, won the economic task. Lawrence Summers, the former president of Harvard University, called Rajan’s idea foolish and delusional. The banking system almost collapsed three years later.
Yellen was president of the Federal Reserve Bank of San Francisco at the time. He saw the warning signs of danger sooner than many others at the Fed, but he later admitted that he could not stop it.
Increase in price
Surprisingly, in the climate crisis, Summers plays the role of skeptic rather than pessimist. Last year he warned that a flood of federal stimulus designed to boost the economy after the Covid pandemic could come at a cost. Many investors saw this as impossible, because the US has been in a period of low inflation for about twenty years and has recently escaped from ten years of suffering unemployment.
“The best thing we can do is act more,” Yellen told Congress.
The point here is not to knock Yellen, but to show the value of challenging one’s ideas.
Yellen made her biggest mark on economics in the decade after the 2007-2009 financial crisis, when she played a key role in pushing the economic consensus in a new direction. In that context, he correctly predicted low inflation and urged his colleagues at the Fed to push to reduce unemployment.
The plan seemed to work in that case. During his fourth year as the Fed chair, which ended in 2018, unemployment fell from 6.7% to 4.1%, consumer prices rose to 1.3%. and the exchange of the dollar was raised to other currencies.
It’s not easy to know when to listen to skeptics and when to judge their arguments as noise. Some economic skeptics are like broken clocks, warning of the same problem over and over again for years or decades, then declaring victory when a problem finally appears. . Others are loud or fight for attention or fame.
Rodrik and Rajan do not fit the description. They are humble people. Summers doesn’t speak, but it’s not a broken clock. Each of the three can be called skeptics, because they seem to have come to their conclusions with a doubt. In the years before the inflation warning, Summers introduced the concept of “secular stagnation,” which was based on the idea that prices are too low, not too high.
As economist Paul Samuelson once said, “Well, when things change, I change my mind. What are you doing?” Samuelson, who later quoted John Maynard Keynes, was an oddity of Summers’ uncle.
Yellen seems to have applied the lesson as well.
“You have to be alert to understand the facts on the ground and what’s happening is different than what you’ve encountered in the past,” he told me.
Taking his observation one step at a time helps keep the doubters on their toes, and ask yourself from time to time: Do they have a point here?
Jon Hilsenrath is a Wall Street Journal economics reporter. This column is adapted from her book, “Yellen,” to be released by HarperCollins Nov. 1.