Anna Schwartz is 93 and has been working at the same place since 1941. She’s that rarity in economics, or indeed any field: a living legend from another era who hasn’t lost a step mentally and who grasps everything that’s going on around her in the present. Or at least she seems to—but more on that later. Schwartz is one of the most renowned monetary scholars in the world. She’s the woman who authored, with Milton Friedman, The Monetary History of the United States—the book that launched the free-market counterattack against Keynesianism in the early ’60s. And now, as she surveys the wreckage of the last two years, Schwartz has one thought: if only Milton were here. “Ever since his death I have lamented the fact that he has not been around to express his views on what’s going on,” she told me the other day at her mid-Manhattan office at the National Bureau of Economic Research.
Despite constant criticism of the Obama administration and the Federal Reserve over their handling of the financial crisis, opponents of their policies don’t have a leader—especially on the right. Their problem is “the big lack of a voice like Friedman’s, someone who’s got instinctive understanding of the way markets operate, a very profound knowledge of history,” Schwartz told me. Had Friedman been around to speak out (he died in 2006), “I don’t believe we would have had a Fed balance sheet currently that has doubled, or tripled, in such a short period of time without any kind of Fed acknowledgment that it was creating a problem for itself [with] inflation already baked into the economy.” In clear, strong tones marked by her New York accent, Schwartz said: “Everybody’s talking about what kind of exit strategy does the Fed have, given that its balance sheet has exploded. It’s something [Fed chair Ben Bernanke] doesn’t discuss. It’s as if he isn’t willing to acknowledge that it is a problem.”
Slamming the Fed, of course, is old hat for Schwartz and her alter ego, Friedman. They concluded in Monetary History that had the Federal Reserve not existed, the Great Depression might never have happened. Their argument: the Fed bungled things by tightening money from 1929 to 1932, something the New York bankers who used to be in charge of resolving crises would never have done. But Schwartz says that Friedman—who along with John Maynard Keynes, his polar opposite in thought, was the 20th century’s most influential economist—would be just as disturbed by what Barack Obama is doing today. “Obama nowadays is the typical believer that government can do everything. So he’s going to change the way electricity is produced in this country. He’s going to change the way energy is going to be produced in this country. And it’s all going to be a government effort. And Friedman would say, ‘Look, if these really are such desirable things, why isn’t it that the private sector has taken advantage of an opportunity to make money and to improve things?’ “
Archive for July, 2009
Milton Friedman v. fed bailout
The Recession Is Over!
Could our long national nightmare be over? The economic contraction, this Great Recession, began in December 2007, and there’s no apparent end in sight. As the unemployment rate has spiked, analysts have thrown cold water on Federal Reserve Chairman Ben Bernanke’s March sighting of “green shoots.” The stock market’s spring rally has fizzled.
But in this season of doubt, I’m prepared to declare that the recession is really, most probably over. Why? Well, it’s not because the economists surveyed by the Wall Street Journal believe it’ll end in this quarter. (These guys wouldn’t know an economic inflection point if it hit them upside the head. All through 2008, when the economy was contracting, they projected growth for the year.)
No, two of the best and most objective forecasters, who are not connected to investment banks or to the CNBC noise machine, have recently called the upturn. Macroeconomic Advisers, the St. Louis-based consulting firm that compiles a monthly GDP index, reported to its clients Monday that while second-quarter GDP was tracking at negative 0.1 percent (recession), the third quarter was tracking at 2.4 percent growth.
The folks at the Economic Cycles Research Institute agree enthusiastically. It’s not because they’ve detected green pea shoots in Central Park. Rather, it’s because we’ve seen the three P’s, says Lakshman Achuthan, managing director at ECRI, which has been studying business cycles for decades and was one of the few outfits to call the last two recessions with any degree of accuracy.
Why economists disagree on the Depression
So why are Dr. Romer and I, or more generally, the economics profession, divided about the Great Depression? And what does this mean for understanding our current crisis? Let’s start by assessing the importance of increasing aggregate demand for promoting recovery during the New Deal. The reason I attribute little of the recovery during the New Deal to aggregate demand is because there was very little recovery in hours worked, but according to proponents of the aggregate demand view, increasing aggregate demand is supposed to increase output by increasing labor.
Hours worked per adult–including government workers–fell about 27% between 1929 and 1933, and in 1939 remained about 22% below the 1929 level. Many people, including economists, are surprised when they read that there was little recovery in hours worked during the New Deal, because the unemployment rate declined, and typically declines in unemployment go hand-in-hand with higher labor. But changes in the unemployment rate don’t provide a good proxy for changes in labor during the New Deal because some New Deal programs included explicit work-sharing. By reducing the average workweek, the New Deal was able to spread employment across workers, but this doesn’t mean there was an increase in the amount of work that was done.
But if work wasn’t significantly restored during the New Deal, how did output grow? The answer: through productivity. That is, changes in output per capita are accounted for by either changes in productivity–output per hour–or by changes in hours worked per capita. Output per hour grew about 30% between 1933 and 1939, which means that most of the increase in real gross domestic product during the New Deal is accounted for by productivity advance. And this is important, because increasing aggregate demand doesn’t have much to say about productivity growth, which instead is the result of technological advances and inventive activity. And because there was so little recovery in labor, the economy, despite rapid productivity growth, remained well below its trend level at the end of the 1930s. Real GDP per capita, which was about 38% below trend in 1933, was about 27% below trend in 1939.
Interesting!
Wall Street: Back to the old school
In response, a handful of high-profile bankers who built their reputations at Wall Street’s biggest institutions have turned to “boutique banking”, based on the belief that big banks are alienating clients who need strategic advice.
And now, as some of the big banks’ higher-margin businesses lie in shambles, the boutiques’ efforts are bearing fruit – suggesting companies are, indeed, willing to pay for old-fashioned independent advice. Boutiques captured 14 per cent of global merger and acquisition fees so far this year, according to Dealogic – the highest number ever – and are vacuuming up talented staffers at record rates.
Bankers including Mr Perella, Ken Moelis and Blair Effron, former UBS rainmakers , launched independent firms when Wall Street’s cracks were only just starting to show in 2006 and 2007, joining a club led by Robert Greenhill, founder of Greenhill & Co, Roger Altman, the founder of Evercore, and Lazard’s Bruce Wasserstein.
Opinions are mixed on whether these firms will flourish or whether today’s aggressive land-grab mentality will lure some to sow the seeds of their demise through rapid growth .
