If the world economy has got Davos, Switzerland, as its stage this week, the U.S. economy has Cambridge.
Some of the world's top economists — including half a dozen Nobel Prize winners — gathered at Massachusetts Institute of Technology to debate the financial crisis and to look at the course the economy is charting.
WBUR’s Curt Nickisch attended the first day of the conference and joined Morning Edition host Bob Oakes to share some of the takeaways.
Bob Oakes: Curt, there's quite a line-up at the conference: the chief economist for the International Monetary Fund, the latest Nobel Prize winner in Economics...
Curt Nickisch: I know, sounds pretty egghead-y, but when the economy is not doing great, people want to hear from the eggheads. More than 1,000 people showed up.
On Thursday, a federal commission released its final report on what caused the financial crisis. If these economists are so smart, why they didn’t see it coming?
The report didn't blame these folks, but their answer is that people, economists included, just aren't very good about thinking about things that aren't in their experience. Harvard economist Greg Mankiw said what happened was, well, almost astronomical:
So my guess is you probably haven't spent a lot of time thinking, 'What am I going to do if an asteroid falls on Central Square?' Right? But it could happen. And if it happens, people will say, 'Why didn't we think about that? Why weren't we planning for that contingency?'
Well, if the economists didn’t dissect the financial downfall as much as they tried to discuss what needs to happen with the economy going forward, what did they say?
There was hand-wringing over the fact that the government and monetary policy makers have already used a lot of the tools in their toolkit, and the economy is still anything but strong. A good example is the interest rate that the Federal Reserve can lower to heat up the economy. Well, you can't lower it below zero. So Northwestern University economist Bob Gordon says they've run out of room to stimulate the economy that way:
Thinking of World War I, we’ve run out of ammunition for the machine guns and the howitzers. We’re in the trenches, and all we’ve got left to fight with are swords and throwing stones. The Fed is pretty much out of the picture.
Actually, this problem has become a new thriving field of economics. A bunch of MIT economics grad students changed their dissertation topics to work on this problem of Zero-Lower-Bound or 'ZLB' as it's called.
Well, if the Fed has run out of stuff to do, what’s going to happen with the economy?
Well, there are those blunter economic weapons. You can try different tax policy or new stimulus money. But the big lament from these economists is that there's isn't enough political consensus to do the things the economist say still could be done. You’d expect Christina Romer, one of President Obama’s economic advisors, to see more hope in the situation:
Despite having been described by the San Francisco Chronicle as 'Obama’s sunny economic forecaster,' even I can’t sound too upbeat.
Of course, the economy's still going to get better, but the reluctant consensus from these expert economists was that it's going to be slow.
This program aired on January 28, 2011.