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| The Case of the Reluctant Laureates |
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Tuesday, August 28th, 2001
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Much of the blame for America�s trade deficits goes to laissez-faire dogma. But are America�s top economic scholars � the ultimate high priests of laissez-faire dogma � happy with the results of their handiwork? Er, no. Eamonn Fingleton investigates.
Why don�t U.S. policy-makers take the U.S. trade problem more seriously? The reason is, of course, they don�t have to. Policy is driven more and more these days by press perceptions and the press has come to believe that trade deficits do not matter.
The ultimate source of this myth is a few self-serving foreign trade lobbyists who began promoting the don�t-w0rry-be-happy approach to trade in the op-ed pages in the 1980s. It is a well-financed campaign. Indeed as propaganda campaigns go, it is arguably the most successful in all history. But it could not have become successful without the complicity of the economics profession. With few exceptions, economists have not challenged the trade-doesn�t-matter view.
It is not as if economists do not have misgivings. They do. The trouble is they are caught between a rock and a hard place. Most economists have long subscribed to the theory that markets can do no wrong. As the trade deficits are ostensibly the result of the free play of market forces, economists cannot raise the alarm about the trade trend without implicitly questioning the fundamental theory underlying all their work.
I recently decided to take the bull by the horns and find out what top economists really think. On behalf of the Boston-based intellectual journal, The American Prospect, I tracked down the ten economists who had most recently received the Nobel prize and asked them point-blank whether the trade deficits were too high. As I expected, most of them were far from pleased to get the question and they tried to duck it. Some required as many as seven or eight communications� either by e-mail or by telephone � before I got any reaction at all. In the end persistence paid off and I received a response from every one of them.
The results were highly revealing. Only one economist said that the deficits were too high, another said they weren�t, and yet another offered an answer somewhere in between. But as in the Sherlock Holmes story, this is a case of the dog that did not bark in the night. For the real news was that fully seven of these famous economists indicated either directly or through assistants that they did not want to answer the question. The fact that so many believers in free markets were not prepared to sanction what the market has been doing to America�s balance of payments speaks volumes. As far as trade policy is concerned, this is the first crack in the edifice of laissez-faire. When the history of contemporary economic thought is written, it will be seen as a large crack.
The article is appended below. If you want to read it in its original format as published on August 14, 2001 by The American Prospect, go to
http://www.prospect.org/print/V12/14/fingleton-e.html
The Silence of the Laureates
Are America's trade deficits too high? Judging by the American intellectual establishment's body language, the answer is no. The press continues largely to ignore the deficits, and so does just about everyone in Washington, D.C. The country's economists have set this tone of complacency. Their view has long been based on the assumption that markets can do no wrong--that no matter how bad the trade numbers get, it's simply an expression of the market's wisdom. But now, we may be witnessing the first stirrings of a change of heart.
I tracked down the 10 U.S.-born economists who most recently won a Nobel Prize and put the same simple question to each of them: Was last year's current-account deficit too high? That deficit, I reminded them, represented a record 4.5 percent of gross domestic product. (The "current account," which includes not only trade in goods and services but financial flows, is the widest and most meaningful measure of trade. Up until 1983, it had never exceeded 1 percent.)
Only three of the laureates answered the question, and they were evenly split: One said yes (Robert Solow), one said no (Gary Becker), and one fell somewhere in between (Daniel McFadden). All the others--Robert Fogel, James Heckman, Robert Lucas, Harry Markowitz, Robert Merton, Douglass North, and William Sharpe--indicated either directly or through assistants that they did not want to get involved.
The fact that so many chose to duck the issue speaks volumes. After all, most of the nonrespondents are believers in free markets. Indeed, no less than three--Fogel, Heckman, and Lucas--are professors at the University of Chicago, that temple of conservative economics. As disciples of Adam Smith, they should have blessed whatever trade numbers have been served up by the ever wise invisible hand.
Considering their silence, it's reasonable to assume that my question put them in a difficult spot. They can't lightly repudiate their belief in laissez-faire, yet they know very well that the United States is entering dangerously uncharted waters in tolerating trade deficits on the present scale.
Fogel, Heckman, and Lucas offered no reason for their refusal to comment. Markowitz, Merton, and Sharpe said that the trade deficit was outside their field of expertise. Douglass North declined to respond on the grounds that economic theory offers no guidelines by which the question could be addressed scientifically.
Such caution in speaking about a topic of great public interest seems out of character for a group of laureates. In the past decade, economics laureates in particular have issued statements on everything from the Balanced Budget Amendment (they were against it) to free trade with China (they were for it). They have urged market solutions to the world's environmental problems and have poured scorn on George W. Bush's tax plan. More generally, many Nobel Prize winners have come forth with strong opinions about the Kyoto global-warming treaty, stem cell research, and the "Son of Star Wars" missile-defense system.
As the only laureate I polled who said he was unconcerned about the deficits, Gary Becker--also a University of Chicago professor--managed to sound not so much complacent as reassuring. "The size of the deficit may be a good sign," he said, "if it means we are importing capital for productive purposes."
Meanwhile, Daniel McFadden, who is a professor at the University of California at Berkeley, was less worried about the short term than about the long term. "As long as foreign investors are prepared to buy American securities, there is no problem," he told me. "It seems likely, however, at some point, that foreign investors will repatriate their funds." Prognosis: The dollar would collapse and U.S. interest rates would soar. "The whole financial system is based on trust," McFadden added. "As long as we have trust, the elaborate house of cards will hold up."
Of all the laureates polled, Robert Solow, a professor emeritus at the Massachusetts Institute of Technology, seemed the most comfortable addressing the issue. Like McFadden, he was concerned about the problem of financing the deficits. "The current deficit is too high under the circumstances," he said. "I do not think any abstract, safe level can be stated out of context. The key is whether small changes in economic conditions would bring about capital flight (remembering that the debt is almost entirely in dollars)."
Later, Solow elaborated in The New York Times: "If the debt is not under control, or if some event makes the debtor appear less creditworthy than before, the creditors may decide that they are not willing to finance a country's growing debt... . They may even want to liquidate part of their investment in search of diversification. If such a thing happened to the United States, there could be very unpleasant consequences for Americans."
Strong words. Of course, only time will tell whether they are borne out by events. It is clear, though, that there is an issue here. Even if most economists want to keep their head in the sand, it behooves both the press and the Washington policy makers to keep an eye on developments.
Eamonn Fingleton is the author most recently of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
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