April 11, 2008

The Inscrutable Lester Thurow

If anything Lester Thurow wrote about in today’s Fish Wrapper makes the remotest bit of sense to you, please leave a comment here and clue me in. In a nutshell, he seems to be proposing three policy concepts to address topical economic concerns of Americans:

First, there is no “sub-prime lending crisis” but what we all think is a sub-prime lending crisis has created a real credit crunch, which affects everyone. Therefore, the government must pay a massive amount of money to banks who wrote high-risk sub-prime home mortgages so that they can write down the principal on those loans, and boom, problem solved. Then, we regulate future mortgage lending to make sure something like this never happens again. Whaaaa? Have housing prices become static all of a sudden?

Second, there is no problem with the price of oil. (Really?) There is plenty of $20-per-barrel oil out there in the world, but the problem is that there is also plenty of $5-per-barrel oil, so the cheap stuff gets bought first.* So, the government needs to guarantee that it will buy all of its oil a $20 a barrel before buying a drop of OPEC oil. It forces the price of oil down, but only to a point below which the market will never fall again. Leaving aside the painfully obvious fact that the U.S. government, and indeed not only the U.S. as a nation, is not the only consumer of oil and therefore monopsony leveraging cannot work, I don’t think that this sort of thing can even be done from a logistical perspective.

Finally, are you bummed out by outsourcing? Thurow is too. And he knows why there’s so much of this going on – that darn dollar is simply too strong! The government should weaken it. Eventually, it’ll be relatively cheap to hire American workers to do jobs, after the dollar has less purchasing power than the rupee. Sure, this means that Americans travelling or living abroad will take it in the short and curlies when they have to pay twenty bucks for a Big Mac in Vancouver, but you can always go to Hawaii or the U.S. Virgin Islands instead. Never mind the fact that two-thirds of the stuff you buy at Wal-Mart comes from overseas and would therefore become more expensive – a symptom of the cycle of inflation and economic contraction that historically is an inevitable result of any significant currency devaluation.

I’m not an economist, but I have slept at a Holiday Inn Express in the past. And more importantly, I have taken both micro- and macro-economics and I have studied a little bit of history taught by more than one Marxist professor who focused my eyes on economic issues as a lens through which to understand why things happened the way they did. That didn’t make me a Marxist myself, but it did make me sensitive to those kinds of issues.

Everything I’ve learned either in school or in real life suggests to me that Thurow is talking dangerous nonsense here. Which isn’t unusual – in 1989, Thurow famously made this contribution to the discussion of maintaining economic growth: “Can economic command significantly... accelerate the growth process? The remarkable performance of the Soviet Union suggests that it can... Today the Soviet Union is a country whose economic achievements bear comparison with those of the United States.” I certainly hope he isn’t auditioning himself for a Cabinet position in Barack Obama’s White House, and I certainly hope that Obama is smart enough to not go along with confabulation like this.

* I suspect that Thurow is talking about per-barrel production costs, not commodity-sale prices. After all, everyone’s in a panic over the fact that oil futures are trading for over a hundred dollars a barrel right now as if $100 were a magic number compared to, say, $98 or $102. To suggest that you could go onto the commodities market and buy oil at $20 a barrel would be Alice-in-Wonderland level fantasy. But the difference between production costs and commodity pricing is very unclear from his article and you’d think a non-comatose editor would have done something to correct that. Which is an example of one of the many reasons why that particular newspaper is named the Fish Wrapper in these pages.

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