Thursday, February 26, 2009

Time to leave US financial crisis to the foxes

Business Times - 27 Feb 2009

Time to leave US financial crisis to the foxes

PUNDITS in Washington are obsessing over the intellectual odyssey of economist Lawrence Summers who has been transformed from an avid free marketer of the 1990s, when he served in the Clinton administration, into a supporter of massive government intervention in the current financial crisis as President Barack Obama's top economic advisor.

'(British economist John Maynard) Keynes famously said of someone who accused him of inconsistency: 'When circumstances change, I change my opinion',' Mr Summers recounted recently in an interview with Newsweek magazine to explain why he had been a proponent of deregulating the financial markets during the height of the age of financial globalisation and why now in the era of 'de-globalisation' he has been promoting a more activist role for Washington in regulating Wall Street.

It's not that Mr Summers was experiencing an epiphany, the sudden realisation of the essence of economic theory. As he recalled in the interview with Michael Hirsh and Evan Thomas of Newsweek, it was during the start of the financial crisis that he began to see that the government's normal mechanism for stabilising the economy through monetary policy was not working and that only swift government intervention could help get the economy out of deep recession. Moreover, Mr Summers insists that while he was never a 'wild-eyed free marketer' during the 1990s, he is not proposing now a vast programme of socialising the American economy. His message is that smart and effective economists, like all good policymakers, need to refrain from clinging dogmatically to Big Ideas and instead should exhibit intellectual flexibility and adjust to changing circumstances.

But intellectuals who tend to be appalled by the suggestion that they should consider divorcing their lovely Big Ideas accuse Mr Summers of being an 'opportunist'. He is seen as a betrayer of liberal economic philosophy by dogmatic free marketers while social-democratic intellectuals are furious that Mr Summers, and by extension President Obama, are not making a turn to the left by nationalising large swathes of the American economy.

In a way, applying a typology introduced by the late British philosopher Isaiah Berlin, Mr Summers and Mr Obama demonstrate in their response to the economic crisis that they are 'foxes' and not 'hedgehogs'. As Mr Berlin argued in a famous essay, hedgehogs are intellectuals who 'know one big thing', one Big Idea, that they apply when they deal with every policy issue.

So when we face an economic recession or an economic boom, the free-marketeer hedgehog deduces from his or her Big Idea that once again we need to lower taxes - and dismisses any challenge to his approach. The social-democrat hedgehog's response under these scenarios would express an unyielding sense of confidence in the need to continue expanding government control of the economy - yesterday, today, and tomorrow.

Foxes, on the other hand, 'know many things', suggested Mr Berlin. They examine the many facts before them, and try to draw the outline of their policy analyses and proposals based on the reality on the ground and not based on some grand theory that may sound very profound but doesn't provide an explanation or produce a workable solution to a particular challenge.

Hence, the inductive process of thinking that foxes apply could lead them to conclude that under the global economic conditions of the 1990s, Washington should have taken some steps to liberalise and open the economy, while the response to the current financial crisis requires more but limited government intervention. In general, the public and the elites, including the media, tend to be attracted to the assertive hedgehogs and their Big Ideas that make for good copy and sound bites. And a Big Idea makes it easier for the leader to employ a battle cry to mobilise the people to 'war' against this or that problem.

The foxes sound a bit hesitant and irresolute and they do a lot of verbal zigzags, using a lot of 'on one hand' and 'on the other hand' argument. And that doesn't sound so great on television or in presidential addresses.

Indeed, Mr Obama in his recent address to Congress could have employed, for example, a populist rhetoric and demanded that the greedy bankers be punished and their institutions be nationalised by the government.

Instead, his address reflected the 'foxy' approach promoted by Mr Summers and his other advisers. It's an approach that doesn't guarantee a successful outcome; the Obama administration may have to take many more policy zigzags in the future. But after several years in which the hedgehogs were in charge - cutting taxes at home, and promoting democracy abroad - Americans seem willing to give a chance to the foxes to pursue their method of trial and error that could prove to be more successful.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.