“I still haven’t heard a reasonable explanation for the global crisis that threatens the entire global economy. So far what I’ve heard is football analysts….we are still in the grips of a global crisis that no-one foresaw….there were those who foresaw the sub-prime crisis, the Wall Street crash, but not a crisis on this scale. So this crisis doesn’t fit into the framework of economic theory as we know it.”
This quote is taken from a news report yesterday on the Globes website, relating to the Caeserea Forum, a travelling circus in which the country’s economic establishment get together every June to talk to each other, whilst inviting in selected guests to moan about their lot. This year the show is taking place in Nazareth and the focus is on Israeli Arabs and their place – or lack thereof – in the country’s economic life. That’s a very serious topic and it’s likely that many serious people had useful and important things to say in the discussion.
However, the quote relates to the global economy, a subject on which the level of knowledge, let alone understanding, among the Israeli economic elite is shockingly low. It is thus perhaps not surprising that the author of the above quotes is talking arrant bilge – but it is sad, nonetheless, that the speaker is our Minister of Finance, Professor Yuval Steinitz. Given that his area of expertise, to which his title relates, is philosophy, it is probably rash of him to express an opinion as to whether the crisis fits into ‘the framework of economic theory as we know it’. With all due respect, he doesn’t know it, nor can or should he be expected to.
What is much more relevant is his complaint that he has yet to hear a reasonable explanation of the scope and depth of the crisis and, above all, his claim that no-one foresaw it. As noted above, this is simply incorrect. There are specific people, many of whom belong to identifiable schools of economic thought – who foresaw with remarkable clarity what was coming. Some of them foresaw it too early, but their rationale was spot on.
For example, all those economists who subscribe to the ‘Austrian school’ of economics, have long been convinced that the huge pile of global debt created by the systematic debasement of fiat currencies is a house of cards and that it would collapse. The sub-prime crisis was just one aspect of that debt mountain. The most basic formulation of this line of thinking that I have seen is chilling in its simplicity and logic: the world now has more debt than it can service – its productive capacity is unable to generate the income needed to pay interest and repay principal, whilst maintaining the current level of consumption. In other words, the world is Greece writ large. The corollary of that idea is that any solution to the crisis that involves generating still more debt – such as those offered by Keynesian economists in the form of government stimuli programmes – is not a solution at all, but is part of the problem.
You don’t have to accept any of that. Next week, one of the world’s leading Keynesian economists, Paul Krugman, will be in Israel and will doubtless present his arguments in favour of Keynesian solutions. But you have to a) be aware of the arguments of monetarists, Austrians and others, and b) be able to rebut them, with reference to what is going on in Greece, Japan, the US, China and everywhere else. Krugman can do that, but most academic economists in this country can’t. Worse by far, most government and private-sector economists fall at the awareness hurdle and never even reach the substantive argument stage.
If Steinitz has never heard a reasonable explanation for the crisis, then he has no idea what’s going on – indeed, he admitted as much. He is flying blindfold. If you think that’s terrifying, you’re probably right. But if you agree with him in his ‘no-one predicted this mess’ wail – referred to disparagingly among the sceptics as ‘whocoodanode’, in hill-billy drawl – then maybe you also have blinkers on.