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Monday, April 06, 2015

'Back to Cranks'

David Warsh:

Back to Cranks: When John Makin, an economist long associated with the American Enterprise Institute, died last week, reporter Nick Timiraos gave him a gallant send-off in The Wall Street Journal: “Economist Who Elevated Think-Tank Discourse.”

Makin, 71, had long been a favorite source for serious journalists. ...

Makin’s hiring in 1984 was widely taken as a sign of AEI’s determination to buttress its reputation as a source of serious opinion-making.

A few years earlier, WSJ editorial writer Jude Wanniski had used a year in residence at AEI as a planform from which to launch his 1978 best-seller, The Way the World Works: How Economies Fail – and Succeed, one of the first in a series of works by various authors that later would be deemed “neo-conservative.”

With its twin contentions, that personal tax cuts would pay for themselves by boosting growth, and that the Smoot-Hawley Tariff Act of 1930 had caused the Great Depression, the book caused no end of embarrassment among the traditionally conservative economists at AEI.

With the election of Ronald Reagan in 1980, the AEI moved towards the center of the economic debate, hiring Makin, among others. There began in Washington what was, in retrospect, a golden age of consensus.

Congress raised taxes slightly in 1982 to prevent deficits arising from the Kemp-Roth tax cuts of the year before from spiraling out of control. In 1983 a “Gang of Nine” legislators negotiated measures advocated by the National Commission on Social Security Reform to put the US retirement system on a sound actuarial basis for another fifty years. Brandeis economist Stuart Butler floated his proposal for health-care reform – a legislated individual mandate – from the still-more conservative Heritage Foundation.

But the splintering of the conservative alliance had already begun. Wanniski, dismissed by the WSJ for political campaigning, advocated for presidential bids by US Rep. Jack Kemp (cosponsor of the 1982 tax cuts) and magazine publisher Steve Forbes. Data systems magnate H. Ross Perot ran as third- party candidate in 1992. Newt Gingrich delivered a Republican majority in the House of Representatives with his “Contract with America” in 1994. Fox News launched in October 1996. George W. Bush was inaugurated in 2001 and abruptly confused the issue.The Tea Party made its appearance in 2010.

Today the most peripatetic figure among the AEI’s roster of experts is probably attorney Peter Wallison, general counsel to the Treasury Department, 1981-85,. and White House counsel to Ronald, Reagan, 1986-87, but better known for his dissent-within-a-dissent to the Financial Crisis Inquiry Commission, 2011.

Three other Republican members of the commission – Bush administrations insiders Keith Hennessey and Douglas Holtz-Eakin and US Rep. Bill Thomas – dissented together from the majority report. They zeroed in on the financial panic that ensued after Lehman Brothers failed, Wallison felt their explanation was overly elaborate. The basic cause of the 2008 financial crisis, he argued, was simple. It was government housing policy, particularly the two giant government- sponsored enterprises, Fannie Mae and Freddie Mac, that bought mortgages from banks, savings and loan associations and other lenders,

A new book by Wallison, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again (Encounter, 2015) extends the argument that that government policies were solely to blame, and that none of the other factors commonly cited – the flow of funds from abroad, financial deregulation, rapid innovation, shifting boundaries among firms, investors’ increased appetite for risk, lax credit- agency monitoring, the panic that followed the Lehman default – were significant contributors to the outcome. ...

Opinions about the reasons for the severity of the crisis can still be found all over the map, but they have begun to converge the center on the panic that occurred in markets for short-term funding that occurred after Lehman failed. This is the view of those who were there at the time: administration insiders Hennessey and Holtz-Eakin, expressed in the FCIC; former New York Federal Reserve Bank president Timothy Geithner, in his book Stress Test; Fed chairman Ben Bernanke, in a series of speeches and lectures...

In other words, in his single-minded emphasis on government housing policy, Wallison is way out beyond the consensus. ... He is ... a lawyer, with no sense of what constitutes a satisfying economic explanation. What makes him a crank is the affable certainty with which he asserts a partial truth explains the whole.

No sensible analyst thinks that political pandering to poor people is a sufficient explanation of the crisis. Probably not since Wanniski’s The Way the World Works has the gap been so great between a non-economist writing for a think-tank and the relevant community of professionals. John Makin stayed the course, remained well within the limits of matters on which experts can be expected to legitimately disagree. AEI has gone back to cranks. It is fairly well established by now that the GOP establishment has swung around against Tea Party thinking. If the Jeb Bush candidacy advances, it will be interesting to watch what happens in the think-tank world.

    Posted by on Monday, April 6, 2015 at 01:24 AM in Economics | Permalink  Comments (35)


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