The Hockett Revolution

-- Posted by Neil H. Buchanan

[Update: Professor Hockett, in a private email, has graciously taken on the blame for the "global currency" confusion that I note at the end of this post. In a very long-run sense, the Hockett vision could become a system with a well-regulated global currency. That, however, is definitely not what is needed in the immediate, or even in the intermediate, policy environment. The confusion in Nocera's column, however, could have been the result of a shortened explanation that Professor Hockett provided to him.]

A few weeks ago, I had harsh words for Joe Nocera, one of the new op-ed columnists for The New York Times, who had written a profoundly misguided column about the National Labor Relations Board. In that post, I also mentioned some other puzzling columns from Nocera, going back to his days as a columnist for the Times's Business Day section. In early 2009, Nocera wrote a column about AIG that mischaracterized the very notion of insurance as a financial scam, a column that I criticized contemporaneously.

My conclusion in my more recent post was that Nocera was "a loose cannon," despite his pose as an unbiased centrist. Nocera does, of course, produce some good work. My complaint about him is not that he is a hack or an ideologue, or a fool, but that he seems to become overly infatuated with a new idea and then to run with it. This is true when I agree with him as well as when I disagree with him. And I often do agree with him.

One such case arose earlier this week, when Tuesday's op-ed page included Nocera's column: "This Time, It Really Is Different." The column summarized and lauded a policy brief co-authored by Dorf on Law's own Bob Hockett: "The Way Forward: Moving From the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitiveness." The brief (summary here, full paper here), which Bob wrote with Daniel Alpert and Nouriel Roubini, debunks the idea that the 2008 global financial crisis was a standard (though extremely deep) economic downturn, to be followed by the usual recovery period and lagging employment growth.

[Because Professor Hockett is "one of ours" at Dorf on Law, I will refer to the paper as "the Hockett paper" herein, rather than following the usual practice of identifying the paper by the first author under an alphabetical listing.]

Hockett and his compatriots argue that the global economy is, in fact, facing something like Japan's "lost decade" (now approaching two lost decades), with chronic deflation, fed by too little government action to fight the economic downturn, and placing too much faith in laissez-faire economics. The very real danger is that the modern global economy has become stuck in the low-employment rut that has left tens of millions of people in the U.S. under- or unemployed for the last three-plus years.

Describing the authors' proposed solutions, Nocera offers a very nice summary of the current state of professional opinion on fiscal policy orthodoxy: "Like most mainstream economists, Alpert, Hockett and Roubini roll their eyes at the calls for immediate government deficit reduction, which led to the creation of the supercommittee. Reducing government spending in the short term will only make things worse."

This is important, because it reminds us that the people who say, "But the stimulus didn't work!" and other such nonsense are on the intellectual fringe. Yes, there are economists who are willing to say things to back up Republican talking points, but Nocera is right that the weight of professional opinion is solidly against the idea that immediate deficit reduction is a good idea.

Economists as a group can be quite wrong, of course. They often are. Still, it is important to know that calls for deficit reduction are not based on "sound economics." They are based -- if they are based on anything at all, other than political and career opportunism -- either on models that were never designed to explain short-run deviations in the real economy (e.g., monetarism) or that have proven unable to do so (e.g., real business cycles).

Hockett et al. further argue, as Nocera notes, that the globalization of the economy has produced a great deal of "slack" in the economy. This is important, because the fundamental error in applying most micro-based economic thinking to our current macroeconomic problems is the assumption that there is scarcity in capital markets. When the economy already has much more capital (both physical and financial) than it needs, and when the most important prices (interest rates) are bounded at zero, our usual homilies about the miracles of the invisible hand are simply irrelevant.

The problem that Hockett and his colleagues stress, moreover, is the problem of inequality and its effect on the macroeconomy. In particular, they resuscitate the deep Keynesian insight that distribution of income affects the ability of the economy to reach full employment. With our growing levels of inequality, and taking into account the inequality of the newly globalized poor economies, we cannot merely assume that, given enough time, the global economy will find a set of prices that will bring full employment prosperity to all.

This is the basis for Hockett's call to have governments engage in aggressive infrastructure programs (which I have endorsed repeatedly in my writing), suggesting 5-7 year time lines for such programs. Similarly, the government must immediately address the debt crisis among homeowners by forcing down the principal values of mortgages.

There are obvious dangers in having journalists explain technical economics papers. One such danger showed up at the end of Nocera's column, where he describes one of Hockett's proposals as follows: "Finally, they call for a 'global rebalancing,' which includes a radical change in the current dysfunctional relationship between creditor and debtor nations, and even a new global currency that would be administered by the International Monetary Fund."

What?! Given the obvious Keynesian foundations of the Hockett proposals, how could they possibly have looked at the problems in the world today and not seen the havoc that the half-baked euro project has visited upon Europe's economies? How could a new global currency be part of their solution? The answer is easy: It isn't. They call instead for an "emergency global demand-stabilization fund to recycle foreign exchange reserves, now held by surplus nations, in a manner that boosts employment in deficit nations." That is not a global currency, but instead a carefully regulated system to make sure that trade imbalances do not fester into permanent stagnation. Creating a global currency would, of course, be a terrible idea right now (and maybe for decades to come).

Notwithstanding that rather large error, Nocera's column is important because it brings welcome attention to a very important contribution to the policy debate. The policy brief from Messrs. Alpert, Hockett, and Roubini lays out the causes of the continuing crisis, the dangers of inaction, and the path to a comprehensive solution. If policymakers will now pay attention, then having their arguments filtered through an inconsistently-reliable source is a small price to pay.