Saturday, 27 August 2011

Report from Lindau: Day 3

I am writing from St Gallen University in Switzerland, where the closing ceremony of the Lindau meetings is taking place. The ceremony includes a panel of economists who will discuss the origins of the financial crisis. Similarly ambitious topics were covered yesterday in the third day of the meetings.

Roger Myerson provided a model of moral hazard in the banking sector where bankers have career concerns and used it to explain financial bubbles. This way of integrating micro and macro considerations is much needed if better models of the economy are to be build. Daniel McFadden also tackled the important issue of government intervention in the health insurance markets when there exist frail consumers. Unfortunately, both talks were not well constructed, were technical and much of their message was lost.

Ed Phelps gave a more descriptive talk and denounced the rise of "corporatism", a way of conducting economic policy that goes back to Mussolini and that consists on a strong intervention of the state in favor of the interests of private enterprises. Phelps argued that corporatism was prevalent in Tunisia and Egypt, and led to corruption, nepotism and inefficiencies, but also in the US where corporatism has precluded the less well off from enjoying the benefits from the last episode of economic growth.

The lectures by Eric Maskin and George Akerloff were much better structured and clear. Maskin gave a talk on Condorcet and Borda voting rules that was almost identical to the one he gave in Edinburgh four years ago. Akerloff gave an introduction to the use of the concept of identity in Economics and its explanatory power. The talk, that was also a way of publicizing his recent book with Rachel Kranton, said nothing new to those have been reading his work with attention but it was of interest to those unfamiliar with his ideas. It is quite remarkable that when Akerloff first mentioned these concepts around fifteen years ago the profession received them with profound skepticism. Fortunately, thanks partially to the behavioral revolution, his work has received the appreciation it deserves.

But the big star of the day was, unsurprisingly, Joseph Stiglitz. It was amazing how Stiglitz managed to compress so many ideas in just 30 minutes. He started with his by saying that macroeconomics has failed as a science because it failed to predict the crisis and as an example mentioned the facts that the models used by central banks do not actually include a banking sector. But his two main ideas where that globalization has made the system less stable rather than in the other way: Financial integration helps contagion and exacerbate risks. The other idea was that the recent crisis, provoked by staggering inequality according to him, was a manifestation of a structural change . In the same way as the crash in 29 represented the transition from an economy based on agriculture to one based in manufacturing, the 08 crisis has marked the transition from a manufacturing based economy to a service based economy. Given this structural change, models and data from the previous "era" are of little use in the new one.

In the afternoon, I attended the parallel discussion session in which Stiglitz answered questions from a big crowd of young economists. He elaborated on some of these ideas and discussed how also with globalization the Pareto optimality of free trade gets severely undermined: With international prices of agricultural products, bad harvests mean that local farmers receive lower revenues for sure. He insisted in blaming, quite rightly, Alan Greenspan for the dire situation of the US economy who thanks to the Iraq war and the tax cuts transformed a superavit into a unmanageable debt.

Now is time to go on a boat trip at Lake Konstanz. So that's all from Lindau, folks!

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