The Economists

Five of B.C.'s leading financial thinkers reflect ?on the Year from Hell – and what we can expect in 2010 ?(hopefully, something better…)

Five of B.C.’s leading financial thinkers reflect ?on the Year from Hell – and what we can expect in 2010 ?(hopefully, something better…)

Will this go down as the era of the economist? Especially in recent months, we’ve hung on their every forecast, even as the magazine that sports the name usurps all others as the must-read of the day. Then there’s the book called Freakonomics (with the inevitable follow-up in bookstores now). Not only was it a blockbuster bestseller, it advanced the idea that, never mind interest rates, the economist’s unique tools are every bit as useful in predicting (and even altering) social factors such as crime rates. In the future, who would need sociologists, psychologists or criminologists when an economist can do everyone’s job??

– Helmut Pastrick (left) is the chief economist for Central 1 Credit Union, the umbrella organization for the credit union system of B.C. and Ontario;
– Marc Lee (centre left) is the senior economist from the Canadian Centre for Policy Alternatives;
– Cameron Muir (centre) is the chief economist for the B.C. Real Estate Association;
– Niels Veldhuis (centre right) is a senior economist at the Fraser Institute;
– John Richards (right) is an economist and professor in the Public Policy Programme at Simon Fraser University

On the other hand – and this can’t be ignored – never before have so many been so wrong about so much. And not only did economists fail woefully in their crucial mission to warn us that something bad was coming around the corner, the gathering evidence suggests they didn’t just miss the damn thing; they caused it! Yes, there’s a consensus building that economists paved the way for the recent (current?) financial crisis through their insistence, meekly accepted by politicians, that free markets are infallible and require no regulation. Or maybe there isn’t a consensus. Because that’s another thing that’s been going on with economists lately. Even as politicians crowd toward the middle of the road, economists are keeping to their respective corners. More than ever, Friedmanites kick sand in the faces of Keynesians and vice-versa. All of which makes economics a particularly interesting field of study just now. Accordingly, we’ve tabbed five of the province’s most prominent practitioners, a very diverse group. The men were each given a questionnaire, and their answers appear below. As you’ll see, they retain views and interests that are – how to put this? – divergent. If the idea was to learn at least as much about the economists as about the economy, well, mission accomplished. ?

How did you rate? Give yourself a letter grade on your record in forecasting the past 18 months. ?

Cameron Muir: Aside from not seeing that little thing called the global financial crisis hurtling toward us, I’d say a B. I base that on the strength of how quickly we responded to events last year and predicting during the darkest days last winter that home prices would stabilize by the third quarter.?

Helmut Pastrick: F for the financial crisis.?

Marc Lee: B+. Amid the housing bubble, I saw a recession coming a few years ago but underestimated how big the hit would be to the financial markets and also how quickly they have recovered. I also expected B.C. housing markets to fall harder.?

John Richards: I have been working on social policy issues for the last five years. No one asked me to forecast the markets, which is fortunate because I had no insight into the precarious state of the sub-prime U.S. mortgage market, the excess leverage of New York investment banks or the nature of AIG’s insurance operations.?

Niels Veldhuis: The Fraser Institute does not engage in economic forecasting. The fact is, economists, like nearly everyone else (including fortune tellers), do a rather poor job of predicting the future. This was certainly the case in the past 18 months but generally holds true throughout time. ?


Keynes vs. Friedman: Allegiances to one or the other of these giant economic theorists – or at least the ideas and approaches they represent – seem to be shifting. Has yours altered in any way??

Richards: My primary academic allegiance is to Keynes. Friedman is important not for his monetary theories but because he and the Chicago School of economists he led insisted on the positive role of markets at a time when conventional wisdom among economists was too indulgent toward state intervention and regulation. Step back from the current financial crisis and take a look at the evolution of developing economies over the last three decades. Deng Xiaoping intuitively understood what Chicago economists would have advised: enable peasants to grow what they want and sell their produce on relatively free markets. ?

Cameron Muir

Muir: Keynes has definitely carried the day with governments, considering the magnitude of fiscal stimulus in the world. The efficacy of Friedman’s money-supply approaches on short-term economic contractions is still debatable. However, long-term control of the money supply is important, indeed. Think of Keynes as an umbrella during a thunderstorm and Friedman as the roof on your house that protects you long-term. ?

Lee: Keynes was the greatest economist of the 20th century. His legacy is evident in the large stimulus packages that governments and central banks have implemented. But more importantly, and less understood by our politicians, Keynes developed a better understanding of how capitalist economies actually work, rather than assuming they lead to free-market utopia. His insights on what drives investment (a favourable outlook for sales and profits, or robust demand) need to be better understood by politicians obsessed with supply-side solutions (cutting costs for businesses through tax cuts and deregulation) that do not boost investment. Friedman led a successful counter-revolution, but his insights and policy prescriptions have by and large proven to be wrong, and he will eventually be consigned to the dustbin of history. ?

Veldhuis: Historical, real-world evidence shows us that the stimulus policies advanced by Keynes and his followers do not work. Japan attempted to stimulate its economy throughout the 1990s with a total of 11 separate fiscal stimulus packages. On the other hand, the most successful countries in the world and those that are experiencing rapid increases in prosperity are following the ideas of Friedman, who said it best: “The record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”?

Pastrick: Both schools of thought have merit. I am only interested in what helps me understand economic developments and outcomes; interpreting them in one framework is too limiting. A practicing business economist needs an eclectic approach, unlike an academic economist who has the luxury of engaging in theoretical paradigms.?

Who’s your current economist crush? What about him or her is so compelling??

Pastrick: Raghuram Rajan of the University of Chicago in a 2005 paper discussed how perverse incentives in deregulated financial markets posed a risk to the economy.?

Lee: Nobel-winning Princeton professor and New York Times columnist Paul Krugman has done a great job of connecting the current crisis to the history of economic thought, reinterpreting Keynes for our times and pressing for major U.S. health-care reform.?

Muir: I’m a big fan of Barron’s economics editor Gene Epstein. His book Econospinning eviscerates pop-economics pundits from CNN’s Lou Dobbs to the authors of Freakonomics.?

Veldhuis: It’s always Adam Smith, the godfather of modern economics. Smith provided great insights on the benefit that individuals acting in their own self-interest can have on society. As Smith famously noted, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”?

Richards: Hyman Minsky. “Who’s he?” many will ask. For someone who became a prominent monetary economist, his life story is not what you would expect. He started out as a socialist working with garment workers’ unions in Chicago in the 1930s. While in the U.S. army during the Second World War, he served in the predecessor of the CIA and in the 1945 post-war chaos of Berlin he saved German socialists from assassination by communists. He studied economics at Harvard at a time when American economists were learning about Keynes. What he took to heart was Keynes’s insistence on the significance of group psychology – fear and greed – in understanding financial markets. Among Minsky’s prominent current champions is Nouriel Roubini (Dr. Doom), the New York University economist who famously predicted the end of the U.S. real estate bubble would have major economic consequences. ?

What’s the most interesting economics-related thesis, ?concept, phenomenon or movement out there just now??


Helmut Pastrick

Pastrick: Carbon pricing and cap-and-trade systems dealing with climate change.?

Muir: The contrast between globalization and localization. Thomas Friedman’s The World is Flat and Jeff Rubin’s Why Your World Is About to Get a Whole Lot Smaller are great examples of each. The big question is the extent to which the global economic landscape will be impacted by the forces of high energy costs and the emerging green paradigm. ?

Richards: The economics of education. Increasingly, it is human capital that matters in determining the wealth and poverty of nations and communities within nations. This is true of Aboriginals relative to other Canadians or Indians relative to Chinese. Beyond freeing markets post-Mao, what distinguishes China is that its post-1949 governments achieved remarkable education success relative to countries such as those in South Asia. Education is an activity that, in general, private markets handle poorly, except for the elites who understand its importance and can afford to buy it for their children. The catch-22 in developing countries is that they need a better-educated population to prosper, but decent education requires effective governments. ?

Lee: The fallout of the housing and financial markets has reinvigorated “depression economics”: what happens when asset prices collapse and how policy should respond. A lot of this is a rediscovery of Keynes, as many economists thought such depressionesque dynamics were no longer possible. Now that we seem to have found the bottom, the challenge is to not pull the rug out from under the recovery by raising interest rates or reducing deficits too quickly.?

Veldhuis: The idea that government stimulus spending (a.k.a. Keynesian economics) will help get the economy out of recession. While it may not be the most interesting, it’s certainly the most shocking. It didn’t work during the Great Depression, it didn’t work in the 1970s or 1980s and it won’t work today.?

What was the most surprising thing about 2009 from an economics point of view??

Muir: Definitely, the housing market performed head and shoulders above expectations. Who would have imagined last January that Vancouver and Victoria would post record home sales for the month of July??

Pastrick: Central bank rates dropping to near-zero.?

Lee: The low bank rate.?

Veldhuis: That the economy is already showing signs of recovery. The “great” recession of 2009 is looking to be much like previous recessions and nowhere close to the doomsday many predicted. Perhaps even more surprising to folks, though it should not be, is that the recovery is occurring despite the fact that most of the stimulus spending has yet to be implemented.?

Richards: The passion with which American conservatives have opposed Obama’s insistence on health reform. Universal health insurance is social policy, but it is also economic policy. The American system of health care is too expensive and delivers inadequate and inequitable outcomes. Whatever the problems of ?Canadian Medicare, it generates better health outcomes at a lower cost in terms of share of GDP. Most industrial countries generate better health outcomes than the U.S., and none spend more.?

What might be the most ?surprising thing in 2010??

Veldhuis: To me it would be a shift in the federal and provincial government spending plans. What Canadian governments should implement is an aggressive plan to rein in stimulus spending.?

Lee: The Bank of Canada and federal government and their international counterparts being too optimistic: raising interest rates and cutting deficits, driving the economy back into recession. This is what? Japan did in the 1990s.?

Richards: I am no good at forecasting.?

Muir: The exposure Vancouver will receive from the world media during the Olympics. The economics of it aside, I think we’re going to be surprised what we learn about ourselves and our city when the world comes to town in February.?

Pastrick: If I knew, it would not be a surprise. One thing for sure, though: no surprise would be surprising.?


What shape will the recovery take: U, V or W? ?

Richards: My guess is U, but I may well be wrong.?

Pastrick: Probably a small W: no fallback to recession in 2010 but a variable, up-and-down growth path partly due to the end of some fiscal stimulus programs in the U.S. and to the normal rebuilding of inventories in the early recovery phase. On a trend basis, a below-average recovery plays out in 2010 with a strong above-trend quarter or two.?

Muir: It’s too early to rule out a W. However, something between a tilted L and a U appears more consistent with recent data. Until B.C.’s largest trading partners climb out of their economic malaise, our economy won’t be firing on all cylinders.?

Lee: More of an L. Positive but lacklustre growth with unemployment rates remaining high. We are not likely to see a return to the boom years of 2003-08.?

Veldhuis: Again, we don’t forecast. In any case, this will depend largely on the direction of government policy. If governments continue to roll out stimulus spending as the economy begins to recover on its own, this will compete with private sector investment and dampen the recovery.