Thursday, April 28, 2011

Five myths about foreign aid

By John Norris, Thursday, April 28, 11:29 AM

Foreign aid has few domestic allies. Aid programs weathered steep cuts in the recent budget deal in Congress, and a plan from Rep. Paul Ryan (R-Wis.) would slash spending on international affairs and foreign assistance by an eye-popping 44 percent by 2016. Sen. Rand Paul (R-Ky.) has called for the abolishment of aid programs, including to Israel, and protests in the Middle East have evoked sharp questions about the effectiveness and goals of U.S. aid.

What’s the point of U.S. foreign aid, and does it do any good? Let’s topple a few misconceptions and find out.

1. Republicans hate foreign aid.

Former congressman Tom Delay (R-Tex.) once noted that it was difficult for lawmakers to explain to their constituents why they were more interested in helping Ghana than Grandma. Yet every Republican president since Dwight Eisenhower has been a staunch advocate for foreign aid programs.

In signing the Foreign Assistance Act of 1974, Gerald Ford resisted congressional restrictions on food aid. Ronald Reagan launched the National Endowment for Democracy in 1983 to help “foster the infrastructure of democracy — the system of a free press, unions, political parties, universities” around the globe, as he put it in a speech before the British Parliament. Declaring that America needed to lead the fight against the HIV/AIDS pandemic, George W. Bush established the President’s Emergency Plan for AIDS Relief in 2003. According to the Congressional Research Service, this fund, along with money for Iraq reconstruction, was part of the largest appropriation for foreign aid in three decades. When it came to opening the nation’s wallet to the world, these conservative commanders in chief weren’t very conservative.

“U.S. assistance is essential to express and achieve our national goals in the international community — a world order of peace and justice.” Sound like Obama? Richard Nixon said it in 1969.

2. Foreign aid is a budget buster.

In poll after poll, Americans overwhelmingly say they believe that foreign aid makes up a larger portion of the federal budget than defense spending, Social Security, Medicaid, Medicare, or spending on roads and other infrastructure. In a November World Public Opinion poll, the average American believed that a whopping 25 percent of the federal budget goes to foreign aid. The average respondent also thought that the appropriate level of foreign aid would be about 10 percent of the budget — 10 times the current level.

Since the 1970s, aid spending has hovered around 1 percent of the federal budget. International assistance programs were close to 5 percent of the budget under Lyndon B. Johnson during the war in Vietnam, but have dropped since. Compared with our military and entitlement budgets, this is loose change.

3. We give aid so countries will do as we say.

Ken Adelman, Reagan’s U.N. ambassador, was shocked when he showed up at the United Nations in 1981 to find that countries receiving U.S. development assistance didn’t always support Washington. As Adelman put it in a recent Foreign Policy article: “Did all that money buy America any love?”

But foreign aid is not designed to make countries like us. The United States wants stable democratic partners that are reliable allies in the long run. Aid builds these relationships, even when the countries we help don’t support us in the short run. For example, the Reagan administration didn’t approve when Costa Rica inserted itself into multiple conflicts raging in Central America during the 1980s. But U.S. assistance to Costa Rica helped that nation become a champion of democracy and human rights as well as of regional trade agreements. Similarly, the United States and India were badly estranged at different points during the Cold War, but U.S. assistance to India helped spark the “green revolution” that prevented massive famine in the late 1960s. Today, India is one of America’s most important allies in Asia.

And aid sent to troubled regions now can save money in the long term. As Defense Secretary Robert Gates noted last year: “Development contributes to stability. It contributes to better governance. And if you are able to do those things and you’re able to do them in a focused and sustainable way, then it may be unnecessary for us to send soldiers.”

4. Foreign governments waste the aid we give them.

During the Cold War, some foreign aid was directed to friendly dictators with little regard for their own people, such as Zaire’s President Mobutu Sese Seko. Local corruption also swallowed assistance to Haiti after 2010’s earthquake. But when aid is wasted, it’s more often a result of stateside congressional inefficiency.

For example, Congress mandates that 75 percent of all U.S. international food aid be shipped aboard U.S. flagged vessels — ships registered in the United States. A study by several researchers at Cornell University concluded that this subsidy of elite U.S. shipping companies cost American taxpayers $140 million in unnecessary transportation costs during 2006 alone.

The Government Accountability Office noted that between 2006 and 2008, U.S. food aid funding increased by nearly 53 percent, but the amount of food delivered actually decreased by 5 percent. Why? Because our food aid policies are swayed by an agribusiness lobby that stresses buying American, not buying cheaply.

5. No one ever graduates from U.S. foreign aid.

The notion that poor countries are doomed to stay poor has always been part of the foreign aid debate in the United States. Nations across Latin America and Asia were dismissed in the 1960s as perennial basket cases, yet countries in both regions combined sensible reforms with a jump-start from U.S. assistance programs to achieve dynamic, lasting growth. According to the United States International Trade Commission, 10 of the 15 largest importers of American goods and services, including countries such as South Korea, Taiwan and Singapore, graduated from U.S. foreign aid programs.

Flagship efforts such as those undertaken by the Millennium Challenge Corporation, established under George W. Bush, make clear that the United States expects progress in combating corruption, improving governance and tackling economic reforms in exchange for assistance.

That’s the most enduring truth about foreign aid: Though it probably won’t do more than blunt the suffering in some places, it can make a lasting difference in countries committed to change. Sure, it’s a bet. But it doesn’t have to be a long shot.

John Norris is the executive director of the sustainable security program at the Center for American Progress.

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Urban Planners 2.0

Leading Thinkers in Urban Planning & Technology

26 April 2011 - 4:31pm

By Chris Steins

In the last five years, there has been tremendous innovation at the intersection of urban planning and technology. The opening of government data has been a major catalyst, as well as the crowdsourcing, mapping and social networking opportunities afforded by the expanding capabilities of the Internet.

As my personal and professional interests meet at this intersection, I am often asked by colleagues to make connections among professionals in the field. Through these networks, and my own research keeping up with the latest news and innovations, I've developed a strong sense of who's who in this field.

Over the last year, I have refined this list of 25 leading thinkers and innovators in the field of Urban Planning and Technology. My list includes a broad range of people, from established academics and CEOs to freelance developers and students, from the U.S. and abroad.

In alphabetical order, I'm pleased to present my list of the Top 25.

Dr. Michael BattyDr. Michael Batty
Director, Centre for Advanced Spatial Analysis, University College London

Dr. Batty's interests focus on wayfinding, urban growth, and the digital divide using the latest software and hardware to understand complex urban planning problems. As director of The Centre for Advanced Spatial Analysis, Dr. Batty leads research on emerging computer technologies in several disciplines which deal with geography, space, location, and the built environment. His book, Cities and Complexity (2005), was recognized with the Regional Science Association's Alonso Memorial Prize.

Ben BerkowitzBen Berkowitz
CEO and Co-Founder, SeeClickFix

SeeClickFix allows anyone to report and track non-emergency issues anywhere in the world via the Internet. This empowers citizens, community groups, media organizations and governments to take care of and improve their neighborhoods. For example, in Philadelphia, an engaged citywide advocacy group used SeeClickFix to mobilize citizens to document instances of vehicle idling, leading to new initiatives to help clean the air. The inspiration for SeeClickFix came from Mr. Berkowitz's desire to improve his own community with his neighbors and his government, and he was named Huffington Post's 2010 Tech Gamechanger.
Scott BernsteinScott Bernstein
President and Co-Founder, Center for Neighborhood Technology

Mr. Bernstein leads the Center for Neighborhood Technology's work to understand and better disclose the economic value of resource use in urban communities, and helps craft strategies to capture the value of this efficiency productively and locally. Mr. Bernstein masterminded strategies to show the hidden assets underpinning transit and smart growth planning, and he introduced the concept of location-efficient mortgages. He also co-founded the Center for Transit-Oriented Development, which created the nation's first National TOD Database, covering all 4,000 existing and developing TOD sites in the U.S.
Dr. Manuel CastellsDr. Manuel Castells
University Professor and the Wallis Annenberg Chair in Communication Technology and Society, University of Southern California

Dr. Castells is the heavyweight of this list, and has been helping planners understand the complex nature of our networked society three decades. Dr. Catells is the world's fifth most-cited social sciences scholar and the foremost-cited communications scholar. He is the author of 22 academic books and editor or co-author of 21 additional books, as well as over 100 articles in academic journals. Perhaps his most important publication is the trilogy, The Information Age: Economy, Society, and Culture, first published in 1996, and which has been reprinted 20 times and translated into 20 languages. His most recent book is Communication Power (2009).

Dr. Mark ElliottDr. Mark Elliott
Founder and Director, Collabforge

Dr. Elliott led the reengineering of the City of Melbourne's strategic city planning process to allow for broad participation using a technology tool called a wiki. The result was Future Melbourne, the world's first 'city plan that anyone could edit'. Building on this award-winning effort, Mr. Elliot has launched a consulting firm, Collabforge, and led participation projects -- often involving the use of wikis and similar collaborative technologies -- in Australia and the US.
Dr. Jennifer Evans-CowleyDr. Jennifer Evans-Cowley
Associate Professor & Section Head, City and Regional Planning, The Ohio State University

As an Associate Professor, engaging writer, consultant, and speaker, Dr. Evans-Cowley seems to be everywhere at once. Prior to becoming a professor she worked as a planner in several cities and is well-known for her innovative research and writing on a range of participatory planning technologies, from the use of social networking to crowdsourcing and beyond. Dr. Evans-Cowley is a sought-after speaker for her energetic and enlightening presentations on how planners can use innovative tools to improve their cities and regions. She is a also a superstar among younger planners for helping thousands of professionals pass the AICP exam through Planetizen's AICP Exam Preparation course.
Dr. Marcus FothDr. Marcus Foth
Associate Professor and Principal Research Fellow, Institute for Creative Industries and Innovation, Queensland University of Technology

Dr. Foth studies how to engage citizens through social networking. Dr Foth's research explores human-computer interaction design and development at the intersection of people, place and technology with a focus on urban informatics, locative media and mobile applications. His most recent book is Handbook of Research on Urban Informatics: The Practice and Promise of the Real-Time City, and is currently co-editing the book, From Social Butterfly to Engaged Citizen for MIT Press (2011). If you'd like to catch up with Dr. Foth, you can see him at the 5th International Conference on Communities and Technologies 2011 in Brisbane, where he is the conference chair.

Rob Goodspeed Rob Goodspeed
PhD Student, Urban Information Systems, Department of Urban Studies and Planning, Massachusetts Institute of Technology

Mr. Goodspeed is interested in how technology can improve cities by making urban planning decisions more democratic and informed. In his current research, he explores the social, political, and practical dimensions of the use of Internet tools for participation in urban planning. Mr. Goodspeed is also the co-founder of, and Rethink College Park, a contributor Planetizen's Interchange Blog, and he recently convened a conference on technology and planning, Planning Tech. Previously, he worked as a research analyst at the Boston Metropolitan Area Planning Council, where he helped run the MetroBoston DataCommon website.
Dr. Eric GordonDr. Eric Gordon
Associate Professor, Visual and Media Arts, Emerson College
Director, Engagement Game Lab, Emerson College

Dr. Gordon focuses on location-based media, mediated urbanism, and games for civic engagement. He is the director of The Engagement Game Lab, a research lab which explores the premise that through the careful design of new media, we can help communities better deliberate, plan, learn, and have fun. Dr. Gordon, along with his colleague Gene Koo, a fellow at Harvard's Berkman Center for Internet and Society, were awarded a MacArthur Foundation grant for their innovative experiments in community planning using a virtual world called Second Life. He is the co-author of a new book about location-based media called Net Locality: Why Location Matters in a Networked World (2011).

Adam GreenfieldAdam Greenfield
Managing Director, Urbanscale LLC

Mr. Greenfield is interested in intersection of design, technology and culture, with an increasing focus on how these things interact in cities. In 2010, he launched Urbanscale, a consulting firm that seeks to bring a user-centered approach to the design of urban interfaces. For example, his current work on Project PERRY focuses on enabling value cards (like transit passes) to display the value of the card using an e-ink technology (similar to the Kindle) that requires only minimal energy. Mr. Greenfield was previously Head of Design Direction for Service & User Interface Design at Nokia and also is the author of Everyware: The dawning age of ubiquitous computing (2006), called "groundbreaking" by Bruce Sterling. Most recently Mr. Greenfield co-authored a pamphlet called Urban Computing and its Discontents (2007), which is a free overview of informatics for urban environments.
Nick GrossmanNick Grossman
Director of Civic Works, OpenPlans

Mr. Grossman focuses on making cities more usable and livable through the application of technology. At OpenPlans, he oversees development of new products around open city technology strategy, sustainable transportation, and local civic engagement. His work supports open city projects such as Civic Commons, Open311, OpenBlock, OpenTripPlanner, OneBusAway and TransportationCamp. He joined OpenPlans in 2006 to produce Streetsblog and Streetfilms. Earlier this year Nick's work with the New York MTA enabled buses in Brooklyn to tell the Internet where they are, as part of a pilot to demonstrate that it's possible to track buses using existing hardware and open source software. Chris Haller

Chris Haller
Principal, Urban Interactive Studio LLC

Mr. Haller is the founder of Urban Interactive Studio LLC, a technology consulting firm specializing in Web solutions for urban planning agencies. Mr. Haller is an information architect for aiding complex decision-making processes, and blogs at Engaging Cities. He is the founder of TextTheMob and Guerrilla Tweets, two interesting experiments using mobile applications to facilitate public participation. Prior to starting his own firm, Mr. Haller assisted Placematters in developing a new cloud-based keypad polling system. Mr. Haller holds a Master's degree in planning from Technische Universität Berlin.

John HankeJohn Hanke
VP Product Management for Geo at Google

Mr. Hanke founded Keyhole, Inc., which was acquired by Google in 2004 and whose flagship product became Google Earth. Hanke is currently the vice president of Product Management for Google's geo products, which include Google Maps, Earth, Local Search, Transit, Street View, SketchUp and special initiatives such as Google Ocean and Sky. Before he began working in the field of technology Mr. Hanke worked in foreign affairs for the U.S. government in Washington D.C. and Southeast Asia. In addition to an MBA from the University of California, Berkeley Haas School of Business, Mr. Hanke holds a BA in planning from The University of Texas at Austin.

BSteven Berlin JohsonSteven Berlin Johnson
Author, Entrepreneur

Mr. Johnson is a prolific author and founder of several influential websites. He was founder and Editor in Chief of FEED, one of the earliest online magazines. He also cofounded, a website that maps online conversations to real-world neighborhoods, and which recently acquired by AOL. Mr. Johnson writes about an incredibly wide range of topics, many of which provide a playful yet thought-provoking perspective of how technology is shaping our communities. Among his books are Emergence: The Connected Lives of Ants, Brains, Cities, and Software (2002), The Ghost Map: The Story of London's Most Terrifying Epidemic—and How it Changed Science, Cities and the Modern World (2006), and his most recent book, Where Good Ideas Come From: The Natural History of Innovation (2010), which tells the stories of great ideas and thinkers across several disciplines.
Michael Kwartler Michael Kwartler
Executive Director and President, Environmental Simulation Center

Mr. Kwartler is an architect, planner, urban designer, and educator. He is the founder of the Environmental Simulation Center, a non-profit research laboratory created to design and develop innovative applications of information technology for community planning, design, and decision-making. Kwartler directed the design and development of the popular CommunityViz software, which was the first GIS based software to integrate virtual reality with scenario design, impact analysis, and policy simulation. His book, co-authored with Gianni Longo, Visioning and Visualization: People, Pixels, and Plans, was recognized by Planetizen as a Top 10 Book in 2009.

Dr. John D. LandisDr. John D. Landis
Crossways Professor of City and Regional Planning, Department Chair; Urban Spatial Analytics Academic Director, The University of Pennsylvania School of Design

Dr. Landis' research focuses on modeling and simulating urban growth and on the impacts of urban development on the natural environment. He has been a pioneer integrating the use of geographic information systems and urban analysis. He coordinated the development of the California Urban Futures series of urban growth models and is currently engaged in a National Science Foundation-funded project to model, forecast, and develop alternative spatial scenarios of U.S. population and employment patterns and their impacts on travel demand, habitat loss, and water use through 2050.
Alexa MillsAlexa Mills
Community Media Specialist, Community Innovators Lab (CoLab), Massachusetts Institute of Technology

Ms. Mills combines her passion for stories and bottom-up urban planning by working directly with communities to develop media that expresses their perspective on various issues. Ms. Mills runs CoLab Radio, a project of CoLab, which supports the development and use of knowledge from excluded communities to deepen civic engagement and improve community practice. Ms. Mills' work includes Predatory Tales, the true stories of predatory lending scams in Lawrence, Massachusetts and an interactive map of Tambo de Mora, Peru, hand-drawn by local teenagers.
Christian MaderaChristian Madera
Web and New Media Manager, National Capital Planning Commission

A self-described urban planner and tech geek, Mr. Madera has spent the last decade working in the fields of urban planning policy and web technology. As a former managing editor of Planetizen and accomplished web developer, he has a unique hands-on perspective on how Internet and mobile technologies can empower planners and citizens. As the Web and New Media Manager for the National Capital Planning Commission, he is responsible for the development of the agency's new open government plan, which includes a array of initiatives aimed at increasing transparency and public participation using online and mobile technologies. Christian also authored the Open Cities column for Next American City as a 2010 Rockefeller Urban Leaders Fellow, and chaired the City Planning, Civic Engagement and the Internet Summit at Princeton University in 2009. He tweets regularly about planning and open government.
Pablo MonzonPablo Monzon
Co-CEO & Founder, GIS Planning

Mr. Monzon is the founder and Co-CEO of GIS Planning, a technology consulting firm that provides geographic information systems (GIS) software to simplify the process of business attraction and site selection for expanding and relocating businesses. Over 12,500 cities including the majority of the 100 largest cities in the United States use GIS Planning's software, created by Mr. Monzon and based on ESRI's popular mapping software. Mr. Monzon is recognized as one of the leading experts in ArcIMS and ArcGIS application development in the industry. Mr. Mozon was also a Fulbright Scholar, and holds a Masters degree in City Planning from U.C. Berkeley and a Bachelor's degree in Civil Engineering.

Carlo RattiCarlo Ratti
Director, SENSEable City Laboratory, Massachusetts Institute of Technology

Mr. Ratti is a civil engineer and architect who teaches at the Massachusetts Institute of Technology, where he directs the SENSEable City Laboratory. His works focuses on senors and mobile devices and how they are transforming our built environment and revolutionizing our idea of the smart city. He is a also a regular contributor of articles on architecture to the magazines Domus and Casabella and several Italian newspapers.
Ken SnyderKen Snyder
CEO, President, PlaceMatters

As the President of PlaceMatters, Mr. Snyder continues to push the envelop on using technology to enable more effective community participation in planning. Mr. Snyder is an expert on a broad range of tools to aid the process of community design and decision-making. He previously worked for the Orton Family Foundation, heading up their Planning Tools Program, and as director of the Tools Program for the US Department of Energy, he developed the earliest comprehensive listing of planning software used for planing. Earlier this year, PlaceMatters broke new ground with the launch of a do-it-yourself (DIY) touchtable integrated with CommunityViz and Brainstorm Anywhere to facilitate community design processes.
Matthew SomervilleMatthew Somerville
Web Developer

Mr. Somerville is a talented freelance web developer based in Birmingham, UK. In addition to other project, he works for mySociety, a not-for profit company that not-for-profit company that runs most of the best-known democracy and transparency websites in the UK, sites like TheyWorkForYou, FixMyStreet and WriteToThem. Mr. Somerville studied Math at Trinity College, Oxford and worked in civil service in Cheltenham prior to becoming a freelance programmer. In his free time he manages the popular Accessible UK Train Timetables website. He recently developed a brilliant London Underground Live train map, which shows all trains on the London Underground network in approximately real time.
Holly St. ClairHolly St. Clair
Data Services Director, Metropolitan Area Planning Council

As the Director of Data Services at MAPC, Ms. St. Clair oversees the agency's activities in the fields of data management, data analysis, research, and public access to data. She has pioneered the use of advanced decision support tools in Metropolitan Boston, managing a variety of projects that use scenarios modeling, 3-D environments, community indicators, and innovative meeting formats to engage stakeholders in dialogue about policy choices. Ms. St. Clair is also the quiet heavy lifter behind the process and structure of Boston's MetroFuture Initiative, and has been pivotal in the creation of the Boston Data Commons, a data portal and interactive web mapper that puts hundreds of data layers at the fingertips of residents, public officials. More recently, Ms. St. Clair has collaborated with Dr. Eric Gordon to to begin create a planning-based gaming platform to help residents become more involved in community planning.
Dr. Anthony TownsendDr. Anthony Townsend
Director of Technology Development. Institute for the Future

Dr. Townsend has been studying the connections between technology, urbanism and innovation for over 15 years. Anthony's interests span several inter-related topics: mobility and urbanization, innovation systems and innovation strategy, science and technology parks and economic development, and sustainability and telework. He received a Fulbright scholarship in 2004 to study the social impacts of broadband in South Korea, and was one of the original founders of NYCwireless, a pioneer in the municipal wireless movement that promotes the use of public-access Wi-Fi in the development of local communities. His recent work includes mapping the future of cities, information and inclusion.
Sarah WilliamsSarah Williams
Director, Spatial Information Design Lab, Columbia University
Adjunct Assistant Professor, Graduate School of Architecture Planning and Preservation, Columbia University

Ms. William's work focuses on the representation of digital information in planning. For example, her work on the Million Dollar Blocks project resulted in a reworking of the justice system focusing on investing in neighborhoods where criminals live rather than in neighborhoods where crime happens. Ms. Williams also teaches GIS and data visualization at the Graduate School of Architecture, Planning and Preservation (GSAPP).

Chris Steins is Planetizen's co-Editor-in-Chief, and the founder and chief executive of Urban Insight, Inc., the Internet consulting firm that operates Planetizen. Chris has 15 years of experience in technology consulting and urban planning and has served as a consultant to public sector state, county and local agencies, Fortune 500 private firms, educational institutions, and nonprofit organizations. He is also the co-author of a children's book on urban planning. You can find him on LinkedIn and Twitter.

Olmsted was what we might call today a reflective practitioner – someone who asked deep questions about his own work and wanted to learn more about more things.

Wednesday, April 20, 2011

U.S. aid cuts could be “diplomatic suicide’’

Do you agree?

By Andres Oppenheimer

On occasion of the recent anniversary of the earthquake that shook Haiti last year, killing about 300,000 people and destroying thousands of schools and hospitals, I read a statistic that blew my mind — Venezuela has pledged more funds for Haiti’s reconstruction than the United States.

I’m not kidding. The Office of the United Nations’ Special Envoy for Haiti, former President Bill Clinton, said in an earthquake anniversary report that Venezuela pledged $1.3 billion for Haiti’s reconstruction, while the United States pledged $1.1 billion. (So far, Venezuela has forgiven a larger amount of Haiti’s foreign debt, while both countries have disbursed about $120 million each, Clinton’s office says.)

If you are alarmed by these figures, and you think that all prophesies about the inexorable decline of U.S. influence around the world are bound to come true if Washington can’t be the biggest donor in its own neighborhood, get ready: it will get much worse.

The new Republican majority in the House of Representatives is seeking to cut up to $100 billion in domestic and foreign aid programs this year to help reduce the U.S. budget deficit.

Congressional sources tell me that Republicans would cut foreign aid programs worldwide by between 10 percent and 30 percent. The U.S. Global Leadership Coalition, a pro-foreign aid group in Washington D.C., estimates that the Republican proposal would cut the International Affairs Budget — which funds everything from State Department salaries to AIDS vaccines in Africa — by more than 13 percent, a figure it says would be “devastating.’’

Some ultra-conservative Republicans, such as Tea Party darling Sen. Rand Paul (R-Ky.) have said in recent days that they want the entire U.S. foreign aid budget eliminated.

House Republicans are seeking to cut at least 2,170 State Department jobs created in recent years to make up for previous job cuts, according to the website. Ironically, most of these jobs had been urged by Republican former Secretary of State Collin Powell, who argued that the United States needed “diplomatic troops’’ to enhance its security in the post 9/11 world.

Wouldn’t you weaken U.S. diplomacy by cutting foreign aid like this, I asked the new chairwoman of the House Foreign Relations Committee, Rep. Ileana Ros Lehtinen (R-Miami), in a recent interview.

Ros Lehtinen, who is more pro-foreign aid than most of her fellow conservative Republican colleagues, told me that “If we are cutting the budget at home in the United States, how are we not going to do it with other countries? We have an out-of-control debt, and an astronomic budget deficit which we are passing on to our grandchildren. We cannot go on like this.’’

Most Democrats fear the proposed foreign aid cuts will cripple U.S. diplomacy. They cite a remark by U.S. Secretary of Defense Robert Gates, who said in September, referring to Afghanistan and Iraq, that “Development is a lot cheaper than sending soldiers.’’

Rep. Eliot L. Engel (D-NY), the minority leader of the House Western Hemisphere Subcommittee, told me in an interview that cuts in foreign aid at a time of growing drug-related violence in Mexico and Central America, and of growing influence from China, Iran and Venezuela throughout Latin America “is penny-wise and pound-foolish.’’ He added that if the United States cuts back on foreign aid, “it will come back to bite us.’’

My Opinion: While the United States is the world’s largest donor country in dollar terms, it is already one of the stingiest of the world’s richest countries in terms of the size of its economy: it gives out only 0.2 percent of its gross domestic product in foreign assistance, compared with 1 percent for Sweden.

What’s more significant — and you won’t hear this on Fox News or conservative radio talk shows — foreign aid amounts to only 1 percent of the U.S. federal budget — much less than most Americans think of.

Perhaps, in the wake of the Wikileaks disclosures, Congress should make sure that U.S. diplomats don’t waste their time reporting on issues such as Italian Prime Minister Silvio Berlusconi’s sexual escapades, and focus on helping export U.S. goods, promoting American culture and fighting terrorism.

But the drastic foreign aid cuts proposed by Republicans could lead to a slow motion U.S. diplomatic suicide. The fact that Venezuela is already outspending Washington in donations to Haiti should speak for itself.

Read more:

Tuesday, April 19, 2011

The Global Cities Index 2010

From an old Foreign Policy Magazine

We are at a global inflection point. Half the world's population is now urban -- and half the world's most global cities are Asian. The 2010 Global Cities Index, a collaboration between Foreign Policy, management consulting firm A.T. Kearney, and The Chicago Council on Global Affairs, reveals a snapshot of this pivotal moment. In 2010, five of the world's 10 most global cities are in Asia and the Pacific: Tokyo, Hong Kong, Singapore, Sydney, and Seoul. Three -- New York, Chicago, and Los Angeles -- are American cities. Only two, London and Paris, are European. And there's no question which way the momentum is headed: Just as more people will continue to migrate from farms to cities, more global clout will move from West to East.

And yet, even as we see the dramatic effects of globalization at work in the rise of up-and-coming cities like Bangalore, Sao Paulo, and Shanghai, what's also remarkable is just how dominant the great capitals of old-school commerce remain. New York, London, Tokyo, and Paris are the top four, as they were in the first Global Cities Index two years ago, and they are ahead in most of the criteria that make a truly global city. Influential networks boost global impact, and having a giant head start -- as New York does in market capitalization, Tokyo in Fortune Global 500 companies, and London in international travelers -- will only amplify those advantages in the future. Success breeds success.

So what makes a Global City? Not size alone, that's for sure; many of the world's largest megalopolises, such as Karachi (60), Lagos (59), and Kolkata (63), barely make the list. Instead, the index aims to measure how much sway a city has over what happens beyond its own borders -- its influence on and integration with global markets, culture, and innovation. To create this year's rankings, we analyzed 65 cities with more than 1 million people across every region of the globe, using definitive sources to tally everything from a city's business activity, human capital, and information exchange to its cultural experience and political engagement. Data ranged from how many Fortune Global 500 company headquarters were in a city to the size of its capital markets and the flow of goods through its airports and ports, as well as factors such as the number of embassies, think tanks, political organizations, and museums. Taken together, a city's performance on this slate of indicators tells us how worldly -- or provincial -- it really is.

The seats of traditional political power aren't necessarily the most global. Only four of the top 10 cities are national capitals. Washington comes in at No. 13. Beijing (15) edges out Berlin (16), which trounces Moscow (25). Two of the top 10 global cities are laws unto themselves, operating outside the jurisdiction of a separate national government (Hong Kong and Singapore). The sun set a half-century ago on the British Empire, and yet London continues to shine at No. 2. For now.

Friday, April 15, 2011

The City Paper: Washington, DC

The Economics of Stephen Fuller How a wonky academic became a major player in the local real-estate business

Full Article
Photo by Darrow Montgomery

It’s never easy to speak third in a lineup of economists. People in the audience fidget. They check their phones and eye the door. But if the third person is Stephen Fuller of George Mason University, a good number of them will stick around to hear the economic weather report. Unless, that is, they’ve already heard him say the same thing at another event that same week—always possible in the small world of Washington-area building industry types. Invariably, the spiel comes packaged with a brilliant white smile and a silver lining.

“We don’t know what the next bubble is. If we did, we’d invest in it,” Fuller jokes one December morning to a chandeliered banquet hall outside Baltimore full of Maryland homebuilders, before launching into a battery of slides showing job growth, home prices, and federal spending. The takeaway is reassuring.

“By 2013, it’s going to be a really roaring economy in the region,” Fuller says. “Hang in there for one more year, and you’ll be rewarded.”

After the speech, Fuller beats a quick retreat to his blue Mercedes roadster and speeds towards a corporate lunch program in Alexandria. It’s a pretty typical pace for the 70-year-old professor with the leathery sailor’s tan. Fuller estimates he has about 80 speaking engagements a year. He’s also the go-to talking head for reporters who need a quote about the latest unemployment numbers or the economic impact of federal budget cuts—not to mention pols who need to import some quick gravitas. When Mayor Vince Gray needed someone to kick off his inaugural jobs summit with an economic overview, he called on Fuller. When the state of Virginia needed a study on the effect of Defense Department spending on the area’s economy, they retained Fuller. Even the government of Portugal reached out to the dean of regional economists for help with an unemployment problem; they wanted Fuller to apply lessons learned from Washington.

In an area full of experts who prognosticate about the fate of the global economy, Fuller is the most influential economist on the area. But while he hands down reports from his perch at George Mason’s Center for Regional Analysis, he’s no ivory tower academic. At each breakfast, luncheon, and gala dinner, the affable professor schmoozes with men—and they are almost always men—who own or have built on vast tracts of Washington, Virginia, or Maryland land, checking in about projects, families, the Orioles. He’s been doing it for the last couple of decades, but has become even more closely followed in the last few years, as recession-weary builders and governments cling to the one certainty Fuller can provide: data.

“Because he is so able to conjure up facts during any conversation, he has earned enormous respect,” says Maryland economist Anirban Basu, who left academia for private consulting. “One of the worst things a researcher can find is that research is not relevant. Steve Fuller does not have that problem.”

“When he speaks, he speaks with authority, because chances are he knows the players involved and he knows the jurisdictions involved,” adds Gaithersburg developer Bob Buchanan, who’s employed Fuller for long-range economic forecasting (more on that later).

But as much as the titans of the real estate industry depend on Fuller’s economic models—as well as his academic credibility and name recognition, which not every consultant can offer—his center, which receives almost no support from George Mason, depends heavily on the generosity of the industry he informs. And, as it happens, he typically finds himself with data that bolster the need for building more housing and better highways to knit the region together—imperatives that tend to please the industry. His research is used not only to inform and guide decisionmaking, but also to advance agendas, in a symbiotic relationship without which neither party would survive.

This doesn’t mean that Fuller’s a shill for developers. He’s also trying to lead them away from the types of suburban housing they’ve built for decades, toward the denser communities sought by both empty nesters moving to smaller quarters—like he did—and young 20-somethings. All the same, the favored luncheon speaker of real estate types around the region is no smart-growth angel, either. Not everyone, he says, will move to a high-rise apartment building and ride a bike to work.

“The real world isn’t ready for a lot of these ideas. People still want three-car garages,” Fuller says, as we drive out to the breakfast in Baltimore, passing open lands that looked ripe for development. “There’s no place for Utopians in reality.”

Every region has someone like Stephen Fuller—based at a university, a federal reserve bank, or a quasi-governmental entity. It’s a field that naturally lends itself to monopoly.

“I don’t think this is a highly competitive industry,” says Howard Wial, who directs the Metropolitan Economy program at the Brookings Institution. “If you’re going to develop your own regional model, that’s a lot of work.”

If Fuller is approaching the asymptotic point for his profession beyond which one cannot grow any more influential, his rise was also smooth and rapid. Born in Summit, N.J., he went to college at Rutgers, and then took a fellowship at the University of Mississippi for his master’s (“Mississippi was really backwards,” he remembers. “The university had its problems”). From there, he took another free ride to Cornell, and came to Washington in 1967 to do research for his dissertation—but ended up staying, when George Washington University offered him an assistant professorship in 1969.

George Washington is where Fuller established himself as the pre-eminent analyst of the Washington economy—especially the influence of the federal government, which changed in the wake of Reagan-era budget cuts that decreased the size of the bureaucracy but created a bonanza of contracting and procurement. Fuller found ways to track each piece of federal spending, and how it affected jobs, private investment, and the housing market. He eventually led the university’s urban and regional planning program.

G.W.’s administration, though, was never that supportive. Local issues aren’t much admired in a university full of people who weigh in on issues of more global significance. In the 1980s, G.W. folded the planning program into the business school and stopped funding studies on the city entirely, opting to chase government and non-profit grants instead.

George Mason, on the other hand, saw Fuller—and his top-notch economic models—as a way to put their fledgling school of public policy on the map. They couldn’t offer him a lot more money, or George Washington’s prestige, but they could give him something more important: freedom. “[At G.W.], the faculty didn’t have much independence, where the opposite was the case at Mason, and still is,” Fuller says. “The environment is very permissive, and very encouraging, and as a consequence it’s a very fertile area for faculty of all kinds.”

Fuller’s old employer never replaced the regional expertise it lost when he left.

“George Washington has never seen itself as a local institution. It sees itself as a national institution,” says Garry Young, who heads up the school’s much-reduced Center for Washington Area Studies. “It is fair to say that we ceded a lot of that research. There’s only so much money to pay for this stuff anyway.”

Fuller’s new gig, though, came with a different master. The university pays his $207,000 salary, but he needs to tap clients in order to fund staff and grad students: Mason is not treated with the same generosity as the University of Virginia or Virginia Tech. “In fact, the university wouldn’t exist if Northern Virginia business leaders hadn’t invented it,” Fuller says. “The state didn’t want it. Northern Virginia kept evolving, and they found resources for it.”

In practice, it’s like bartering: The Northern Virginia Association of Realtors, for example, funds a research assistant; in exchange, Fuller and colleague John McClain will make presentations at association meetings and put together a bimonthly research newsletter. (Young says G.W. doesn’t do this because they want their grad students to be able to publish in academic journals, which they typically can’t do with research performed for private groups.)

Sometimes, Fuller lands bigger windfalls. When G.W. tried to steal him back in the early 2000s, retired George Mason president George Johnson got Dwight Schar, a wealthy homebuilder and part-owner of the Redskins, to endow a university chair for a million bucks.

Vice President for Research and Economic Development Roger Stough, who initially recruited Fuller, says the academic-industrial complex is part of George Mason’s competitive advantage. “The strategy for Mason for a long time has been to make itself useful to those interest groups so it could use their wealth to make it prominent among the universities,” he says. “Fitting into the ecology of the region so you can benefit from being a part of it.”

Is there anyone professors aren’t allowed to take money from?

“We wouldn’t take money from the Mafia,” Stough answers. “We would be very careful about taking funding for foreign sources. Social turmoil of any sort, revolutionary-type activities. That doesn’t mean that there aren’t some things where some people might say gee, there might be some question about that.“

Thus, it became Fuller’s mission to be useful.

Every region may have a Stephen Fuller, but Washington isn’t like every region. Divided among three jurisdictions, area planners’ ability to do things is further complicated by the rise or fall of Northern Virginia’s influence in Richmond, the District’s influence on Capitol Hill, and the capacity of Montgomery and Prince George’s counties to get along with each other as well as with their state legislature. To make matters worse, there is no empowered regional body—like New York and New Jersey’s Port Authority—to make them play nice.

It’s a set-up that frustrates developers, who just want the region to cooperate on infrastructure projects to serve the office parks and residential towers they need to keep building. As Exhibit A, Fuller remembers the mid-1990s fight over the Techway Bridge, which would have eased the commute from Reston to Gaithersburg with a four-to-six lane highway over the Potomac River. Smart growth types lambasted the project as an unnecessary sprawl machine, but Fuller says it actually failed because Maryland officials thought it would make it too easy to get to Dulles International Airport, stealing traffic away from BWI. (“None of these are really good reasons,” he says. “No other region in America that has this kind of coordinating problem.”)

Meanwhile, Fuller had been doing housing market research that found the region would have 200,000 more jobs than places for people to live by 2025, in large part because elected officials haven’t been willing to push local jurisdictions away from zoning restrictions that keep housing density low. And he fretted that without serious attention to the problem, Washington’s economy could be surpassed in size by places like Dallas and Atlanta—certainly a good talking point to take to people whose pride and profit margins are tied to the relative positioning of their home turf.

At the same time, Fuller was thinking about the future of his own center at George Mason.

“He said he was worried, because a lot of the old line people who had supported him were not as active as they were, and there didn’t seem to be any of the next generation who realized the importance of this,” says Bob Buchanan.

So in 2006, Fuller got together with one of his biggest supporters—attorney and Fairfax County real estate mogul Til Hazel, who built Tysons Corner—and came up with the 2030 Group: A collection of 20 local business leaders who would each kick in $20,000 for five years to fund research and outreach that would support regional transportation and infrastructure improvements. Nearly $300,000 of the money went to the Center for Regional Analysis. The broader business community was invited, but the ones who ultimately threw down were those whose fortunes were tied to the soil.

“The fact that it is dominated by people in real estate says something about their commitment,” Fuller says. “They’re third, fourth generation families. They’re paying attention to this region like most businesses don’t. There are corporate leaders in other cities. We don’t have big corporate leaders. We have very wealthy corporations, but they don’t show up for any of these meetings.”

The group launched with a splashy event at the National Press Club featuring studies about job growth and regional governance. Fuller, along with University of Maryland professor Jacques Gansler, lent enough name-brand cachet to soften the perception that a group of heavy hitters was just trying to bully regional governments into acting in their interests.

“I think we found that Steve’s credibility was important so that people did appreciate the academic credentials, and the modeling and the standards he uses,” Buchanan says.

But the brash announcement still put the establishment on edge—the group had shunned existing regional organizations because the 2030sters believed the older groups were inadequate. The Greater Washington Board of Trade has lost membership and influence over the years, while the Metropolitan Washington Council of Governments (known as “COG”) has always lacked teeth, as well as much in the way of independent spending authority.

“Basically, the political world is controlled by the anti-growth people,” said Hazel at the press conference. “We can’t let the ‘antis’ control the world.”

But those who had worked on regional planning for some time thought members of the 2030 Group just hadn’t liked the outcome, and were trying to take decisionmakers back toward highways over dense, transit-oriented development. “I’m tired of hearing about them,” snapped Coalition for Smarter Growth director Stewart Schwartz last summer. “The 2030 Group acts like nothing is happening, and no one has a plan for the future. Darn it, we do. Clearly, the 2030 Group is a return to the past.” COG sent the 2030 Group a prickly letter suggesting that it could best help by throwing its weight behind the Region Forward 2050 initiative, an aspirational plan drafted in 2009 and endorsed by a variety of local players.

Schwartz was particularly frustrated with Fuller, who had also participated in the Region Forward 2050 planning, and now seemed to disregard it. Fuller says the issues are apples and oranges.

“There’s no economic basis for 2050. It’s a wish list,” he says derisively. “It’s very valuable, it sets goals for the region, but there’s nothing in it that says what kind of housing we’re gonna need, who’s going to pay for this, and how is it going to be achieved.”

Those things, of course, can only be achieved by people with money.

Fuller’s 2030 Group adventure raises the question: Given the financial pressures on a fee-based research center, does he just tell people what they want to hear? It’s a critique that gets tossed at many economists.

“I think sometimes there’s a perception that Steve has been overly optimistic in his forecasts,” says Dave Robertson, executive director of the Council of Governments and a former student of Fuller’s at George Washington. “My guess is it’s closer to right than not.”

Some of that perception could be rooted in Fuller’s projections of massive regional growth as a result of spending on the Iraq war, which never quite came to fruition. It may also come from the fact that there is always an upside to forecasting in the Washington region—the federal government keeps the lows from getting too low, and makes happy projections a generally defensible bet. To be fair, he did sound notes of caution during the go-go years of 2005 and 2006.

But Fuller knows his reputation. “Someone told me the other night that they discount whatever I say by 10 percent,” Fuller says, noting that most economists are pessimistic and the media is always reporting negative news. “I’m a glass-is-half-full person about life. And I’m trying to provide some balance.” He prefers to say he’s “enthusiastic,” not optimistic; either way he says he looks at data analytically.

Then there are the studies that just pay the bills: Industry groups need data to support their interests, and Fuller can supply it. He did work for the Capital-to-Capital Coalition, which used his economic analysis to support United Airlines’ bid for a nonstop air route between D.C. and Beijing. In 2003, he performed a study for the pro-development Citizens for Property Rights concluding that density restrictions put in place for environmental purposes had impeded Loudoun County’s economic growth. In 2004, the Corcoran Gallery of Art—of which Til Hazel is a board member—commissioned a study on the economic impact of its proposed expansion (the verdict was positive).

That’s not to say Fuller fudges the numbers. But it’s probably fair to say that paying gigs like that wouldn’t come in the first place if the client didn’t expect a certain result.

To Fuller, it makes perfect sense to just answer the questions that are asked.

One of Fuller’s side jobs is serving as an expert witness in court cases, many of which are brought by developers against local governments that don’t want to allow denser growth. Fuller makes the case for the positive economic impact of rezoning. The one he found most exciting, though, was testifying in the trial of serial murderer John Lee Muhammad. The prosecution charged him with economic terrorism, and brought in Fuller to talk about how the local economy had suffered because people were too afraid to go outside and shop. Asked whether sales had been depressed, Fuller answered yes. What he didn’t say was that sales rebounded immediately afterwards, leaving no net effect on retailers. Muhammad was convicted.

Why didn’t he add that key bit of context? “You’re always counseled on the stand: Don’t answer a question you haven’t been asked,” Fuller explains. “You can find statistics to support almost anything.”

And then there was Fuller’s brief flirtation with Walmart, which wanted to develop an economic indicator based on what “Walmart moms” were thinking. The company ultimately decided not to go forward with it, but Fuller was intrigued by the idea of getting all the data Walmart had gathered on its female shoppers—as well as by the national exposure. And he can see the gigantic retailer’s pros and cons.

“If I were asked to make a case for it, I could make a really strong case for it, and if I were asked to make a strong case against it, I could make a really strong case against it. You do what you are asked to do, and you don’t answer other questions,” he says. “I still like to pick the side that I’m happier with.”

Despite the rarefied circles he inhabits, Fuller remains, at base, a teacher. It’s why he likes talking to reporters so much.

Last September, we sat so long in his heavily upholstered office on the ground floor of a Rosslyn condo building—he lives with his third wife, an executive at Human Genome Sciences, in an upstairs unit with sweeping views of the Washington Monument—that the room’s three chiming clocks went off multiple times before I left, forcing brief pauses in the conversation. (There are two others in his residence.)

“I used to think I could educate people,” Fuller says, his legs crossed, in an armchair. “So when I’d get the same reporter calling me over again, I’d explain why unemployment’s going to go up, and how you understand whether it’s a problem or not.”

“I go through this, and then I get the same question the next month,” he continues. “I learned a long time ago, your job is to figure out whatever it is you’re writing about and move on to the next story, you’re not supposed to remember everything you write about. But I think about you as a student, and I try to educate you.”

His actual pupils, of course, are a different story. He teaches a handful of grad students each semester, many of whom are from foreign countries. He piles on the reading assignments every week. When they’re less than chatty in class, he easily fills the silences, walking engagingly and patiently through a regional economy’s component parts.

But Fuller’s professorial mien in the classroom doesn’t mean that his center at George Mason shies away from normativity. One of their causes has long been the need for more affordable and workforce housing. Neither Fuller nor his partner John McClain—who does a fair amount of speaking engagements and media hits himself—are shy about telling local jurisdictions they need to allow more units per acre, and developers that they need to build them.

“I was totally not restrained from saying that the fact that housing prices have gone down, and the housing bubble burst and things got bad, we still have an issue in terms of providing enough housing to people that’s affordable who need to live close to where their jobs are,” McClain says. “So in terms of public policy, there’s still a lot of work to be done. The market hasn’t solved it for you, it’s still there.”

And sometimes, the NIMBY resistance really bothers them. From the window of his office in George Mason’s shiny new academic building in Clarendon, McClain points out one of the worst examples: A church-led, Arlington County-funded housing project that local groups had held up for five years on constitutional grounds. “It was really just because the local residents didn’t want more affordable housing,” McClain says.

It’s a struggle, sometimes, to get people to think of themselves as citizens of a region defined by its natural economic boundaries, not artificial political ones. It’s been Fuller’s life’s work, and he’s retiring soon. So he’s even more eager to get the message out.

“This city is laid out closer to Los Angeles. It’s an automobile-based city, it’s not a northeastern city,” Fuller says. “People have a hard time thinking urban. They don’t think they’re in a city with five and a half million people. They haven’t figured this out yet, that this is a big place. The future’s gonna happen, and we’re just not ready for it.”

Clinton Climate Initiative, C40 Cities Climate Leadership Group Expand Partnership

The William J. Clinton Foundation has announced an expansion of the alliance between the C40 Cities Climate Leadership Group (C40) — a global coalition of cities working to reduce urban carbon emissions and adapt to climate change — and the Clinton Climate Initiative Cities Program (CCI).

CCI and C40 have been working together since 2006, but the new agreement will bring increased resources and improved infrastructure to the combined organization while expanding the number of cities participating in the coalition. According to the New York Times, the newly combined organization is expected to have a budget of about $15 million, a staff of seventy, and will have its main offices in New York, Los Angeles, and London.

Although cities occupy just 2 percent of the Earth's land mass, they are home to more than 50 percent of its population, account for more than two-thirds of its energy consumption, and generate over 70 percent of its carbon emissions. Given these statistics, former President Clinton and New York City mayor Michael R. Bloomberg, chair of the C40 Group, believe that cities have the potential to be one of the greatest drivers of climate change action.

"Cities around the world play an essential role in addressing climate change. I've been honored by the progress that we have achieved since 2006, when my foundation was invited to assist forty of the largest cities in the world with energy efficient buildings, improved transportation, outdoor lighting, and waste management," said Clinton. "Together we are proving it is possible to create jobs and grow economies through reduced emissions. By combining forces with the C40, I believe the CCI Cities Program can continue to expand this work and make an even greater impact."

“President Clinton and Mayor Bloomberg Join Forces to Combat Climate Change.” William J. Clinton Foundation Press Release 4/13/11.

Barbaro, Michael. “Bloomberg and Clinton Merge Climate Groups.” New York Times 4/13/11.

Primary Subject: Environment
Secondary Subject(s): International Affairs/Development
Location(s): International


Monday, April 11, 2011

Partners for Livable Communities


Today’s economies are in transition, not only due to the current economic and political climate, but to our physical climate. Pollution, carbon emissions and climate change are realities threatening communities around the world. Local economies unable to adapt to these phenomenon are at risk of becoming obsolete. In 2009, acutely aware of the intimate ties between a region’s economy and other quality of life issues such as social equity and mobility, Partners for Livable Communities embarked on a major new agenda: The Economics of Sustainability, a program incorporating ‘sustainability’ into an ever-evolving definition of livability. This initiative explores how community leaders, faced with the challenge of ensuring the future strength of their economies and local quality of life, can employ creative new agendas that not only help reverse the effects of environmental degradation but leverage the occasion for valuable economic and social gain.

This new program is largely based on Partners’ 1985 publication the Economics of Amenity, which asserted that quality of life amenities played a critical role in the economic future of our communities. Today, this is not only an accepted idea, but has become the bedrock of many successful community revitalization projects and a critical part of what most people understand as economic development.

Partners believes the same opportunity can now be found in the application of green business strategies. Through programming and innovative partnerships, Partners has taken bold steps to showcase environmental sustainability as a powerful tool in strengthening economies and improving local quality of life.

Thursday, April 07, 2011

Viva la Revolucion!

Viva la Revolucion!
Originally uploaded by heydee

old school to new school pants are still relevant.

Urban poverty and vulnerability to climate change in Latin America

This paper considers who within the urban population of Latin America is most at risk from the likely impacts of climate change over the next few decades. It also considers how this risk is linked to poverty and to the inadequacies in city and municipal governments. It discusses those who live or work in locations most at risk (including those lacking the needed infrastructure); those who lack knowledge and capacity to adapt; those whose homes and neighbourhoods face the greatest risks when impacts occur; and those who are least able to cope with the impacts (for instance, from injury, death and loss of property and income). Adaptation to climate change cannot eliminate many of the extreme weather risks, so it needs to limit their impacts through good disaster preparedness and post-disaster response. This paper also discusses the measures currently underway that address the vulnerability of urban populations to extreme weather, and how these measures can contribute to building resilience to the impacts of climate change.

Jorgelina Hardoy
IIED-América Latina, Av. General Paz 1180, (1429) Buenos Aires, Argentina,
Gustavo Pandiella
IIED-América Latina, Av. General Paz 1180, (1429) Buenos Aires, Argentina,

How Did Economists Get It So Wrong?


Published by the NYTimes September 2, 2009


It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.


The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.

This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.

It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism. The neoclassical revival was initially led by Milton Friedman of the University of Chicago, who asserted as early as 1953 that neoclassical economics works well enough as a description of the way the economy actually functions to be “both extremely fruitful and deserving of much confidence.” But what about depressions?

Friedman’s counterattack against Keynes began with the doctrine known as monetarism. Monetarists didn’t disagree in principle with the idea that a market economy needs deliberate stabilization. “We are all Keynesians now,” Friedman once said, although he later claimed he was quoted out of context. Monetarists asserted, however, that a very limited, circumscribed form of government intervention — namely, instructing central banks to keep the nation’s money supply, the sum of cash in circulation and bank deposits, growing on a steady path — is all that’s required to prevent depressions. Famously, Friedman and his collaborator, Anna Schwartz, argued that if the Federal Reserve had done its job properly, the Great Depression would not have happened. Later, Friedman made a compelling case against any deliberate effort by government to push unemployment below its “natural” level (currently thought to be about 4.8 percent in the United States): excessively expansionary policies, he predicted, would lead to a combination of inflation and high unemployment — a prediction that was borne out by the stagflation of the 1970s, which greatly advanced the credibility of the anti-Keynesian movement.

Eventually, however, the anti-Keynesian counterrevolution went far beyond Friedman’s position, which came to seem relatively moderate compared with what his successors were saying. Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good.

Not all macroeconomists were willing to go down this road: many became self-described New Keynesians, who continued to believe in an active role for the government. Yet even they mostly accepted the notion that investors and consumers are rational and that markets generally get it right.

Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.


In the 1930s, financial markets, for obvious reasons, didn’t get much respect. Keynes compared them to “those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, nor even those that he thinks likeliest to catch the fancy of the other competitors.”

And Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

By 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the “efficient-market hypothesis,” promulgated by Eugene Fama of the University of Chicago, which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information. (The price of a company’s stock, for example, always accurately reflects the company’s value given the information available on the company’s earnings, its business prospects and so on.) And by the 1980s, finance economists, notably Michael Jensen of the Harvard Business School, were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino.”

It’s hard to argue that this transformation in the profession was driven by events. True, the memory of 1929 was gradually receding, but there continued to be bull markets, with widespread tales of speculative excess, followed by bear markets. In 1973-4, for example, stocks lost 48 percent of their value. And the 1987 stock crash, in which the Dow plunged nearly 23 percent in a day for no clear reason, should have raised at least a few doubts about market rationality.

These events, however, which Keynes would have considered evidence of the unreliability of markets, did little to blunt the force of a beautiful idea. The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.

To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.

But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”

By October of last year, however, Greenspan was admitting that he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.” Since this collapse of the intellectual edifice was also a collapse of real-world markets, the result was a severe recession — the worst, by many measures, since the Great Depression. What should policy makers do? Unfortunately, macroeconomics, which should have been providing clear guidance about how to address the slumping economy, was in its own state of disarray.


“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.” So wrote John Maynard Keynes in an essay titled “The Great Slump of 1930,” in which he tried to explain the catastrophe then overtaking the world. And the world’s possibilities of wealth did indeed run to waste for a long time; it took World War II to bring the Great Depression to a definitive end.

Why was Keynes’s diagnosis of the Great Depression as a “colossal muddle” so compelling at first? And why did economics, circa 1975, divide into opposing camps over the value of Keynes’s views?

I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.

This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.

Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .

In short, the co-op fell into a recession.

O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.

Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.

Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.

But don’t recessions look like periods in which there just isn’t enough demand to employ everyone willing to work? Appearances can be deceiving, say the freshwater theorists. Sound economics, in their view, says that overall failures of demand can’t happen — and that means that they don’t. Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.

Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion.

By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.

Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.

Meanwhile, saltwater economists balked. Where the freshwater economists were purists, saltwater economists were pragmatists. While economists like N. Gregory Mankiw at Harvard, Olivier Blanchard at M.I.T. and David Romer at the University of California, Berkeley, acknowledged that it was hard to reconcile a Keynesian demand-side view of recessions with neoclassical theory, they found the evidence that recessions are, in fact, demand-driven too compelling to reject. So they were willing to deviate from the assumption of perfect markets or perfect rationality, or both, adding enough imperfections to accommodate a more or less Keynesian view of recessions. And in the saltwater view, active policy to fight recessions remained desirable.

But the self-described New Keynesian economists weren’t immune to the charms of rational individuals and perfect markets. They tried to keep their deviations from neoclassical orthodoxy as limited as possible. This meant that there was no room in the prevailing models for such things as bubbles and banking-system collapse. The fact that such things continued to happen in the real world — there was a terrible financial and macroeconomic crisis in much of Asia in 1997-8 and a depression-level slump in Argentina in 2002 — wasn’t reflected in the mainstream of New Keynesian thinking.

Even so, you might have thought that the differing worldviews of freshwater and saltwater economists would have put them constantly at loggerheads over economic policy. Somewhat surprisingly, however, between around 1985 and 2007 the disputes between freshwater and saltwater economists were mainly about theory, not action. The reason, I believe, is that New Keynesians, unlike the original Keynesians, didn’t think fiscal policy — changes in government spending or taxes — was needed to fight recessions. They believed that monetary policy, administered by the technocrats at the Fed, could provide whatever remedies the economy needed. At a 90th birthday celebration for Milton Friedman, Ben Bernanke, formerly a more or less New Keynesian professor at Princeton, and by then a member of the Fed’s governing board, declared of the Great Depression: “You’re right. We did it. We’re very sorry. But thanks to you, it won’t happen again.” The clear message was that all you need to avoid depressions is a smarter Fed.

And as long as macroeconomic policy was left in the hands of the maestro Greenspan, without Keynesian-type stimulus programs, freshwater economists found little to complain about. (They didn’t believe that monetary policy did any good, but they didn’t believe it did any harm, either.)

It would take a crisis to reveal both how little common ground there was and how Panglossian even New Keynesian economics had become.


In recent, rueful economics discussions, an all-purpose punch line has become “nobody could have predicted. . . .” It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains.

Take, for example, the precipitous rise and fall of housing prices. Some economists, notably Robert Shiller, did identify the bubble and warn of painful consequences if it were to burst. Yet key policy makers failed to see the obvious. In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

How did they miss the bubble? To be fair, interest rates were unusually low, possibly explaining part of the price rise. It may be that Greenspan and Bernanke also wanted to celebrate the Fed’s success in pulling the economy out of the 2001 recession; conceding that much of that success rested on the creation of a monstrous bubble would have placed a damper on the festivities.

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing. And the finance theorists were even more adamant on this point. In a 2007 interview, Eugene Fama, the father of the efficient-market hypothesis, declared that “the word ‘bubble’ drives me nuts,” and went on to explain why we can trust the housing market: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.”

Indeed, home buyers generally do carefully compare prices — that is, they compare the price of their potential purchase with the prices of other houses. But this says nothing about whether the overall price of houses is justified. It’s ketchup economics, again: because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right.

In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.

Now that the undiagnosed bubble has burst, the true riskiness of supposedly safe assets has been revealed and the financial system has demonstrated its fragility. U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940. So what guidance does modern economics have to offer in our current predicament? And should we trust it?


Between 1985 and 2007 a false peace settled over the field of macroeconomics. There hadn’t been any real convergence of views between the saltwater and freshwater factions. But these were the years of the Great Moderation — an extended period during which inflation was subdued and recessions were relatively mild. Saltwater economists believed that the Federal Reserve had everything under control. Fresh­water economists didn’t think the Fed’s actions were actually beneficial, but they were willing to let matters lie.

But the crisis ended the phony peace. Suddenly the narrow, technocratic policies both sides were willing to accept were no longer sufficient — and the need for a broader policy response brought the old conflicts out into the open, fiercer than ever.

Why weren’t those narrow, technocratic policies sufficient? The answer, in a word, is zero.

During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.

But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.

Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.

Such Keynesian thinking underlies the Obama administration’s economic policies — and the freshwater economists are furious. For 25 or so years they tolerated the Fed’s efforts to manage the economy, but a full-blown Keynesian resurgence was something entirely different. Back in 1980, Lucas, of the University of Chicago, wrote that Keynesian economics was so ludicrous that “at research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another.” Admitting that Keynes was largely right, after all, would be too humiliating a comedown.

And so Chicago’s Cochrane, outraged at the idea that government spending could mitigate the latest recession, declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)

Meanwhile, saltwater economists, who had comforted themselves with the belief that the great divide in macroeconomics was narrowing, were shocked to realize that freshwater economists hadn’t been listening at all. Freshwater economists who inveighed against the stimulus didn’t sound like scholars who had weighed Keynesian arguments and found them wanting. Rather, they sounded like people who had no idea what Keynesian economics was about, who were resurrecting pre-1930 fallacies in the belief that they were saying something new and profound.

And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.

And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?

The state of macro, in short, is not good. So where does the profession go from here?


Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.

There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance. Practitioners of this approach emphasize two things. First, many real-world investors bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic. Second, even those who try to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd.

On the first point: even during the heyday of the efficient-market hypothesis, it seemed obvious that many real-world investors aren’t as rational as the prevailing models assumed. Larry Summers once began a paper on finance by declaring: “THERE ARE IDIOTS. Look around.” But what kind of idiots (the preferred term in the academic literature, actually, is “noise traders”) are we talking about? Behavioral finance, drawing on the broader movement known as behavioral economics, tries to answer that question by relating the apparent irrationality of investors to known biases in human cognition, like the tendency to care more about small losses than small gains or the tendency to extrapolate too readily from small samples (e.g., assuming that because home prices rose in the past few years, they’ll keep on rising).

Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.

On the second point: suppose that there are, indeed, idiots. How much do they matter? Not much, argued Milton Friedman in an influential 1953 paper: smart investors will make money by buying when the idiots sell and selling when they buy and will stabilize markets in the process. But the second strand of behavioral finance says that Friedman was wrong, that financial markets are sometimes highly unstable, and right now that view seems hard to reject.

Probably the most influential paper in this vein was a 1997 publication by Andrei Shleifer of Harvard and Robert Vishny of Chicago, which amounted to a formalization of the old line that “the market can stay irrational longer than you can stay solvent.” As they pointed out, arbitrageurs — the people who are supposed to buy low and sell high — need capital to do their jobs. And a severe plunge in asset prices, even if it makes no sense in terms of fundamentals, tends to deplete that capital. As a result, the smart money is forced out of the market, and prices may go into a downward spiral.

The spread of the current financial crisis seemed almost like an object lesson in the perils of financial instability. And the general ideas underlying models of financial instability have proved highly relevant to economic policy: a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse.

Meanwhile, what about macroeconomics? Recent events have pretty decisively refuted the idea that recessions are an optimal response to fluctuations in the rate of technological progress; a more or less Keynesian view is the only plausible game in town. Yet standard New Keynesian models left no room for a crisis like the one we’re having, because those models generally accepted the efficient-market view of the financial sector.

There were some exceptions. One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole. But until now the impact of dysfunctional finance hasn’t been at the core even of Keynesian economics. Clearly, that has to change.


So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.

Paul Krugman is a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.”

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