Romney’s Lead Economist Urges Policies That Will Cause the Next Financial Crisis
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Presidential nominees of either U.S. party can secure economic advice from any economist in the world. This makes it all the more amazing and sad that they choose economists with track records of disastrous policy advice. Bill Clinton chose Robert Rubin, George W. Bush chose Gregory Mankiw. Obama chose Lawrence Summers. And Mitt Romney has chosen Greg Mankiw. Rubin and Summers led the Clinton administration’s efforts to gut financial regulation, while Mankiw led the efforts under Bush. Collectively, these efforts created the criminogenic environment that produced widespread financial fraud (also known as “green slime”).
I have often emphasized the importance of George Akerlof and Paul Romer’s 1993 article (“Looting: the Economic Underworld of Bankruptcy for Profit”) to understand the economics of why we suffer epidemics of accounting control fraud and recurrent, intensifying financial crises. Mankiw was the “discussant” when Akerlof and Romer formally presented that paper. I was also present at their invitation, and I can report that Mankiw was unconcerned about the issue of looting in the discussion of the Savings and Loan crisis. It was my first introduction to Mankiw's stated morality: “It would be irrational for savings and loans [CEOs] not to loot.” I was appalled, but my outrage at Mankiw paled when I observed that the members of the audience -- professional economists -- were not even made visibly uncomfortable by such a depraved response to elite fraud. CEOs owe fiduciary duties to the shareholders, and Mankiw’s response to the findings that CEOs were looting their shareholders was to praise the rationality of the fraudulent CEOs. If you don’t loot you, you’re insane. One cannot compete with "theoclassical" economists’ unintentional self-parody.
Mankiw and "Green Slime"
Recently, Mankiw wrote a column in the New York Times praising competition among governments, which is a good place to analyze his faulty philosophy. I start with an historical note that falsifies Mankiw’s claim that competition among governments is desirable. Mankiw supports his claim by noting that the “founding fathers were no fools.” In an odd way, we can thank our immensely successful Constitution for avoiding the demonstrated disaster produced by governmental competition engendered by the Articles of Confederation. The States competed vigorously – to aid their merchants at the expense of “foreign” States (their neighboring States). They competed to impose more destructive internal tariffs (and other trade barriers) so aggressively that they crippled commerce. This is one of the principal defects that led the committee appointed to reform the Articles to instead junk them and adopt our Constitution. The upshot was that the Constitution created a nation instead of a confederation. The interstate commerce and supremacy clauses were key provisions of the new Constitution because the framers knew that competition among the States and the new federal government could threaten our nation’s survival.
In the context of public finance and financial regulation, Mankiw’s praise for such competition demonstrates that he has learned nothing useful from our recurrent crises. Competition among governments in financial regulation leads to the criminogenic financial deregulation that produces the epidemics of green slime that drive our financial crises. I have recently explained, in the context of opposing the JOBS Act, why the “regulatory race to the bottom” is an oxymoron designed by regular morons.
Mankiw read Akerlof and Romer 19 years ago, but he missed what they were saying, even though they ended their article with this paragraph in order to emphasize their key policy message:
“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (George Akerlof & Paul Romer.1993: 60).