SEPTEMBER 4 2009

Paul Krugman, NYT: How Did Economists Get It So Wrong? 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. 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. 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.

Kenneth Rogoff, Koreatimes: From Financial Crisis to Debt Crisis? We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the U.S., for example, significantly inflated down its debt in the 1970s. The rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years. Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis. The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.

Murat Tasci, Kyle Fee, Fed Cleveland: The Incidence and Duration of Unemployment over the Business Cycle. Longer durations as a result of lower outflows may reflect a permanent mismatch of skills among the unemployed. Workers who are out of a job for a long time lose skills, and their human capital in general deteriorates. To the extent that this is true, we might expect to have an unemployment rate that stays relatively higher even after the recession. As a matter of fact, looking at every recessionary episode in the post-World War II era, we do see a positive relationship between the fraction of the unemployment increase that is due to a decline in outflows and the magnitude of the decline in unemployment during the recovery. The current downturn might end up being one of the most severe recessions we have experienced in the labor market. Similarly, it is likely to be become one of the longest contractions in employment, hence longer unemployment durations might just be due to the duration of the recession.

Jonathan Hersh, Hans-Joachim Voth, VoxEU: Coffee, consumer choice, and the consequences of Columbus. There is a broad consensus that living standards stagnated for millennia before the Industrial Revolution. This column attributes that conclusion to a measurement error in real wage indices. The introduction of new goods such as coffee, sugar, and tea to England in the 1700s and 1800s dramatically raised living standards – perhaps more than 15%.