Tuesday, September 8, 2009

Still Confused About the Economic Crisis? Economists Are Too

As the economic crisis reaches its one year anniversary, mixed messages continue coming from the economic "experts" about what exactly is happening in the global economy and for how much longer. Dominique Strauss Kahn, Managing Director of the IMF, claimed recently in a Italian newspaper that economic recovery could come a full quarter earlier than expected.
"For the (global) economy, we have been saying for a year that the recovery will come in the first half of 2010. It might even be a quarter ahead and that would be a good thing,"
UNCTAD on the other hand has warned recovery is not around the corner and called for the creation of a an alternative world reserve system that would replace the supremacy of the US dollar with several currencies. UNCTAD also called for tighter controls on global financial flows.
''Tumbling profits in the real economy, previous over-investment in real estate and rising unemployment will continue to constrain private consumption and investment for the foreseeable future,''
What accounts for the two very different diagnostics on the global economic crisis? There is little consensus among economists on the health of the global economy, namely because they can't agree on any complete diagnosis of the disease. How international economists forecast our economic future depends on whether or not they believe the global recession is primarily financial in nature or a much deeper structural crisis in production, and consumption of goods and services.

Governments are being asked to choose between two significantly differing views about how the global economy is functioning and therefore what sets of policies to implement to navigate the storm. Though economists love to claim complete empirical objectivity when providing policy advice, the two alternative paradigms on the "Great Recession" highlights the all important role that politics and ideology play in shaping macroeconomic change. Paul Krugman's recent analysis on the forecasting of macroeconomists is on point. The crisis in the economics profession may be just as great if not greater than the crisis in the real or financial economy---depending on your point-of-view.

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