I wrote yesterday about my dismay at the failure of Congress to pass the revised rescue package. It is time for economists to own our share of the blame.
We have failed to explain in clear language just what it is that credit markets do, and hence why it is so important that we fix them. (Dani Rodrik agrees.) This failure is all the greater, given the public’s understandable cynicism about Wall Street, the government, and economics. Our failure helps explain why Congressional populists believe that opposing the rescue plan will help their re-election prospects.
I am truly, deeply sorry we failed. Truly. But it’s not too late to remedy the situation. Here’s my first attempt, voiced in a piece on American Public Media’s Marketplace program last night (listen here):
The financial system does something pretty amazing: it converts your savings into productive capital. It’s a bridge between borrowers and lenders. When it works, it’s a beautiful thing: your savings are redirected to help young couples buy houses, entrepreneurs turn ideas into innovations, and employers invest in their workers. … Today’s problem is that the bridge between borrowers and lenders has been washed away. Think of the bailout as infrastructure investment. We need to rebuild that bridge.
In fact, the financial system is so important that the Wall Street whizzes can get insanely rich by taking even just a small sliver of the gains the system generates. And this is part of the problem: these exorbitant pay scales have yielded a pretty raw — and understandable — desire for revenge against the folks who got us into this mess (see the comments thread, here).
But the demand for revenge respects the usual laws of economics: the public wants revenge (refusing the bailout) when it thinks it is cheap. Revenge is in much less demand when it is expensive. (Dan Ariely has more.) My fear is that we have done a poor job in explaining the costs of this revenge. If economists succeed in explaining the role of credit markets in our lives, an informed public can weigh its desire for revenge with the very serious economic consequences of doing nothing. An informed public will help lead Congress to better decisions.
Why have economists failed in our roles as educators? Solving the crisis is not simple, and we have been debating what to do, rather than making the case that we need to do something about these broken financial bridges (thanks to Alex Tabarrok for the metaphor). This debate has been quite useful: the revised rescue plan was much better than the original Paulson plan: we now have real oversight; clearly defined objectives; a chance for taxpayers to share in the gains; and a measured response to the public’s anger about bad C.E.O.’s earning big bucks.
But as Andrew Samwick noted, “Don’t all of us who insisted that Congress be involved and improve upon the Treasury Secretary’s initial proposal look stupid now.”