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Disappointment With Economists (It’s Cyclical)

What sort of crisis is the West living through now? Has the response to the crisis been correct? The answer to the second question depends heavily on the answer to the first question. If there's been a misdiagnosis of the type of crisis it is likely that the response to the crisis will not be appropriate, because different remedies apply to different crises.

One way of looking at the problem is to say there are short business cycles and long structural cycles. Short cycle recession could be self-correcting; it is much easier when there is genuinely non-discriminatory state regulation to protect market freedoms. Short cycle recession can also be amenable to limited low-risk tinkering with the levers that government has at its disposal (preferably these would be predictable rules-based monetary and fiscal policy, public investment projects that pass true cost-benefit tests, automatic stabilisers of the safety-net variety, and even a bailout or two in exceptional cases).

But there is a danger of misdiagnosis when symptoms or surface phenomena are treated in practice as though they were the underlying causes. Policy makers might be led to believe that by tackling the highly visible and most painful symptoms in isolation they will quickly solve the problem. Examples include housing bubbles, bank insolvency or illiquidity, stock market and price fluctuations, unemployment, or depressing changes in total output and consumption.

Any such analysis is complicated even further by the fact that multiple kinds of cycles exist at the same time. Short business cycles overlap and get tangled up with longer structural cycles. In these situations, and especially across so many types of fluctuation, only a few basic rules will usefully apply to a solution.