Insights From Leading Economists, Overheard At MIT

An impressive group of economists — one that included numerous MIT alumni, including a number of winners of the Nobel Memorial Prize in Economic Sciences — assembled at MIT Thursday for an economics and finance symposium that is part of MIT’s 150th anniversary celebration. The economists provided lots of interesting insights into the state of the economy and the discipline of economics. Here are just four of those many insights, in brief:

• On the effect of the economy’s woes on jobs in small businesses: MIT Professor Peter Diamond noted that a great deal of employment is with small businesses. And, he explained, the financial issues facing banks and households affect the financing of small businesses more than large corporations, since a lot of small businesses depend on banks and household wealth for financing. The result? “Employment growth by small business — relative to employment growth by large business — is way down,” he said.
• On causes of the U.S.’s current economic challenges: In analyzing the current economic situation in the U.S., Stanford professor Robert Hall emphasized that a key cause of the current “long slump” was regulatory lapses, such as the U.S. Security and Exchange Commission’s 2004 decision to remove capital requirements for investment banks. “It’s entirely the result of a very substantial enforcement policy lapse, of allowing extremely highly leveraged financial institutions to have important roles in the economy without proper regulation,”  Hall argued.
• On Obama’s stimulus package: Robert Gordon, a professor at Northwestern University, pointed out that the Obama stimulus did not increase the share of government spending in potential output, because the increase in spending by the federal government wasn’t enough to offset the decline in state and local government spending that was also going on. State and local governments in the U.S., he said, have shed 200,000 jobs in the past year — and  they’re just beginning. Paul Krugman of Princeton University, who joined the panel discussion from New York, agreed that the stimulus didn’t amount to any significant increase in government spending.
•  On the challenges of stimulus: Harvard Professor N. Gregory Mankiw observed that we don’t know that much about how best to do discretionary fiscal policy. He said he personally is somewhat skeptical about infrastructure projects as a tool for achieving short-run stabilization. For one thing, it takes a very, very long time to put a serious-sized infrastructure project in place, Mankiw pointed out.

Want to learn more?  You can view videos from Thursday’s session. (Diamond and Hall were among the panelists in a morning panel on the evolution of macroeconomics, while Gordon, Krugman and Mankiw were among the panelists on an afternoon panel on macroeconomic policy.)

The economics and finance symposium continued Friday, with a focus on finance and a group of speakers that included renowned financial experts such as Robert Merton and  Myron Scholes. You can also view videos of Friday’s sessions, including a keynote address by MIT Sloan’s Merton, in which he proposed a new approach to retirement savings.