Economic Recovery Guidance

Friend-of-Full-Disclosure David Smick reviews two new books in The Washington Post : Robert J. Samuelson’s “The Great Inflation and Its Aftermath” and Paul Krugman’s “The Return of Depression Economics and the Crisis of 2008.”

The review serves up strong guidance to President-elect Barack Obama and his economic policymakers: Paul A. Volcker, who will head the White House Economic Recovery Advisory Board; White House National Economic Council head Larry Summers; incoming Treasury Secretary Timothy Geithner; and Christina Romer, the next director of the Council of Economic Advisors.

According to Smick, the books suggest that “economics should be viewed less as a science than as a social art.” As a result, the speed with which the global economy recovers will depend more on psychology – the extent to which Obama can “restore confidence and optimism” – and less on tinkering with interest rates and fiscal stimulus packages.

“The world desperately needs a big-think financial doctrine,” Smick writes. “The problem is not a lack of capital or liquidity, but a lack of trust in the financial system. Team Obama needs to use its considerable brainpower to outline nothing less than a global financial architecture for the 21st century. This, however, will be a process of muddling through, a sorting out of possible solutions by trial and error. As Samuelson and Krugman show, there are no quick-fix panaceas. The age of hubris is, or should be, over.”