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Making Sen$e of 2010: Economic Surprises in Store

Looking ahead to 2010, what economic development would surprise you most?

Barry Schwartz

Professor of social theory and social action at Swarthmore College

A century ago, the great biologist Jakob von Uexkull, in writing about what he thought were deep principles of adaptation and evolution, said that in nature, “security is more important than wealth.” What he meant was that adaptations that enhanced chances of survival were favored over adaptations that “enriched” an organism’s experience.

I think he was right. Security is more important than wealth. Americans once understood this, but in the great post-war boom that lasted half a century, we came to take security for granted. We focused on enhancing efficiency, and increasing wealth. We spent everything we had, sure in the belief that tomorrow would be a better day. We became disdainful of government safety nets. Who needed them? Government meddling was just sand in the gears of the engine of market productivity.

Perhaps, the economic meltdown will be brief enough that we will come to regard it as nothing but a gust of wind that introduces a momentary chill into the room, and we’ll soon go back to business-as-usual, spending all we make and investing in anything that has a pulse. But I’m hopeful that this time things are serious enough to make a difference. And what a difference there might be:

–Saving some of what we earn, and ceasing to be the world’s consumer of last — and first — resort;

–Talented people seeking work that improves people’s lives instead of work that improves their own net worth;

–A focus on security and stability rather than “efficiency” as we evaluate market institutions;

–A renewed respect for the many ways that government makes our lives better, by providing security and stability.

I am not optimistic that any of this will happen, and the mindlessness of the current debate about healthcare reform does not inspire much confidence that any of the big changes above are on the way. But if the forecasters are right about how long it will take for employment to recover, there is some reason for hope that this time really will be different, that this time, the downturn will last long enough to scare us into remembering what our grandparents, and evolution knew.

Lynn Stout

Professor of corporate and securities law at UCLA

Perhaps the most unexpected economic development we could see in 2010 would be the U.S. adoption of an excise tax on short-term trading in financial instruments.

From a revenue perspective, such a tax makes a great deal of sense — there’s no question the government could use some money to combat rising deficits. But even more important, a tax on short-term stock, bond and derivative trading makes economic policy sense as a means of combating investor short-termism and socially wasteful speculation.

Financial traders make profits by “buying low and selling high.” Unfortunately, this is not possible unless someone else sells low and buys high. In other words, traders only earn” money because someone else loses it. In the meantime, hedge funds, investment banks, and mutual funds that focus on short-term trading are kept too busy trying to pick other investors’ pockets to focus on more long-term goals, like improving a company’s future performance. Short-term trading as a result contributes not only to wasteful risk-taking, but to investor myopia as well.

Traders typically defend their chosen profession by arguing that short-term trading adds liquidity to markets, and makes sure securities prices accurately reflect the latest information. However, there is shockingly little hard evidence to support the notion that average investors really get much value from such “benefits.”

Meanwhile, logic suggests long-term investors don’t need 100 percent annual stock market turnover to be confident of selling their shares when they retire. Nor do they benefit much from “flash” trading that moves information into prices only a fraction of a second faster than it would otherwise arrive.

The economic and policy benefits of a global excise tax on financial trading are obvious enough that the idea has attracted substantial support across the Atlantic, including the support from both France’s Nicholas Sarkozy and the UK’s Gordon Brown. Unfortunately, in the United States, the idea is probably dead on arrival. Wall Street gets too much money from short-term trading — and U.S. politicians get too much money from Wall Street.

Richard Sylla

Professor of the history of financial institutions and markets and professor of economics at New York University’s Stern School of Business

My biggest surprise in 2010 would be to witness a failure of the U.S. economy to grow at least at its real long-term trend rate of about 3 percent. Add in 1-2 percent inflation, and nominal GDP ought to grow at least 4-5 percent.

As idle resources are put back to work in a recovery from recession, our economy typically has a year or two of growth greater than the long-term trend. Hence, I wouldn’t be surprised if nominal GDP growth in 2010 turned out to be 5-7 percent.

How might we fail to achieve a strong recovery? If, in response to soaring budget deficits and charges of fiscal responsibility, the Obama administration in 2010 delays implementing the current stimulus package and decides against asking for more, the economy might stagnate and unemployment rates could rise from the current 10 percent.

If in response to widespread fears that run-away inflation is right around the corner, the Federal Reserve in 2010 tightens credit and raises interest rates, the strong recovery I expect could be nipped in the bud.

That’s what happened in 1936-1937. The Roosevelt administration decided to be more fiscally responsible and cut back on spending. The Federal Reserve, fearing inflation, tightened credit by forcing banks to hold more required reserves, so the banks stopped lending. After a strong recovery during 1933-1936 from the depths of the Great Depression, the U.S. economy plunged back into the Great Recession in 1937-1938.

Let’s hope our current policy makers have learned from the mistakes made in the mid 1930s and don’t repeat them. I am confident they have.

There will be a time not far off when we will need to make fiscal responsibility and minimal inflation our top priorities in economic policy. But 2010 is not that time. If we avoid repeating the policy mistakes of the mid 1930s, 2010 should be a pretty good year.


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