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Interview with Arnold Kling

We visit with noted writer and economist, Arnold Kling, who questions whether the massive federal bank bailout has done more harm than good.
Interview with Arnold Kling

Arnold Kling

Show Dates

Show 1019: Interview with Arnold Kling

Air date: May 9, 2010



Rob:  For my next guest, many of the efforts to bail out Wall Street, or even the federal government's involvement in rescuing automakers, he believes is just wasted money.

Arnold Kling is an economist and author of several books including,

Unchecked and Unbalanced:  How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy;

And, I had a chance to visit with him before he gave a talk in Tulsa.

Rob:  Dr. Kling, You've described something called economics 2.0...can you tell me exactly what that is?

Arnold Kling:  Yeah sure.  Economics 1.0 describes the allocation of a given amount of resources and we ask, is this sufficient.  And Economics 2.0 asks how is an economy changing over time.  So how is it adaptably efficient because most of the height of our standard of living comes from adaptation over time; innovations, new ideas, new technologies.  So it's adaptation that really determines the standard of living.  And so that's the focus of economics 2.0 is on adaptation.  Another way to look at it is that economics 1.0 looks at what we call the hardware layer of the economy, things that you can count and touch like, you know, number of workers or machines and so on.  Economics 2.0 focus on what we call the software layer which are the ideas and innovations that enable us to get rich and on the other hand, the impediments to prosperity which include predatory government and cultural resistance to learning.

Rob:  So in this new adaptive economy, will we see like we've seen over the past two years with the recent recession, that some attribute to lax regulation and maybe some reckless business practices, in this new adaptive economy will there be the standards to keep that from happening?

Arnold:  Ah, no!  Failure is going to happen in an adaptive economy.  Joseph Schumpeter used the term creative construction.  What we say in our book is that there's been an economic 1.0 level, there's this conflict of, you know, people say, well markets work, let's use markets and other people say, no, markets fail, we need government and what we say is that markets fail and that's why we need markets.  That is, yes, markets fail a lot, there's individual failure, sometimes there's a collective failure as we saw with the financial crisis but the best way for the economy to adapt to the market failures is for markets to sort of pick themselves up and start over.  So new innovators are really what, people are wondering where the next jobs are going to come from, well they'll come from innovations.  Maybe the iPad will create an ecology of innovation around it.  People developing applications for it or more likely it will be something else; some innovation that we haven't thought of.  People still hope for great innovations in biotechnology or innovations in energy and so on.

Rob:  How do we resist what we've done in recent times of privatizing profits then socializing the losses like we've seen in the past years.  What I'm speaking of is the financial bailout.

Arnold:  My concern there is that what we have in Wall Street and in Washington is sort of the equivalent of the country club.  Where the country club members are very supportive of one another and don't recognize people on the outside.  Because the people who say the financial crisis coming were real outsiders.  These were people who didn't have the right ability to get along at places like Goldman-Sacs and so on.  It's interesting as you read the books that are coming out about the hedge fund managers who bet against the bad mortgages, these were people who just were not part of the this country club.  And some how we've got to break this country club control over finance and government so that we really benefit from points of view that are outside this sort of this insider country club point of view.

Rob:  I'd like to hear what you think about a recent comment by former presidential candidate, Ron Paul, when he said that there's really not a dimes worth of difference between Republications and Democrats and he lumped them all into a group called, corporatists.

Arnold:  Well that phrase, corporatists, is, I think it's the biggest concern that I have right now about where the economy is headed and where Washington is headed.  That is a real focus on just the few large financial firms and central control from government and I think that term is an apt term.  I hope that there will turn out to be differences between Democrats and Republicans but one of the new books that I have, sort of assumes that that will be a problem that neither party really has, ultimately, a solution.  That what we really need is to think about ways to decentralize government and create, and this is kind of a far out idea, it may almost sound like science fiction, but forms of competitive government.  And ideas I have along those lines would be letting people allocate their own tax money to the charitable causes of their choice as opposed to having it allocated by Congress for them.  So these are kind of far out ideas to sort of make government a more competitive process.  Make it easier for people to opt into different governments, different regulatory structures and to sort of make use of what Detokville called the American tendency to form private associations.  We're a great country for forming private associations to solve problems.  We don't necessarily need a central government trying to solve every problem.  In fact, the, I see the central government as being very clumsy in it's attempt to solve problems.

Rob:  While politically unpopular, and certainly immeasurable tragedy on a personal level, have there been too many home foreclosures or maybe not enough home foreclosures?

Arnold:  My view is that we need more.  That's actually what I said at the hearing is that by trying to mitigate the crisis, they're actually keeping the crisis in front of us when we really need it to be behind us.  You know, obviously, foreclosure is a painful process for individuals, but people can move on and there are so many people who stand to benefit from having the crisis behind us.  I mean, above all there are people who could buy homes and here the government is trying to do it's best to sort of keep home prices up so that home buyers in some sense are being cheated.  It's as if the only people that the government cares about are people who, right now, want to sell.  But for everyone who wants to sell right now, there are people who want to buy and you're not making them better off by trying to keep home prices up.  And I think people in general will be in better shape when there's a natural balance of supply and demand and people don't have to think about well how many houses in this neighborhood have people who are just on the borderline between foreclosure and not.  And one of the things that these loan modifications do is they keep them right on the borderline.  A lot of these people are going to default again and they're just being set up to fail.  That's not a productive situation.

Rob:  Like many states, Oklahoma is facing a fairly significant budget gap and as severe as it is, it would almost be three times as large if it wasn't for the stimulus dollars that are coming in to all the states and here in Oklahoma.  While the stimulus package has been criticized for not creating jobs has it in fact saved a lot of jobs certainly in the public sector?

Arnold:  Well, my concern with that is that there's another way to save jobs in the public sector and of course this never gets me any popularity when I say it, but you could cut salaries in the public sector, right.  If you have to cut your budget by ten percent, cut salaries by ten percent.  You're not going to lose workers and people will be unhappy and I'm not saying that public sector workers have done something to deserve it, but this is the economy we're in.  If you're in the private sector, you know, people haven't been earning as much.  People are losing jobs.  So if you're company is losing money, as a worker, you're going to hurt sooner or later and if your state government is losing money, as a worker, you know, you probably ought to expect to be hurting sooner or later.

Rob:  Thank you for your insights.  And we continue our continue our conversation on our website.  Just go to okhorizon dot com and click on value added.