The winner of the 2006 Nobel Prize in Economic spoke along with other bright minds in a New York’s Columbia University seminar called “Rethink the State”. Some old ideas were rejected and a new paradigm was outlined about capitalism and society.
Who killed innovation in the US? For Prof. Phelps, both US Presidents George W. Bush and Barack Obama have applied State intervention to compensate the lack of demand from a private sector that has been backing away from innovation since the crisis burst. Bush with his TARP, tax cuts and his entitlements expansions (yes, you heard it right, think about Medicare drug expansion); Obama with his monetary easing policy, among other decisions. The current president, moreover, has been a good new corporatist: rescuing GM was a good example.
Keynesianism, would be the State influencing the economy; New Corporatism, the corporations influencing the State (by lobbying and paying political campaigns), so they indirectly influence the economy. Both systems asphyxiate the innovative creation of individuals so well favored by capitalism.
Spain was also a hot topic in the seminar.
“There is no doubt that there was a big amount of fiscal irresponsibility in Europe,” Prof. Edmund Phelps said. “It was more flagrant in Greece but also bad in Italy. Spain was a more complicate case (…) As far as I know it will not be easy to restore a big employment rate. It simply cannot be done. No payment transfer from Germany can solve it because Germany cannot take Spain on its back”.
Whose fault is that?
“I would say that Spain is on an austerity period path and I cannot see any alternative to it. I’d say that even without Germany, Spain would face a long period of austerity. You cannot blame the Germans, ” stated Prof. Phelps.
Harvard Economics Professor Emmanuel Farhi defended a fiscal union in the European Union and concluded that transfers from North to South are essential. Much like in the US there are automatic stabilizers that compensate one state’s success with another failure, similar mechanisms have to be set up in a future European fiscal union. And, as a collateral, concluded that monetary policy in Europe has to be further eased to equilibrate German’s boom with “Spanish bump”, as he called it.