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Unformatted text preview: 21 N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. Copyright 2010. All rights reser ved. See w w w.NationalAf fairs.com for more information. Crisis Economics N. Gregory Mankiw T o understand the challenge government economists have faced over the past year and a half, it is useful to imagine the case of a physician trying to treat an ill patient. The patient presents herself in terrible shape; the physician has never treated a condition with symptoms quite like hers before; and the causes of the ailments are unclear. The doctor remembers reading about a similar case in medical school and, trying to recall as much of his training as possible, he endeavors to come up with a theory as to why the patient is sick and to determine what will make her better. In an ideal world, the doctor would run a controlled experiment: He would assemble 100 patients with similar symptoms, give 50 of them the medicine that seems most likely to work and the other 50 a placebo, and then see whether the patients on the medicine in fact improved. But the doctor does not have 100 patients he has only one. So, based on his assessment of what is causing the patients troubles, and the most likely remedy, he takes a risk and administers the medicine. The patient, however, returns a few weeks later; this time, her symp- toms are worse. What, then, should the doctor conclude? He might decide that he gave the patient the wrong medicine. Or he might de- termine that the patient was even sicker than he originally thought, and thus that the medicine should be administered at an even higher dosage. Either conclusion is plausible, but there is no way the doctor can be sure. What he does know is that he must act before the situation gets even worse. When the Obama administration came into office, the American economy was one very sick patient. To complicate matters, the financial crisis and the recession that ensued did not neatly follow the pattern of National Affairs Summer 2010 22 Copyright 2010. All rights reser ved. See w w w.NationalAf fairs.com for more information. past downturns instead combining a collapse of the housing market, a credit crisis, failures of large financial firms, and an assortment of other worrisome symptoms. Still, the new administrations economic advi- sors had no choice but to diagnose the problem and propose solutions. There was, however, little room for trial and error: Their only laboratory was the very economy they were seeking to heal, and time was of the essence, as markets continued to plunge, jobs swiftly evaporated, and bad news mounted. In an economic assessment they released in January 2009, President Obamas advisors concluded that, if they did nothing, the unem- ployment rate would reach 9% its highest level since 1983. So they developed their medicine: an ambitious plan to stimulate the econ- omy by spending a great deal of taxpayer money. According to their estimates, that stimulus would help keep the unemployment rate from...
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This note was uploaded on 12/04/2011 for the course ECON 305 taught by Professor Terrell during the Spring '08 term at Maryland.
- Spring '08