Saturday, December 11, 2010

Never Learning From Our Mistakes

When he took office, one of the first things George W. Bush did was turn the surplus he inherited from Bill Clinton and turn it into a deficit. When economic times are relatively good, there is a tendency to believe that economic troubles are unlikely to return. As Avinash Dixit puts it for a recent article in Finance and Development:

We shouldn’t think [economic crisis] have been abolished. Thinking that we have abolished them is an illusion and perhaps a dangerous illusion, because if you think you have abolished crises, your policymakers, business people, consumers, et cetera, will behave in more reckless ways and thereby make crises more likely. The lesson that really should be learned, and I’m afraid will never be learned, is that the time for fiscal prudence is when times are good. That’s when governments should be running substantial surpluses, so that when crises or a recession hit, they can spend freely without worrying about debt. Unfortunately, the reason the lesson will never be learned is that good economic times are especially conducive to the illusion that bad times will never return. (Bold added.)
The idea that we will never learn from our mistakes may sound pessimistic, but it may very well be true. Why don't we learn that reaching a surplus in good times is a good reason to pay down debt and even set aside some of the surplus, instead of thinking that it is very important to turn that surplus into a large deficit as soon as possible?

It is too really unfortunate that the business cycle is more severe than it needs to be, simply because people refuse to face reality and learn from the mistakes of the past.

No comments:

Post a Comment