James Pethokoukis

Politics and policy from inside Washington

Study: Blame China, not Wall Street, for Great Recession

October 21, 2009

This paper make a great case for blaming the Great Recession on the massive influx of cheap labor (and the continued weak yuan) into the global economy. Bad decisions on Wall Street didn’t help, but they are not the root cause:

The common wisdom is that cheap money and lax supervision of financial institutions led
to this financial crisis, and solving that crisis will take us out of the recession. In our view,
the financial crisis is just the symptom. The fundamental cause of the crisis is the huge
labor supply shock the world has experienced, not the glut in liquidity in money supply.

In what follows we argue that this huge and rapid increase in developed world’s labor
supply, triggered by geo-political events and technological innovations, is the major underlying
force that is affecting world events today. The inability of existing financial and legal
institutions in the US and abroad to cope with the events set off by this force is the reason for
the current great recession: The inability of emerging economies to absorb savings through
domestic investment and consumption caused by inadequate national financial markets and
difficulties in enforcing financial contracts through the legal system; the currency controls
motivated by immediate national objectives; the inability of the US economy to adjust to
the perverse incentives caused by huge moneys inflow leading to a break down of checks
and balances at various financial institutions, set the stage for the great recession. The
financial crisis was the first symptom.

Comments

Jim,
You come to LA and all you do is hang out with the elitist Don and don’t come visit us at IBD? Shame on you. Don’t tell me you are an elitist, too.
I mean, you are good, but you are not that good.
Brian Deagon

Posted by Brian | Report as abusive
 

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