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Sunday, April 02, 2023

Opinion | Cecilia Rouse explains why markets needs the government to work - The Washington Post

Opinion Cecilia Rouse did her best to make democracy educational again

"Historian Christopher Lasch insisted that if you see “argument as the essence of education,” then you’ll “defend democracy not as the most efficient but as the most educational form of government.”

I doubt that many Americans see our politics these days as even a half-decent elementary school. Lasch’s hope seems especially forlorn during a week that will be dominated by the rowdy schoolyard noises incited by the indictment of a loudmouth former president.

Which is why I want to lift up a much quieter event, the departure on Friday of Cecilia Rouse as the chair of the President’s Council of Economic Advisers. She is returning to Princeton to resume her work as a professor of economics and public affairs.

If you want to maintain faith that Lasch’s insight about democracy is right, a good place to start is with the teaching Rouse, the first Black CEA chair, undertook while she was at the White House.

Part of her job was to advance and defend President Biden’s policies. But in her lectures, testimony and writing, Rouse also sought to advance a public argument about government’s proper role in a well-functioning market economy. Views on that question influence all sorts of policy judgments (and a lot of hollow rhetoric, too). Only rarely do we drill down to its fundamentals.

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In an interview in her office the day before she left, Rouse spoke as a good economist in insisting that she does not see the government displacing the market. In a $25 trillion economy, she observed, “the idea that one central planner can actually efficiently allocate all of those resources is just too much, right?”

But all by itself, the market is insufficient, she said, and not just because, as we learned again recently, government regulation is essential to keeping banks and other private institutions from flying off the rails. Which government roles really matter?

“The first is for macroeconomic stabilization,” she said. In a recession, “we don’t have a lot of economic activity from the private sector, but people still need to pay bills. They still need to eat.” The “automatic stabilizers” such as unemployment insurance (which she sees as in need of reform) and food stamps not only help people directly, but they also speed revival in an economy where nearly 70 percent of gross domestic product is based on consumption.

“The second is the more classic — where there’s market failure,” Rouse continued. On many questions, market actors worry “about their own benefits and costs” and are not “taking into consideration the benefits and costs for the rest of society.” Pollution in general and the climate crisis in particular are classic cases of this.

The third area is public investment when there is no immediate incentive for market actors to take risks. “Government makes investments … in basic science. Some of them work out, some of them don’t work out. Private companies may not be willing to bear the cost of this research.” Government investment, she noted, sped the production of vaccines by private companies. The basics also include infrastructure, education and public health — along with child care and elder care that make it possible for more people (especially women) to participate in the economy.

“I'm a labor economist,” she said. “I think we have to understand that if people are going to work, that they need to be able to ensure that their children are taken care of, that their parents are taken care of.”

Finally, government can reduce the inequalities created by the natural workings of the market and by discrimination, including socially and politically divisive regional economic disparities.

Rouse’s overall view of government and her particular interest in labor markets undergird her insistence that Biden’s $1.9 trillion rescue plan was the right pandemic bet, despite inflation that, she notes, hit other advanced economies, too.

She does not dismiss critics of the spending plan such as her old grad school adviser, former Treasury secretary Lawrence Summers. Rather, she argues that at a moment when the future was very hard to read, the administration had to balance the risks of spending too much or provoking a deeper recession. The dangers of doing too little, she thinks, were far greater.

“We did not know how effective that vaccine was going to be,” she said. “We didn't know how long immunity would last with it. We didn’t know if it reduced transmission. We didn't know what new variants might emerge. … Hunger was starting to rise again. Food insecurity was starting to rise again.”

She grabbed a small, milky globe she keeps on her conference table. “It’s my cloudy crystal ball,” she said with a smile. In the face of “a lot of uncertainty,” the question before the administration was “where did you want to put your weight?” Her choice, she said, was on the side of “individual well-being and worker well-being.”

Rouse’s colleagues, back at Princeton and elsewhere, will spend years debating the decisions made over the past 26 months. But in a crisis, I’ll take an economist who knows that crystal balls are usually cloudy, is transparent about her values, and does her best to make democracy educational again.

Opinion | Cecilia Rouse explains why markets needs the government to work - The Washington Post

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