Time for economists to review important issues - Nobel Laureate Edmund Phelps

ASTANA. KAZINFORM / Rizvana Sadykova, Karina Worku / As part of series of publications in connection with the Second Astana Economic Forum on ?Economic Security in Eurasia in the System of Global Risks? held in Astana, 11-13 March, 2009 we introduce our honorable guest Professor Edmund S. PHELPS, the winner of the 2006 Nobel Prize in Economics, Professor of Political Economy at Columbia University, Director of Columbia's Center on Capitalism and Society . He was named Chevalier of the Legion of Honor, won the Premio Pico della Mirandola for humanism and the Kiel Global Economy Prize.

Could you please give some comments on the anti-recessionary measures implemented by the Kazakh Government? And what do you think about the stimulus plan implemented under the new administration of Barack Obama? Do you support the idea to extend a hand to the falling banking system? I have not learned too much about the measures taken by the Kazakh Government. The only measure I did hear about is a contribution to the banks and businesses amounted to 10 billion US dollars and I hope that it was the right decision in the current situation. As far as Obama administration plan is concerned, I must note the following: whatever discussions on this point may be, I cannot say whether his stimulus plan is appropriate or not as there was no other option and time will tell. What I think about this strategy of bailing out the banks in particular, is more important. The answer is very simple. It is destructive; almost devastating to let one of these huge banks fail and go on to bankruptcy. Because, there is so much lending from one bank to another. There is just one remaining question ? what is the best strategy for avoiding destruction There is also a debate going on about nationalization, as the banks will be seized by the government. What we need is new banks, banks of new kind. Do you mean some transformations in the banking system or business and in economic system as a whole? What main ideas or recommendations did you advocate at the forum? The restoration of prosperity in the U.S. requires restoration of banking lending. But the existing banks appear unable to raise the necessary capital in view of their past performance. Furthermore, the revival of aggregate investment activity will require a strong revival of business investment in view of the patent unprofitability of investing in housing at past rates. And the existing banks lack the expertise to serve the business sector of the economy. So the U.S. economy will require banks of a new kind ? banks dedicated to serving the business sector. Yet the dynamism of the business sector in the U.S. and perhaps the U.K. as well has been in decline for many years. In the 1990s the number of initial public offerings (IPOs) by young companies was at the rate of 350 per year, in the present decade it declined to 50. It is likely therefore that the rate of new firm formation has likewise fallen. Venture capital firms in Silicon Valley are shrinking. Thus, the new class of banks will require government support. The government will have to help with the establishment of a new class of banks ? banks that possess or acquire the expertise to serve the business sector by means of lending to companies for long-term investment and for innovation. This help by the government might take the form of a subsidy to reduce the new banks? cost of capital. Or it might take the form of an initial endowment contributed to each bank by the government. It seems clear that, with the rest of the world effectively blocking a large increase in U.S. exports and with the prospects of profitable lending to the housing sector extremely dim, the road to normal prosperity requires rehabilitating the financial sector in order to revive business investment and innovation. Coming to the last part of your questions, frankly speaking, it is somehow embarrassing what is happening with economy. It is time to review some important issues for economists. For 15 years the economics have been studying the changes that are not helpful yet. What do you think about the creation of the Eurasian Union? As you know 15 years ago President Nazarbayev announced this idea in 1994. It was difficult time then. Do you believe that this idea will become the strongest one in this period of time? I think if all countries proposed the Eurasian Union they would possess a very open economy. And then I could see very little to be gained by establishing a union of them because they would already be engaged in export and import, international investments abroad so what they would gain from having the Eurasian Union. But I think they would have some monetary union, harmonization of regulations, for example. I think if you have 3 or 7, or 10 countries all of which have very low capabilities for trading, investing and put them together they will still have opportunity to be transformed into the countries with more prosperous economies. You make it rising efficiently and sometime facing incomes but just the formation for formation of the Union itself may not bring great transformation or rapid changes and growth in economy. May be it is convenient to have such union, and may be it brings some advantages? And there is also a risk may be if you have a union. They will have a niche but there is no substitute for commercial imagination, inventiveness, and so on. There is no substitute for that. Edmund Phelps was born in 1933 in Evanston, Ill., spent his childhood in Chicago and, from age six, grew up in Hastings-on-Hudson, N.Y. He earned his B.A. from Amherst in 1955 and his Ph.D. from Yale in 1959. He is McVickar Professor of Political Economy at Columbia University, Director of Columbia?s Center on Capitalism and Society, and the winner of the 2006 Nobel Prize in Economics. His career began with a stint at the RAND Corporation. Back east in 1960, he held appointments at Yale and its Cowles Foundation until 1966, then a professorship for five years at Penn. In 1970 he moved to New York and joined Columbia in 1971. Phelps?s work can be seen as a program to put ?people as we know them? back into economic models ? to take into account the incompleteness of their information and their knowledge and to study the effects of their expectations and beliefs on the workings of markets. He has adopted this perspective in studying unemployment and inclusion, economic growth, business swings and economic dynamism. Phelps was elected a Fellow of the National Academy of Science in 1982 and made a Distinguished Fellow of the American Economic Association in 2000. In 2008 he was named Chevalier of the Legion of Honor and was awarded the Premio Pico della Mirandola for humanism and the Kiel Global Economy Prize. In the same year the University of Buenos Aires Law School established the Catedra Phelps for Programs on Dynamism and Inclusion. He also holds many honorary doctorates and several honorary professorships. An extraordinary tribute occurred when scholars came from around the world for a large Festschrift conference in his honor just three weeks after 9/11.