Nouriel Roubini the Mercantilist

Here’s a question: why is economist Nouriel Roubini so popular again? The man is syndicated in the financial press. He has a number of best-selling books on the ebb and flow of the global economy. And he teaches at New York University’s Stern School of Business.

But how did he ascend to this level of influence? Roubini supposedly forecasted the collapse of the American housing market back in 2008. His negative outlook on the economy has since earned him the nickname “Dr. Doom” by the financial media; that’s the same media that was broadsided by Wall Street’s collapse.

His prescient call of economic collapse gave him a voice commentating on global economic affairs. But as Forbes editor John Tamny points out, Roubini isn’t the grand wizard he fancies himself to be. He saw the housing bubble deflating in 2008 by monitoring data on home consumption. That’s it. He made the prediction that housing prices would soon tilt downward, and that would put pressure on the construction and financial industries. If homes weren’t being built at the same rate, that meant builders need employment elsewhere. And if the mortgages that made home-buying possible were losing value, they were worth less on the bloated secondary market.

So it’s easy to see why someone might think the economy is heading into a rough patch when a dominant industry is beginning to flail, if only so gently. To his credit, Roubini was not swayed by contrary opinion. Months before the financial crisis hit, there were prominent voices who declared the good times would last forever. Former presidential candidate and chairman of the Kansas City Federal Reserve board Herman Cain was actually optimistic about the economy almost two weeks before Lehman Brothers went under. His call was not all that different from mainstream thought at the time.

While other economists and commentators were predicting the housing boom would never end, Roubini stuck to his guns. When the crisis bore its fruit in the Autumn of 2008, he collected on his harvest. For that, he deserves some praise.

With a stellar record of predicting the biggest financial catastrophe since Black Tuesday, one would think Roubini had a solution for turning the downfall into an upswing. Then again, the same crowd that put their trust in Alan Greenspan was totally wrong about his inability to fine-tune the marketplace. Roubini might have spotted the crisis, but he still puts his faith in the ability of central bankers to manipulate the economy back to life. Roubini was fully on board with the Fed’s drastic efforts to shove the financial system full of liquidity after the crash. And to add a bit more drizzle to the interventionist cake, Roubini endorsed a big-spending stimulus effort by Washington.

Fast-forward a few years and Roubini is back at it. At a recent meeting of the Economic Club of Canada in Toronto, Dr. Doom was surprisingly sanguine about the ongoing economic recovery. He told the crowd the Canadian economy is “doing okay [but] not exceptionally.” He pointed to solid growth expected this year but fretted over a strong loonie that is “crowding out manufacturing.” It all goes downhill from there. Roubini isn’t the gloomy financial sage he once was. Instead, he has regressed to a full-blown Keynesian without the slightest clue as to what ails the economy.That is to say, he regressed a few hundred years in economic philosophy.

The old Keynesian canard of deflation scaremongering is nothing new. Neither is the idea that economies can be grown by currency debasement that boosts exports. That goes all the way back to Keynes’ General Theory of Employment, Interest and Money and then some. The roots date back to 17th and 18th century Europe.

The theory that currency debasement drives economic growth isn’t based on solving the economic hardship for all. It’s based on the centuries-old model of state-based mercantilism.

In his General Theory, Keynes praised the mercantilist economic model. Citing Swedish economist Eli Heckscher, Keynes endorsed the idea of a nation ridding itself “of an unwelcome surplus of goods” while increasing the stock of money so as to have the “advantages of a fall in the rate of interest.”

The printing of money was done at the behest of politically-connected industries. Mercantilism, in other words, was proto-fascism. It gave the benefit of easy money to business cronies but it left everyone else destitute. Creating money ex nihilo inevitably lays the foundation for the boom-bust cycle by distorting capital allocation. From the tulip bubble to the Great Depression and even to China’s ongoing property bubble bust, central banks do more harm than good. Roubini endorses this model of economic mismanagement and can’t get around the fact his preferred policy solutions are the cause of so much misery.

Canada is currently experiencing its own housing bubble. Should Stephen Poloz and the Bank of Canada take Roubini’s advice, it will only exacerbate an already untenable situation. During the tutelage of now-Bank of England Governor Mark Carney, M2 money supply of the loonie increased from $1.1 trillion to $1.55 trillion. Housing prices have risen in tandem. And Roubini wants to spike the punch bowl once more for the party to continue. His efforts will only delay the hangover. They won’t cure it.

The thing to remember is that devaluation is always a two-way street. Sure, exports may get a boost if citizens in other countries get their hands on the bolstered amount of currency. With more dollars, euros, yen, etc., to spend, they will find it in their interest to purchase foreign goods that are relatively cheaper than before. In the short run, everything appears great.

On the home front, the situation isn’t so hot. Currency devaluation may help exporting businesses initially, but it harms the ability to import. Few countries live in a vacuum. They need raw materials from abroad. As debasement takes place, it becomes more difficult for domestic producers to acquire those inputs needed to produce outputs. Anyone who thinks inflation boosts economic growth in the long term is only looking at the knoll, and not the grassy run off in the horizon.

Nouriel Roubini has an undeserved reputation for economic knowledge. Yes, he made the right call about a recession at the right time. But Dr. Doom doesn’t understand the cause and cure of that which he wants to diagnose. He is plagued by antiquated economic theories that enrich the few at the expense of the many. Thus, he ruffles no feathers and fails to advance the intellectual truth.

James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada, where this article was originally published.

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