The Long-Term Damage Done by Consensus Thinking

09/18/2008 05:12 am ET | Updated May 25, 2011

Two recent big-time media articles again suggest how we have been misled by the consensus of economic opinion. I referred to one last week.

Many economists, including Ben Bernanke and the powers at the Commodities Futures Trading Commission, argued that speculation did not drive up the oil price. This enables them, with support from many and perhaps most mainstream economists, to argue there need be no regulation or even much greater transparency about who is trading.

On Friday, the Wall Street Journal noted that the CFTC has now identified one of the giant traders as a speculator. That raised the number of those who trade actively and are not in the oil business to nearly 50 percent on the NY Merc. Even thirty or forty percent is enough to drive prices up to irrational levels -- and crate pain and overreaction by central banks around the world. The resistance among so many economists to believing that a financial assets can be seriously influenced by speculation is just outrageous.

The more recent story is a fine one in Monday's NY Times by Lou Uchitelle. It noted that the low dollar is helping us sell more US products abroad. But here's the problem: they are far more agricultural products than manufactured goods. Sound like a Third World country?

The fact is America does not have that much to sell abroad anymore other than foodstuffs. Why? Some argue that manufacturers had to globalize and place facilities overseas. Of course they did. But not to this extent. The barrenness of the US manufacturing landscape was very much the consequence of a dollar that was too high for too long.

Conservative economists kept defending the high dollar as a sign of American strength. Foreigners just loved to invest in the wonderful US economy, they argued. The trade deficit was a sign of success not failure.

More to the point, it kept inflation down -- the conservative bugaboo. Most important -- here we go again -- it kept Wall Street happy. A high dollar kept attracting buyers for US securities.

And in light of that, you hardly heard a peep from more centrist mainstream economists. Oh, some wanted a lower dollar. Fred Bergsten of the Peterson Institute for International Economics is a centrist mainstreamer who argued for a lower dollar.

But for the most part, centrists ducked and joined those who wanted to keep hands off the high dollar. They won the day.

Now we have to rebuild manufacturing capacity, R&D, and a manufacturing work force. And of course the high dollar allowed consumers to borrow and spend, rather than earn and save.

There is no robust debate in America about economic policy.