Follow Up on Poterba on Capital Markets

In my most recent blog post, about last night’s event at the American Academy of Arts & Sciences, I said I’d wanted to ask James Poterba, the President of the National Bureau of Economic Research, a follow-up question, and that I’d let readers know if I heard back from him by email.

Well–I’m getting a somewhat better impression of him; he got right back to me. Here’s my email and his response:

Dear Prof. Poterba,

I greatly enjoyed your remarks, and John S. Reed’s remarks, at the American Academy of Arts & Sciences yesterday evening.

In response to the suggestion from a member of the audience that the federal government could do more to alleviate the “social costs” of the downturn (especially of long-term unemployment), e.g. by investing directly in certain industries, you said that it is hard for government to pick winners, and that “markets do a better job of allocating resources.” (I believe I am quoting you verbatim.)

The question I’d hoped to ask–and your remark made me want to ask it even more urgently!–was this: Do you think that financial markets and financial institutions have done a good job of allocating capital over the past couple of decades? And my follow-up question would be: if you think that they have done a *good* job, what on earth would count as doing a bad job?

Best,

Chris Sturr, co-editor, /Dollars & Sense/ magazine

And his response:

Dear Chris -
I am glad that you enjoyed the session last evening. I do believe, as I said last night, that capital markets such as those in the US do, and have done, a reasonably good job of allocating capital. I don’t know of any better mechanism. All best wishes.
Jim

So I have a good impression of him for getting back to me so quickly, but I still find it pretty astonishing and disturbing that the financial crisis and recession don’t seem to have shaken his market fundamentalism one bit.

—CS