Can good economic policies be based on what our leaders learned in university 50 years ago?

When I started talking and writing about economic issues two years ago, I often got a response like, "I learned in economics in college (or business school) that . . . , and that's inconsistent with you just said (or wrote)."  Well, I know what they learned because I learned it too, and the reason I brought it up is that I think there are problems with the old doctrine.  Usually, I get open-minded consideration of discrepancies between current reality and what we were taught, but I'm depressed by a video of Pete Peterson saying this: 

"I was taught at the University of Chicago and Northwestern that it was terribly important for countries to have savings and to invest a lot in the future and that that had a lot to do with how well they're doing." 

Peterson is Senior Chairman of The Blackstone Group, former Chairman of the Federal Reserve Bank of New York, former Secretary of Commerce, retired Chairman of the Council on Foreign Relations, and number 165 on the Forbes 400 list of the world's wealthiest people.  He graduated from Northwestern in 1947 and the University of Chicago in 1951, and he starts and ends his analysis that the US economy is in trouble by saying our national savings rate isn't as high as he learned 60 years ago it should be!  Good grief! 

Does he not remember that the economic doctrine being taught then was largely developed when America's economy was still predominantly agricultural and that when he was learning this doctrine the US was in a post-war boom while the rest of the industrialized world was being rescued by Marshall Plan aid?  Did he not notice that in those days national savings tended to be invested at home and "Eurodollars" were an oddity, whereas today the most significant feature of globalization is that investment capital easily flows across borders in enormous quantities?  Certainly on a worldwide basis there is plenty of capital seeking investment opportunities today--that's why interest rates have been so low (making the arbitrage opportunities for The Blackstone Group and other private equity and hedge funds so great).  What is the importance of a national savings rate in a global economy, Mr. Peterson?  Does what you learned 60 years ago give any useful guidance about that? 

I share Peterson's concern that it is China, Japan, and petroleum exporters that are doing the saving and that Americans are selling them our assets in order to keep spending on current consumption, sort of like burning the furniture to keep the house warm.  But, I seriously doubt that scolding Americans (as Peterson does in the linked video) for their moral laxity in spending now instead of deferring their gratification will be effective or that we could avoid a recession if middle class Americans start spending less and saving more.  And I am beyond appalled that Mr. Peterson and so many others who make our important economic decisions have no better models of current reality upon which to base their decisions than theoretical models they learned 60 years ago.  The officers of the Titanic and the Exxon Valdez had more situational awareness. 

Update on Friday, January 25, 2008 at 04:33PM by Skeptic

The problem is well stated by John Maynard Keynes, which I found in this secondary source: 

"Ideas . . . when they are right and when they are wrong, are more powerful than is commonly understood . . . .  Practical men, who believe themselves . . . exempt from any intellectual influences, are usually the slaves of some defunct economist . . . .  The power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas." 

To that I would add that, as new ideas gradually encroach, old ones only gradually recede. 

Update on Sunday, January 27, 2008 at 09:10AM by Skeptic

Nick Anderson makes the "inadequate savings" point well in this Houston Chronicle cartoon.