Seeker Blog

Every year the Milken Global Conference hosts a roundtable of Nobel laureates in economics, chaired by the financier Michael Milken. This year’s discussion, held in Los Angeles April 29, includes Gary Becker (1992), Myron Scholes (1997), Michael Spence (2001) and Ed Phelps (2006). In this excerpt, the Nobel laureates discuss the depth of the U.S. financial crisis, its effect on the rest of the world and the commodity price rises for oil and food.

Three excerpts:

Scholes: …There has to be new learning about the affordability of a home. Banks have already written off $250 billion in losses. Some say that could reach a trillion. Housing prices in some places like Southern California might have to fall 40 percent from their peak to clear markets. We have a ways to go in this adjustment.

Becker: In the end, we would do best to look back on how the U.S. had dealt with past crises. The U.S. has responded to so many shocks in recent times — the bursting of the Internet bubble, 9/11, the Iraq war, the twin deficits (the current account deficit with China and the huge budget deficit) — yet we’ve done well. As I read history, we have a flexible economy. Just like in the past, the U.S. has a great capacity to absorb shocks. Europe or Japan doesn’t have that kind of flexibility. From this perspective, it is hard to be pessimistic about America’s economic prospects.

There is one other area of concern globally, and that is the price rises in oil and food. Oil price increases are driven by increased demand, including from China and India. Food price increases, though, are in large measure supply-driven; there has been a reduction in supply due to the shift of acreage from food crops to corn for biofuels. That means more corn is grown and less soybeans. As corn and soy prices increase, the consumer shifts to rice, which causes the price of rice to go up.

So, supply-and-demand-driven rises are merging. Oil supply can’t be increased without sufficiently high prices, which will spur further exploration and investment. To get food prices down, you can increase acreage and improve productivity with technology. The food crisis will be solved by supply adjustments.

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Scholes: If you move too fast to improve productivity in food, you create a surplus population that is forced to move to the already over-urbanized cities. That is a huge cost. There are 1.25 billion people in agriculture in India and China. Where will they go?