How to "Do No Harm"
Yesterday's FT article by Gary Becker and Kevin Murphy titled, "Do not let the 'cure' destroy capitalism" is worth reading. In it they highlight three basic flaws with the current approach to the crisis. They are
a) an overly broad diagnosis of the problem,
b) a misconception that market failures are readily overcome by government solutions, and
c) a failure to focus on the long-run costs of current actions.
The problem is also a problem of democracy. Governments are intervening in part because its constituents want someone to solve the problem quickly. And no entity can do so much so quickly than government. This would occur regardless of which party were in power. Democratic representation will always call upon politicians to "do something" to solve distress in the market. And both parties could be expected to react in similar ways. I have little doubt that if Republicans were in power we would still have a TARP (oh right, that happened when Republicans were in power!) , we would still have a fiscal stimulus plan, and we would still have some assistance to Chrysler and GM. Perhaps the degree of intervention would be different, but Republicans would still have taken similar actions.
In the far future, the only way to prevent politicians from doing too much (and thus forcing them to do no harm) under similar circumstances will be to tie their hands in some way. There are two ways to do that. One way is via commitments to international agreements. For example, the world might be able to prevent a free fall into rampant protectionism, IF, countries abide by their WTO commitments. This is a big if (hence the capitals). A second method is with constitutional restraints. As an example state balanced budget amendments prevent states from becoming overly reckless in their spending. A similar requirement does not hold for the federal government though, and thus the US is destined to run deficits in the trillions of dollars for at least several years in the future.
My utopian vision for the future is a world in which politicans are ignored by the press and the people because everyone recognizes that they have very little ability to affect outcomes in their lives. It's a pipe dream, I know!
4 comments:
Before you seek out your pipe dream, how about writing your version of "It's A Wonderful Life", imagining what state we would be in now if the government didn't intervene the way it has with the banks, auto industry, mortgages, and whatever else have you.
Just as a side comment, the best representation of free market capitalism is Mexico, competition is confused for free market; without anti-trust regulation, the end result of real free market capitalism is monopoly, corruption, and poor people living in squalor.
Maybe you should revise your dream just a little?
I'm curious to hear your response
to anonymous' comment.
Here's a few thoughts. First, of all it's important to separate a long-term vision of the world (the pipe dream) from what can reasonably be implemented here and now. I believe we need, first, a vision of the end-state in terms of the role for government and its limits and then we need a plan for how to get there. One criticism of anyone's long term vision is that it is impractical to implement under current conditions. Often that criticism is valid. For example, one could argue that given the expectations of government involvement to sustain demand for goods and services, were the government to respond to this economic crisis with a laissez-faire policy, the drop in aggregate demand would have been much worse. Consumers and businesses would have been more spooked and cut back demand even further. Hence the govt intervenes mollifying expectations. However, the long term effect, especially of the fiscal deficits may be to cause a much more sluggish recovery down the road. Thus the government acts for short term impact despite the longer term consequences.
Now fast-forward to a different world with different set of expectations. If it is well known that government will not come to the rescue, if financial firms don't expect IMF bailouts and thus will not get paid back if they make dangerous loans to LDC governments, if car companies do not expect huge subsidized loans and also do not have to abide by a panoply of regulations and tax codes, if consumer and business expectations are not affected by government actions because they don't expect government to interfere, then given these ifs, it is conceivable both that the economic downturns would be milder, because business declines would be spread more evenly across industries and across time, and that the recoveries would be more rapid because business would spend more time attending to their customers desires.
A common mistake though is to think that we can just impose a new set of policies or responses on top of the current system and all will work according to the model or plan. I don't think it will.
Thus, would the economy be worse off now if the government didn't intervene with monetary and fiscal stimulus? I think it would.
My concern is more with the degree of intervention. The government could possibly have mollified expectations with a much lower level of intervention. I worry the government is overreaching. And that the overreach will not have major negative impacts until much later and will be irreversible, because it may be almost impossible for government to get its hands off of things in the future.
In the meantime though, the crisis affords another opportunity to rethink where we are going. Hopefully out of the rubble will emerge a clearer new vision of a better future.
I'm under the impression that if government regulatory laws had remained intact(Glass-Steagall), or enforced(SEC not winking) we would not nearly be in the mess we are in now.
If the above is true, then when is government intervention good or not good?
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