Category: Random News

Fixing the country (by Russell Roberts):

This is the biggest fantasy of politics, that the country is broken or damaged and we just need to get a different contractor in charge of the project who knows more about how to do renovations. It is a dangerous metaphor and an inaccurate one. It ignores the fundamental insight of economics that there are no solutions only trade-offs. It presumes, impossibly, that we share goals as a people when in fact, virtually every government policy benefits one group at the expense of another.

The essence of political action is a compromise over who wins and who loses. The essence of politics is pretending that such actions benefit everyone. So we are told that it is necessary to bail out the auto industry not to benefit a small group of people but rather to save the Midwest or the country or the millions of jobs related to the auto industry or to preserve the industrial base in the name of national security. What is good for GM is usually not good for the nation. It’s good for GM.

The Rules of the Game (by Russell Roberts):

Bob Higgs claims that “regime uncertainty,” the uncertainty about the rules of the game, is what made the New Deal so ineffective. Because business didn’t know what the government was going to do next, people were hesitant to invest and take risk in the 1930s. It’s possible but it’s very hard to measure. Maybe investors were discouraged by the lack of opportunities in the economy or some other reason.

At the end of last week, the government announced that insurance companies were next to be bailed out. It became clear that firms were lining up making the claim that they too deserved government help. The effect that Higgs had written about feels palpable right now. When you know the government can save your company and your bottom line, you start spending an increasing amount of time on that possibility rather than trying to actually turn things around or look for private suitors. When you’re not sure about the rules of the game, risk-taking and investing becomes much more uncertain than usual.

In today’s WSJ, I argue that government policy appears to be making things worse and that doing nothing, at least for a time, is probably better. Of course, government has a problem with credible commitment. Doing nothing cannot be guaranteed to last for very long. And unfortunately, neither  presidential candidate has a commitment even to the principle that doing nothing might be the best policy. Such a principle might make a commitment to inaction somewhat credible. But even though the commitment to do nothing might be only temporary, I think it still would be useful for alternative strategies to the current one (so something, anything) to emerge and generate a consensus as to whether such alternatives might be preferable to the current scattershot approach of doing one thing today and something else tomorrow. Such uncertainty has to effect the calculus of risk-taking.

Reason: Is it Too Late for a Do-Over?:
“Three scholars associated with the Federal Reserve Bank of Minneapolis decided to do a little quick fact-checking of “widely held claims about the nature of the [financial] crisis and the associated spillovers to the rest of the economy,” and put their findings in a new working paper [PDF]. What’d they learn?

The financial press and policymakers have made the following four claims about the nature of the crisis.

1. Bank lending to nonfinancial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.

4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. Our argument that all four claims are false is based on data up until October 8, 2008.

Whole thing, well worth a read (and probably a drink), here.”