Friday, August 27, 2010

Reinhardt's Panglossian Vision of Policy

In an Economix article today,

Professor Reinhardt basically says economists shouldn't weigh in with policy preferences, and should leave this to politicians. Here is my comment on the site, hope it get posted.

Professor, I appreciate the historical context you provide here, but I'm surprised and disappointed that you would prefer economists abdicate any preferences for policy. Your objective model of policy development requires that politicians judge the facts economists provide and make decisions that affect our social welfare. I don't think this is a good idea for a variety of reasons, all of which should be obvious, but I'll just point out that politicians need all the help they can get as far as I can tell.

I understand the fear of Ivory Tower liberal economists master-minding the economy, but I'd prefer that to over-lobbied, partisan, popularity contest winning politicians any day. Do you think if economists had gotten their way for the last 30 years we would have plundered social security, spawned an unaffordable health care industrial complex, underfunded state/muni pensions by trillions, subsidized housing finance cabals, and ran up operating deficits that approach Grecian levels? Its actually hard to imagine things having gone worse, short of losing the cold war, so I'm not sure you have a leg to stand on when you ask experts to stand back at this point.

In fact, the media's favorite poster child for effective economic policies is China, which engages in just the type of tough, undemocratic decision making that you say won't deliver the goods. I'm no fan of that model of getting things done, but it provides an important foil for your proposed model.

Yours is an argument that assumes politicians can be effective leaders, and economists would come up short. I assure you, the former is innocent of the charge, and I'd say the jury is still out on the latter....

To bring this into fair market context, I agree with his point that redistribution of goods through policies should not be a focus of policy. But that doesn't mean that a policy that redistributes welath is bad. Lets imagine, and it won't be hard, that a small group of financial institutions have managed to capture 40%+ of corporate profits, and simultaneously rely on taxpayer guarantees for risk-free financing. now clearly any policy that disrupts this scheme will redistribute wealth from bankers to other businesses and ultimately reduce taxpayers' unforeseen liabilities. Nevertheless this policy would be good - it would make the market more competitive.

Thursday, August 26, 2010

Baseline Scenario - Pro-Market?

I realize that being a fan of Baseline Scenario, and Simon Johnson in particular, is neither new or original in the blogosphere, so given that this is my first post, my blog is probably doomed to irrelevance, but I did want to highlight some key conceptual linkages among SJ's major reform efforts and Fair Market Principles.

SJ's coverage of the Too Big To Fail issue in our financial system is a prime example of pushing for fair markets. Where the regulators, and the Frank-Dodd bill, recommend an array of rules and disturbances for large banks, Baseline Scenario maintains that the best way to promote the future health of the financial market is to alter its current structure. Of course, the current structure is a product of regulatory evolution, that has nothing to with what a "free market" might yield in either optimal, or simply other, circumstances, but this subtlety would never stop someone who stands to lose from a break-up of big banks from accusing SJ and his proposals of being opposed to free markets.

This strikes at a core concept underlying Fair Markets: that just because a market is - the way it is, how it is, who is in it - does not mean that we should assume that market is either free or competitive and therefore leave it be, free from disturbance. Rather, all efforts regarding market intervention should be premised on the concept of addressing underlying flaws in the market structure, and concerned primarily with improving the marketplace for the general benefit of participants. Clearly a more fractured marketplace of lenders would a)reduce prices for clients b) allow smaller banks to compete on even footing c)reduce the risk to the taxpayer of having to pay for massive failures.

A more fractured marketplace would in turn require less regulation and less oversight, and thus be closer to what one would describe as a competitive and fair market.