Wednesday, April 29, 2009

Posner's A Failure of Capitalism -- VIII

Chapter six of A Failure of Capitalism -- entitled "A Silver Lining?" -- somewhat quickly reviews possible beneficial effects of the current depression.

These include: The bursting of the housing bubble, which had to happen eventually, and having it happen when it did is preferable to having it happen, say, a year later, when it would be that much bigger. The exposure of fraudsters such as Bernard Madoff, who, again, would have done still more damage the longer the bubble lasted. Increasing the efficiency of business enterprises' use of labor and capital, since the drop in revenues requires that "slack" be taken up. Inducing federal, state, and local governments to increase their efficiency, since tax revenues drop. (But, on the other hand, the depression will also likely cause government to grow in size.)

More beneficial effects: "The depression may give the Administration and Congress pause concerning measures to strengthen unions, such as the proposed Employee Free Choice Act[,]" since unions can cause "an increase in wages, and a reduction in the efficiency with which labor is utilized." An increase in taxes (once the depression is over) will not "necessarily" be a bad thing. Increased unemployment will lead to an increase in the general level of education, since the opportunity costs associated with spending more time in school have been temporarily lowered. The depression has taught the banking industry "a great deal . . . about the risks of leverage and the downside of complex financial instruments intended to reduce the risk of default more cheaply than by traditional means." The public has learned "about the dangers of speculating on housing prices and investing the rest of one's savings in the stock market."

Still more: "The depression has shown that privatizing social security -- that is, allowing recipients to invest in the stock market some or all of the money in their social security retirement accounts -- would have been calamitous." The depression has caused commodity prices to drop, especially with oil. The level of carbon emissions has fallen as business activity has slowed. Lower oil prices have reduced the wealth of many nations that are "either hostile to the United States . . . or politically unstable." The depression will free up to pursue other work a lot of "brilliant people" who were formely employed in the financial industry. "The depression is a wake-up call to the economics profession." And the depression may lead to "a durable increase in the personal savings rate."

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