Sunday, May 17, 2009
The New York Times has published an excellent review, by Jonathan Rauch, of A Failure of Capitalism. This is the best review of the book I've seen so far, and also the best short summary of the book's contents. (It's much better than, for example, Nobelist Robert Solow's cranky, condescending review in the New York Review of Books.)
Thursday, May 14, 2009
Wednesday, May 13, 2009
As I've pointed out elsewhere in this blog, Judge Posner argues in A Failure of Capitalism that depressions are poorly understood, and that where hard data is in short supply, preconceptions will fill the void.
That argument came to mind today when I read Judge Posner's latest post on his "Failure of Capitalism" blog. He is describing the causes of possible "aftershocks" of a depression:
The government has created a great deal of money, and borrowed a great deal of money, to finance the bailouts and the stimulus package and increase the amount of money in circulation (to help push down interest rates). If when demand rises the banks lend their $800-plus billion in excess reserves, the ratio of money in circulation to the output of goods and services is likely to rise--and this will mean inflation. The ratio will rise further if the government decides to finance some of the huge additional debt that it is incurring as a result of its anti-depression expenditures by increasing the money supply, that is, by inflation, which is a form of taxation--taxation of cash balances. A low rate of inflation is manageable and does little economic harm, but a high rate is very harmful, and can be broken usually only at the cost of a sharp recession (consequent upon a sharp rise in interest rates in order to reduce the amount of lending and hence the amount of money in circulation). And the recession might (as in 1937) disrupt a recovery from the depression. These costs have to [be] balanced against the benefits of the anti-depression programs; unfortunately only guesses are possible.
The last point -- "only guesses are possible" -- leads one to wonder how we should choose between the "guesses" of Keynesian economists and the "guesses" of "conservative" economists. Both sides make plausible arguments that rely partly on hard research but also partly (largely?) on naked reasoning. What would be worse -- a deflationary spiral (assuming the absence of bailouts and stimulus spending would have resulted in one), or post-depression inflation, or a double-dip depression? Not to mention permanent growth in the scope of government. Whose bogey is more likely to be real? Whose would be worse if real?
UPDATE: After posting this, I noticed that economist Arnold Kling has a post today touching on what appears to be the same uncertainty. He passes along the Three Iron Laws of Social Science: (1) "Sometimes it's this way and sometimes it's that way." (2) "The data are insufficient." And (3) "The methodology is flawed."
Tuesday, May 12, 2009
Judge Posner -- at his other blog -- has a fascinating post on the recent history of conservatism in the United States. He argues that, today, the intellectual underpinnings of conservatism are "weak." Conservatism now has no one filling roles comparable to those of William F. Buckley, Milton Friedman, et al. It has grown "strident and populist."
Judge Posner puts this in autobiographical terms:
By the end of the Clinton administration, I was content to celebrate the triumph of conservatism as I understood it, and had no desire for other than incremental changes in the economic and social structure of the United States. I saw no need for the estate tax to be abolished, marginal personal-income tax rates further reduced, the government shrunk, pragmatism in constitutional law jettisoned in favor of "originalism," the rights of gun owners enlarged, our military posture strengthened, the rise of homosexual rights resisted, or the role of religion in the public sphere expanded. All these became causes embraced by the new conservatism that crested with the reelection of Bush in 2004.
* * *
By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.
The reactions to Judge Posner's A Failure of Capitalism demonstrate his point. So far, no one on the right, as far as I know, has engaged the book's arguments regarding market failure and re-regulation. Conservative magazines seem not even to have acknowledged that the book exists. It does not fit the conservative conventional wisdom and therefore must be either ignored or shouted down.
Thursday, May 7, 2009
Richard Posner continues to, in effect, revise and enlarge his latest book, A Failure of Capitalism, by posting timely short essays on his blog of the same name. His most recent entry, posted last night, evaluates the government's various responses to the depression so far. I'm pleased that, among other things, he takes the President to task for "leading the attack on the resistance of Chysler's secured creditors (whom he referred to unhelpfully as 'speculators,' when the government is desperate to encourage lending, including by lenders who will not lend without collateral that gives them a favored position should the borrower go broke)...."
This is the first time I've made intensive use of a book-blog combination. It works especially well here, because the book appeared in the midst of a crisis that is not yet ended and will have ramifications far into the future. Hearing Judge Posner's views on the changing situation is fascinating. They enhance the usefulness of having read the book, by causing me to employ what I picked up from the it. And the background knowledge provided by the book enables me to fit the blog updates into a larger argument.
Wednesday, May 6, 2009
Today's post (really, late last night's post) on Judge Posner's Failure of Capitalism blog discusses the auto bailouts, the second stimulus package (which was passed after he finished the book), and bank stress tests.
In the book, Judge Posner argued that the auto bailouts were necessary simply to keep the major auto companies from collapsing when uncertainty about the course of the depression was highest. Their utility lay in delaying bankruptcy, not in making the companies viable again.
Today, some five months later, Judge Posner observes that the bailouts "worked." They kept the companies from failing at the height of public fear, when there was the greatest risk of a deflationary spiral. But by the end of March, the generalized, public fear had largely subsided. Thus, the bankruptcy of Chrysler and likely bankruptcy of GM do not raise the same concerns they did in December.
Although Judge Posner does not say this, it would therefore appear that there is now no emergency that could justify the administration's efforts to strong-arm Chrylser's bondholders.
Hat tips to Volokh Conspirator David Bernstein and to Instapundit.
Tuesday, May 5, 2009
The second post on Richard Posner's new blog about A Failure of Capitalism is now up. It is the first of three promised posts on the federal government's responses to the current depression. Today's post looks at the Fed's "easy money" response, Treasury's effort to partner with private investors to buy mortgage-related assets from banks, and planned legal changes to give relief to underwater mortgagors.
Of particular interest to me is the paragraph explaining why nationalization of "bad banks" would be a wrong step. Nationalization would be much more complicated, time-consuming, and unpredictable than it at first sounds: Because the bad banks are not worthless, their current owners would need to be compensated in any takeover. And then the government would face the question of what to do with the banks it would now own.
Monday, May 4, 2009
As promised in his latest book, A Failure of Capitalism, Judge Posner has launched a new blog in which he will expand upon the book's argument as events unfold. The first post appeared today.
He observes that events since February, when he finished the book, have not "alter[ed] the basic analysis and conclusions in my book." He cites data showing that the economy is continuing to decline, "but there is evidence that the rate of the decline has slowed" (his emphasis).
He refuses to speculate on whether we have hit bottom. My own (very impressionistic) sense is that we have, and that we're seeing more and more signs of impending recovery. I hope I'm right about that.
The WSJ today has a positive opinion piece on Richard Posner's Failure of Capitalism (may be gated). The author appears to agree with the book's argument and concludes:
Even capitalism's staunchest supporters recognize that it cannot function unless government plays its proper part. If all the players, including regulators and bankers, can accept their rightful share of blame and responsibility, we can begin to prevent future failures.
New regulations will inevitably come out of the current economic crisis. And they will inevitably be bad regulations if "capitalism's staunchest supporters," especially those with finance-industry know-how, do not participate in the process with a good attitude.
Friday, May 1, 2009
This post concludes my ongoing review Failure, which I finished reading last night. The last chapter of the book, "The Future of Conservatism," is followed by a "Conclusion" that is (by design) nothing more than a summary of the entire argument.
Judge Posner's hope is that both conservative and liberal preconceptions can be sufficiently loosened that "pragmatic, apolitical, nonideological solutions to economic crises" can be considered. The Republican "coalition" of economic, security, and social conservatives has been shaken by recent events, each component pulling away from the others. The Democratic Party, meanwhile, came out on the winning side of the "competence gap" during the presidential campaign. But both conservatism and liberalism have "substantial" histories of failures.
Judge Posner realizes that politics cannot be banished from economic policymaking. ("There are conflicts within society that can be resolved only by political competition.") The current crisis, however, has given rise to a spirit of pragmatism among economists that with luck will result in better policy-making once the current crisis has passed.
Chapter twelve of Failure (entitled "The Way Forward") discusses measures that could be taken to help prevent future depressions. In keeping with his view that systemic reforms should not be attempted or even devised until after the depression has ended, Judge Posner here offers an open-ended array of changes to consider, not a fully worked out program. Among other things, we need to see first what "the new, bound-to-be activist regulatory regime . . . can do within the existing regulatory framework."
Almost nothing is off the table. Possible (but not necessarily recommended) changes include consolidating the various federal and state financial regulatory bodies; forming an "international regulatory authority"; capping credit-card and mortgage debt; further restricting the extent to which debt can be discharged in bankruptcy; changing compensation arrangements for credit-rating agencies, to reduce conflicts of interest; "forbidding proprietary trading by banks (that is, trading of their equity capital, which puts that capital at risk)"; changing bank reserve requirements; regulating hedge funds more like banks and credit-default swaps more like stocks; "and even resurrecting usury laws." Controlling executive compensation through income taxation, and increasing income taxes generally to finance the anti-depression programs, are other suggestions that will surprise readers accustomed to thinking of Judge Posner as a libertarian.
Judge Posner devotes several pages to the difficulties that will be faced in trying to regulate well. We could, he notes, return to the regulatory framework of the 1960s, but we don't know how much value on net is added by having a deregulated financial industry. Consequently, we're unable to compare the costs and benefits that would be associated with various forms of re-regulation. (Judge Posner's description of everything that will need to be taken into account for regulations to be of benefit left me wondering where we can find the Solons capable of meeting the challenge.)