David Henderson’s take

Schuck explicitly defends public choice from its critics, writing, “[P]ublic choice theory’s rational actor model explains and predicts far more observed official behavior than its main rival, public interest theory.” He then lays out how well public choice predicts the destructiveness of many government programs–programs that are destructive precisely because of the many perverse incentives that motivate politicians, bureaucrats, special interests, and voters. Schuck gives many historical and contemporary examples of government programs that cause large inefficiencies, including unemployment insurance (creates the incentive to stay unemployed); disability insurance (creates the incentive to claim disability and quit work); and the Dodd-Frank Act (creates moral hazard by broadening the government’s safety net for risk takers).

My take:

Schuck has an impressive grasp of neoclassical economics, but I think he gives it too much weight. Neoclassical economics is obsessed with the concept of equilibrium, and in turn it pays little attention to innovation. I believe that one of the biggest lessons of economics is the value of trial-and-error learning through entrepreneurial activity.

Incidentally, that is one of the important ideas that is, for all practical purposes, outside mainstream economics. The process of innovation has three steps: introducing experiments, learning from experiments, and evolving as a result of those experiments. The government is particularly inferior to the market when it comes to both experimentation and evolution. The government does not have the ability — or the will — to attempt as many experiments as private actors do. In the marketplace, when one organization won’t explore alternatives, another one often will.

Yuval Levin calls this the three-E’s model–experimentation, evaluation, and evolution.

Securitization and Government Backing

Stephen G. Cecchetti and Kermit L. Schoenholtz write,

That is, only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 – before the financial crisis grew intense – the government-backed share exceeded 60%.

To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that (again, as of end-March 2014) only $6,094 billion out of $9,922 billion in bank deposits are insured. That is, 61% of bank deposits are government backed (see chart below) versus 82% of securitizations.

Pointer from Mark Thoma.

In my view, the political economy of banking works like this:

1. Financial intermediaries want to issue risk-free, short-term liabilities backed by long-term, risky assets.

2. Governments want to allocate credit, both to their own borrowing and to favored constituents.

To accomplish (2), governments guarantee the liabilities of particular financial intermediaries. This in turn allows those intermediaries to accomplish (1).

When government creates agencies, such as the Fed, the FDIC, it does so in the name of financial stability. But you should think of these agencies as tools for credit allocation, not as tools that actually stabilize the financial system.

When to Kill the Export-Import Bank?

Paul Krugman writes,

under current conditions mercantilism works – so this is exactly the moment when ending an export-support program really would cost jobs.

Pointer from Mark Thoma.

I say that the right time to kill it is any time you can.

If killing the Ex-Im bank is tea-party mischief, then I say let’s have more such mischief.

The AEI’s Tom Donnelly writes,

The worst thing about the defense loan program is that it only applies to our richest and best allies – NATO Europe, Israel, Japan, South Korea, the ones who can most afford to finance arms purchases on their own – and does nothing for real at-risk states in Africa, Latin America or the Middle East. The FMS-DELG duo has hampered, not helped the Pentagon’s security “partnering” efforts. In today’s environment, and particularly when China aims to replace Russia as the alternate, non-US source of front-line military equipment, the United States government needs a bigger, better and more aggressive export credit agency. The Congress should rejuvenate, not exterminate, the Ex-Im Bank.

His case for the Export-Import Bank speaks for (i.e., against) itself.

Failure Gets Rewarded

Reihan Salam writes,

Yesterday, the Congressional Budget Office announced that it believes the bill will cost $35 billion over three years, ramping up to as much as $50 billion a year if its programs are made permanent. As, of course, they will be, meaning that this is an absolutely gigantic expansion of the VA.

The way capitalism works, if a private firm fails its customers, it goes bankrupt and someone else takes over. (Crony capitalism does not work that way, of course. Instead, you get bailed out.) When a government organization fails its customers, it gets a huge budget increase.

I guess the idea of selling the VA facilities to the private sector and instead giving veterans money to shop around for the best available health care is just too silly to consider.

Replicating Successful Government Interventions

According to Stuart M. Butler and David B. Mulhausen, it is not easy.

the task of mimicking and scaling up programs that work is not so straightforward. Success is never a simple matter of easily traceable cause and effect, and even the people who have achieved a breakthrough often cannot pinpoint exactly what worked and why. Social outcomes have an impossibly complex array of causes, and the circumstances that characterize one place are rarely identical — and are often not even very similar — to those found elsewhere. A seemingly successful preschool program in Chicago may fail in Atlanta, even if it is reproduced virtually identically, because of differences, both large and small, between the two cities.

I think that a big problem is that success can be mis-measured in the first place. For example, the authors write,

Early-childhood education offers a good example of such pitfalls. Head Start, a federal program that funds preschool initiatives for the poor, was based on a modest number of small-scale, randomized experiments showing positive cognitive outcomes associated with preschool intervention. These limited evaluations helped trigger expenditures of over $200 billion since 1965. Yet the scaled-up national program never underwent a thorough, scientifically rigorous evaluation of its effectiveness until Congress mandated a study in 1998. Even then, the publication of the study’s results (documenting the program’s effects as measured in children in kindergarten, first grade, and third grade) was delayed for four years after data collection was completed. When finally released, the results were disappointing, with almost all of the few, modest benefits associated with Head Start evaporating by kindergarten. It seems the program had been running for decades without achieving all that much. Worse yet, the scant evidence of success has not stopped Head Start’s budget from continuing to swell: The program cost $8 billion last year.

In the private sector, if a firm gets off to a promising start but then founders, it sinks. Government programs keep right on going. This is one of the issues that I will be raising when I discuss a new book at Cato on Thursday. I will offer an even more pessimistic take than the authors of the article or the author of the book.

My Review of Calomiris and Haber

Is here. An excerpt:

The authors posit a contrast between what they call liberal democracy and populist democracy. Liberal institutions are designed to limit the power of what James Madison called factions, in part by making the government relatively unresponsive to public clamor. Populist institutions are designed to increase the power of those who can command electoral majorities.

A central claim of the authors is that banking crises are more likely in heavily populist countries than in countries that are less populist. They cite Canada as an example of the latter. For instance, in Canada, Senators still obtain office by appointment, rather than by direct election.

Wesley Mouch’s Assistant

CBS reports,

Lesley Stahl: Let me interrupt you. You were the government. How many of the loans were you involved in?

Steven Koonin: Difficult to know the exact number. But I would say in the order of 30.

Lesley Stahl: Did you make mistakes?

Steven Koonin: I think I didn’t do as good a job as I could’ve. In retrospect, I would’ve done things a bit differently.

Lesley Stahl: Part of this was supposed to be creating new jobs. Everything I’ve read there were not many jobs created.

Steven Koonin: That’s correct.

Lesley Stahl: So what went wrong there?

Steven Koonin: I didn’t say it would create jobs. Other people did.

Honestly, I did not know what to excerpt. Read the whole thing. Wesley Mouch was, of course, Steven Chu, the Energy Secretary in President Obams’s first term.

What Kind of Corporatism?

A commenter on this post writes,

corporatism is the only game in town ( The question then is what KIND of corporatism?

Libertarians who say that regulation = corporatism and who shrink back from any effort to regulate end up de facto enablers for the worst kind of corporatism from a progressive POV: the kind that makes the public in public/private partnership the junior partner.

I believe that you get the benefit of markets when businesses are allowed to fail. The worst evil of corporatism is its protection of incumbent businesses. What disturbs me about the progressive vision is that it seems to involve regulation of a static business environment rather than encouragement of a dynamic market with creative destruction.

Public Choice 101

From Cathy Reisenwitz.

Earlier this year, Center for American Progress donor Citibank hired lobbyists to literally write 70 out of 85 lines of a bill regulating derivatives trading which passed the House. If this regulation was meant to hurt Citibank’s profitability while defending their customers it’s unlikely to have done so.

There are three main reasons corporations like Citibank write their own legislation. First, lawmakers feel pressure from constituents to regulate industries about which their staffs know nothing; corporate lobbyists and lawyers provide much-needed information. Second, it’s much easier and faster for a company to understand and comply with a regulation it wrote. Third, and most important, companies write regulation that is easier and cheaper to comply for them than for their competitors.

Read the whole thing. Of course, it will change no one’s mind. The way to resist public choice theory is to insist that with sufficient moral authority “we” can regulate in a non-corporatist way. That is a non-falsifiable hypothesis, because the premise of sufficient moral authority is never satisfied.