Sentences I Might Have Written

A pro-innovation agenda begins instead by recognizing that markets are far more likely to resolve market failures than regulators, and to do so at a lower cost. This is not because markets are perfect, or appropriate subjects of uncritical reverence, but simply because markets react more quickly than do governments to the negative but usually short-term side effects of disruptive innovation. The next generation of technology is far more likely to remedy consumer harms than regulatory intervention can, and with considerably less economic friction.

They come from Larry Downes.

Ideas vs. Interests

In the latest Critical Review, Jeffrey Friedman argues against those who would interpret politics entirely in terms of individual interests. He says that ideas matter, and that ideas do not necessarily coincide with interests. However, things like the squelching of patent reform are indicative that interest matter.

The Murray Edelman view of politics that I learned at my father’s knee was one in which ideas do not matter. Instead, politics is a contest among insiders (as in the linked story, between tech lobbyists and trial-lawyer lobbyists), who have rational interests. The public is treated to political theater, using what Edelman called symbols. While the public is paying attention to the theatrics (think of Ferguson, or ISIS, or the controversies over contraception and Obamacare), the insiders are helping themselves to the real goodies.

The Problem of Monopoly

Tim Harford writes,

No policy can guarantee innovation, financial stability, sharper focus on social problems, healthier democracies, higher quality and lower prices. But assertive competition policy would improve our odds, whether through helping consumers to make empowered choices, splitting up large corporations or blocking megamergers. Such structural approaches are more effective than looking over the shoulders of giant corporations and nagging them; they should be a trusted tool of government rather than a last resort.

Pointer from Mark Thoma.

Unfortunately, I can imagine “assertive competition policy” creating more monopoly power. The problem is that government is by far the most secure monopolist. The more “assertive” is government, the more assertive is this monopolist. One can hope that this monopoly power will be exercised wisely. I, for example, hope that the government could break up big banks wisely.

But the public choice of the matter, as Harford points out, is not reliable.


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.