Jean Tirole on French Government

In 2007, he wrote,

Every action of the State must be subject to a double independent evaluation. The first should be before the action: Is public intervention necessary? What are the costs and benefits? The second is after. Did it work? Was it cost effective? On this point, it would be necessary to require that the audit recommendations (for example, those of the Audit Court) be either followed according to a strict schedule, or rejected with a convincing justification.

Interesting throughout. Pointer from Mark Thoma.

The Season of Giving

I would recommend giving your progressive friends gift subscriptions to Regulation. The articles in the current issue, as usual, show the gap between intention and outcome.

For me, the issue was too depressing to digest in one sitting. It is hard to single out any one article, but perhaps Peter Lemieux on the U.S. wanting to apply tariffs to Chinese solar panels is the one that describes a government action that even a progressive should easily find reasons to condemn.

Do you believe in respect for international law? The World Trade Organization ruled against the U.S. Do you believe in using “green” energy to fight global warming? Raising the price of solar panels will reduce the use of solar power. etc.

Larry Summers Favors Nirvana

He writes,

the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

Pointer from Mark Thoma.

If we assume that government invests perfectly rationally and efficiently, then I think we have to agree that infrastructure spending is likely to be a free lunch. That is because it is impossible for the private sector to allocate resources perfectly rationally and efficiently.

Of course, in order to assume that government spends money rationally and efficiently, one has to ignore public choice theory. A bridge to nowhere is not a free lunch. A huge loan guarantee to a “green energy” company that goes bankrupt is not a free lunch.

In the real world, human fallibility does not disappear when the decision-maker crosses from the private sector to the public sector. In my area, a highway called the “Inter-County Connector” has cost billions of dollars, caused construction-related disruption for years, and carries almost no traffic. A “transit center” near where I live was structurally unsound, and the excess costs probably will be in the billions. No free lunches there, either.

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.

Schucks

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.