The Myth of the Rational Regulator
Justin Fox has written a terrific book, and anyone who wants to make sense of what has happened in financial markets in this century needs to read it. Seriously, buy it now. I adored the late Peter Bernstein's books on the evolution of capital markets and Justin has written a more accessible version of those works.
That said, I'll take the bait in his latest post:
Finally, post-World-War-II-style corporate paternalism may not have been sustainable. But it needn't have been replaced by exactly the "ownership society" that we got. As a former gung-ho free-marketeer it pains me somewhat to say this, but government may be able to more efficiently provide for (or at least set the ground rules for) health insurance and retirement income than either big corporations or the free competitive market can.
Someone needs to write a book called "The Myth of the Rational Regulator." Let's assert that Justin has established that markets are not perfectly rational, that they are prone(financial markets, especially) to manias, panics and other non-rational forcings. Why would we expect the government to do much better? Here's a quick illustration: Federal and state governments are partly responsible for the housing boom (and subsequent bust) by having encouraged -- through policy, regulation, tax structure and so on -- home ownership as a societal goal. This is hardly a partisan political point: George Bush was very keen on promoting home ownership as keystone of the very "ownership society" Justin mentions.
If markets fail, it does not then follow that government -- which also fails -- must always and everywhere attempt to correct them. The government's various intrusions in the housing market were designed to address market failures. It is not clear that those efforts have helped matters.
I don't know that anyone—least of all me—is willing to defend the government as the perfect, impartial, rational regulator, but it does have one important difference from corporations or "the free market."
Namely, the government can make decisions for reasons other than profit. Not that it isn't influenced by money in the form of lobbyists and campaign donations, but it has the ability to design and enforce regulations based on what is good for the people, whereas the market and corporations are purely profit driven, even to the point of being required by law to put shareholders and investors first.
Not that trying to do things for the good of the people—including promoting home ownership—isn't also motivated by profit for some, and may in fact not be good for people, but at least a benevolent government regulator has the possibility of doing "the right thing." Unless you're a shareholder, or a Master of the Universe, corporations and the market aren't going to look out for you at all.
Seems to me we should be demanding that our government live up to its potential as a benefactor of the people, not just pointing out that it may (often) fall short of that tremendous potential.
July 14, 2009 12:22 PM | Reply | Permalink
Okay, now I'll take your bait.
You say: "If markets fail, it does not then follow that government -- which also fails -- must always and everywhere attempt to correct them. The government's various intrusions in the housing market were designed to address market failures. It is not clear that those efforts have helped matters."
But who is saying that it follows that the government must "always and everywhere" try to correct market failures? In most cases, the government does nothing. Most of the time, when markets fail (by which we mean -- doesn't do what we want it to do) people are forced to live with the consequences. Heck, even in the current situation where the government has gotten involved big time most people are left mostly on their own to deal with the fallout of the crisis.
I think Justin's suggesting something far less dramatic than the straw man you're arguing against. He's saying something like, "If we know from experience that the market isn't going to provide universal health insurance coverage but that we want it anyway, that's probably where the government should step in."
Nobody is advocating a planned economy here. We know that governments are too fallible to pull that off. But we also know that markets are too fallible to allow for a totally unplanned economy (without the government there'd be no national rail system, no interstate highways and no Internet so admit it, the government has a role to play). Since none of this is controversial in the slightest, I wonder what it is you're really trying to argue.
July 14, 2009 12:28 PM | Reply | Permalink
I think Justin's suggesting something far less dramatic than the straw man you're arguing against.
My thought exactly. Don't we learn these fallacies of poor arguments in introductory logic class?
So the government, while perhaps well-intended, does a subpar job at certain things. Thanks. First, that doesn't mean it does a subpar job of everything, and second, it doesn't mean that the market does the best job.
One point about the quotation: Mr. Fox states: "government may be able to more efficiently provide for ... health insurance and retirement income than either big corporations or the free competitive market can." Here is the flaw: If the market is competitive in the economic sense (many buyers and sellers, homogeneous product, free entry/exit, perfect information) then the market does the best job. Period. However, most markets bend at least one of those assumptions. The health care market probably outright breaks at least two of them (it shatters the fourth assumption because information in health care markets is neither perfect, i.e. there is uncertainty, nor is it symmetric, i.e. some agents know more than others). That is the crux of the problem.
Maybe Mr. Schultz could put a little more effort in, or use some worker reeducation stimulus bucks to take principles of economics and logic at a nearby community college.
July 20, 2009 4:16 PM | Reply | Permalink
Unlike the markets and corporations, government here is nominally, and often factually, the will of the people. The markets are the will of those buying and selling, which may not represent more than a fraction of the total citizenry. And corporations are at best the will of shareholders, and in practice the will of the board and CEO.
So it is not useful to equate government and business; they have goals that are not commensurate. Life is inherently irrational---why does it matter if you or your family thrive? So if government acts to increase home ownership it is irrelevant if the goal is irrational. What matters is if the method is unreliable or counter-productive.
It is not automatically true that the ownership goals of recent legislation were unachievable, since implementation depends heavily on administration in good faith. The latter was lacking in the recent administration, who preferred to reward the businesses instead of the customers.
But expecting the action of some to satisfy the goals of the many is irrational on its face. Business will only ever satisfy its own goals first, which are profit, period. Government can answer the vote-determined needs of the citizens.
July 14, 2009 12:50 PM | Reply | Permalink
I’ve been trying to list successful government programs - here's my off-the-cuff 10 minute list of programs and agencies that work most of the time. I think all of these make life better for most of us.
Federal Govt programs and agencies
Clean water act
Clean air act
Interstate highway system
National park system
NASA
NOAA
FEMA (at least under Clinton)
Social security
Medicare
Federal court system
State Govt - limited to the states I’ve lived in lately - California and Oregon
First, California in the early 1960s:
One of the best public school systems in the nation
One of the best state highway systems in the nation
One of the best state park systems in the nation
One of the best state university systems in the nation
(All this sort of fell apart under Reagan, Wilson, Deukmejian, and Schwarzenegger thus proving that it’s easier to destroy than to create. But my point is that it was created.)
Oregon:
Fairly good public school system
Pretty good state university system
Good state justice, courts, police, prisons
Fairly good state highway system
Good environmental protection
Very good DMV
Very good election system
Local govt:
Police
Fire
Courts
Schools
Good public transportation
Well, you get the idea.
July 14, 2009 7:36 PM | Reply | Permalink
Two words: Canadian banks. Yes, it IS possible to get it more or less right, certainly much more right than the deregulated "free market" did in the US.
July 15, 2009 12:07 AM | Reply | Permalink
Well, Glass and Steagall knew what they were doing back in 1933.
Also, George Bush...really? Did you write this post in five minutes on the can?
July 15, 2009 2:08 AM | Reply | Permalink
Yep, George W. Bush.
He and Cheney had a 'spend spend spend' strategy from the start of their reign of terror, as their intention was to bleed the coffers so social security among other social programs would have to be massively reformed/cut to shreds by force of lack of cash flow.
Doing this via the housing market was a quick way to do it(check out the charts for home ownership in the past 20 years: the spike from 2000 to early 2008 is horrendously massive after decades of relative stability).
Honestly.
I remember it being quite the promoted idea among republicans at the start of Bush's term, and remember Cheney fully endorsing the idea.
July 15, 2009 2:29 AM | Reply | Permalink
When I read the title of this post, I thought it might be about rational-expectations theory applied to regulators themselves. You know, to the issues raised by regulators being able to take enormously lucrative jobs in the very industries they previously regulated, or industry big- and littlewigs taking jobs at the agencies that ostensibly oversee their once and future employers. The incentives are obvious, and obviously not good.
But instead it seems to be about as plausible as arguing that because police won't be able to solve every crime, we should let the market take care of the criminal-justice system.
July 15, 2009 12:09 PM | Reply | Permalink
The point is, as some noted above, there -are- people advocating a planned economy here (and even in Congress, that supposed bastion of moneyed interests). Especially in health care.
The problem with government intervention is that democratic government is not a closed, secret system. People know where the levers are. And the more willing the voters are to allow government to intervene, the more effort vested interests (From the NRA to the AARP to Citigroup) will be willing to expend to influence government. Even aside from the possible distortions to policy (See : Waxman-Markey), this is effort they ought to be expending either growing their businesses or compensating their shareholders. (Economists, in their inexplicable and blind love for acronyms, call this DUP, or Directly Unproductive Activity).
There are some things that government does well; it would be difficult and rather scary to have national defense outsourced (and don't give me Blackwater, they're a side issue). NASA too.
July 15, 2009 4:54 PM | Reply | Permalink