Not only a great crash course in recent financial regulatory history, not only a sound presentation of the insights of constitutional political economy, but also an enjoyable read digestible to the everyman.
A great thanks to Steve, for producing such a classic and relevant piece in such a timely manner. If you’re being asked by friends and family what you think, or what they should look at to learn more about the current financial crises, this is it.
Yesterday at Austrian Economists, Pete was puzzled how the political rhetoric behind the financial crisis managed to wind its way around the topic of executive rewards. Some people were using the platform to voice concerns about wealth, greed and inequality. Not only are these huge companies failing, not only do hundreds of thousands of Americans appear to be on shaky grounds with regard to their mortgages and financial assets, but executives at some of these firms make really high salaries. Oh the horror, the horror!
Steve Horwitz awarded me victory of the thread for this comment:
Shouldn’t we expect failing companies to desperately try to attract innovative and talented executives to implement desperate efforts at turning the company around?
This reminded me of a related point. While traveling last weekend the person next to me on the plane had Greenspan’s new biography. When I saw it I immediately thought of a point from Jim Collins’ From Good to Great.
Collins wanted to answer why some companies have done so well above average market returns for so long (sounds similar to “why some countries are rich and other countries are poor?”). His first intuition is to ignore leadership because if it all boils down to “you have to have Steve Jobs to make a profit” than there is no replicable advice for the marginal company. But even though he wants to avoid leadership he keeps coming back to it and recognizes a unique distinction. The companies that pull out as great have leaders you wouldn’t think of as great. They’re reserved, quiet, work-a-holic types, rather than larger than life Lee Iaccoca types.
Now the real point. Nothing speaks more highly to your specific contribution to a firm (rather than the stability and profitability of the firm itself) than the fact that it falls apart as soon as you leave. That’s what came to mind when I saw the Greenspan biography.
Maybe that’s what’s happening in this financial crisis. If so we should interpret it as a sign of the broken nature of these financial institutions – specifically incentives for self-enforcing constraints. I’m not saying Greenspan was great but maybe he was better than the available alternatives and it’s because of his own relative prudence and foresight that we’ve had financial stability in the past decades. But the institutions themselves and the incentives for financial intervention that they promote are messed up to the core. Now these gone things have gone to hell in a hand-basket.
We usually think that the worst tend to get on top but when someone marginally less than awful gets the job we should be careful not to confuse his quality with the quality of the system.
Though I would expect that one of the benefits of economic freedom and prosperity was safety and security in person and property. There is little to no observable correlation between crime rates and economic freedom. If there was we could have an argument about which came first the chicken or the egg, does a foundational respest for person and property make economies boom, or do booming economies afford the ability to secure person and property. Controlling for OECD and various other things doesn’t really help get out a correlation.
The major reason for not seeing correlation here is because international crime data is pretty bad. Not bad in so far as the numbers are false, but bad in so far as the numbers are incomparable with one another. Different countries have different laws and budgets for law enforcement etc. This is desperately trying to be overcome with various statistical techniques. But I’ll bet we could use some cruder indicators to get out a decent correlation.
Empirical evidence on proportionality has shown that different countries maintain similar ordinal ranks of criminal severity but they vary in magnitude. Other studies are being done to measure the gap between crime and reported crime. I would argue that the placement of murder in the consistent tops of ordinal scales across countries tells us it can be selected as a good objective proxy for crime across countries. Now if we can get a good proxy for the differences between murders committed and murders reported then we would have a good objective measure of how much people trust the cops in their country and I’d expect to see the correlation with economic freedom a la Claudia Williams style.
Lastly I would expect the correlation to be stronger if we held constant for prison populations of non violent offenders. Ideally this would parse out the fact that some of the violent offenders are violent because of the profit potential for prohibition trades.
Any thoughts are welcome.
It seems the financial crises has struck a chord with economists both near and far. The following was one of my comments from The Austrian Economists:
I like to begin a lot my classes by explaining that economics is not all about boring GDP, interest rates and financial markets its about a much richer and deeper set of topics pertaining to all of human behavior.
Perhaps I’ve taken that too far because admittedly I know very little about the contemporary political history surrounding the American financial crises. It seems true regardless of the causes that we must in fact understand the causes before any proposed cure can hope to be effective. As for the cause there are two mainstream perspectives: (1) the republicans did it by de-regulating the financial markets, (2) the democrats did it by sub optimally regulating the financial markets. And both of these lead to some sort of bail out with tweaking today.
I think these obviously seem shortsighted, and I am puzzled at the state of economic understanding in much the same way as Boettke. If 500 planes fell out of the sky we wouldn’t blame gravity we would blame some form of policy or plan, and rightly so. To blame markets in this case seems odd.
But what are these specific “de-regulations” that people are accusing the republicans of?
There’s a host of literature that admits to temporary downturns after de-regulations, if the Republicans truly understood the process of deregulation and had some sort of ideological end in mind, then they would have owned up to the potential of downturns and been prepared for such social expansions (because it would threaten their end). I think this greatly weakens the claim that there is some sort of laissez faire conspiracy behind Washington republicans.
Whenever I come across a website or online article worth reading I bookmark it. Doing some spring cleaning today and want to delete these from my sidebar but not loose track of them forever. They’re obviously relevant here:
1. James Wilson at Volokh Conspiracy claims the net gain from incarceration is worth it.
2. A new blog in the form of a personal recollection of life on the inside from Jon.
3. An op ed on how to survive prison.
4. Levitt comments on inmate uses of technology.
5. Cowen points to this new paper on the econ of Vengeance and this other paper on why burglaries have declined.
6. Some political commentary on the extreme rate of incarceration from Jennifer Gonnerman at Mother Jones. More from Physorg.com and from the creator of the Wire at Reason. Concern about bail for profit in America at NYT.
7. What’s proportionate punishment for child rape?
8. Top 100 criminal justice blogs.
9. Brian Hollar on prison rape.
10. Dick Clark on buying a handgun.
11. Prisoner releases in low budget states and the UK.
Admittedly some of these are old news but here they are. Enjoy.
Alex Tabarrok thought they should about a week ago because the costs of warfare in terms of economics and liberty are both so great and often under-estimated.
This is an argument I find convincing, but now I’m not so sure. In recent comments about the state of the financial crises, Obama said:
“What we’ve seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed”
Scary stuff in conjunction with a blind call for hope and change. Tyler Cowen gets it right:
There is a misconception that President Bush’s years in office have been characterized by a hands-off approach to regulation. In large part, this myth stems from the rhetoric of the president and his appointees, who have emphasized the costly burdens that regulation places on business.
Hat tip to Chris Coyne at Austrian Economists.
If a hurricane hits your neighborhood dead on then your top concern is probably your house and furniture (other precious items can be taken along in an evacuation).
But when the hurricane doesn’t do much pervasive damage, the priorities and burdens of costs are rearranged. Say all that happens is your power goes out. Tossing what would otherwise be perfectly good meat into the trash is disappointing.
There’s got to be some way to harness battery power in the event of a short but significant power outage to maintain some optimal temperature to keep food from going bad. Just a week or so would make a world of difference.
I started this topic a long while ago, but admittedly failed to live up to my hopes. Well here’s another one.
You know those pills or goo you put on your dog to protect them from fleas, well apparently they also protect from mosquito bites. As I’ve been told the dogs actually emit a bit of repellent from their skin.
Why don’t they do this for people? If I could take a pill once a month and never get bitten by a mosquito I would take it, heck even if I reacted like some dogs (puked or freaked out for a little while), I’d still take it. I hate getting bit by mosquitoes.
Cracked has a list of real life vigilantes up past and present.
Lott points to a recent phenomenon where gun lovers are buying up now to avoid costly regulation later.
“We call it the Obama factor. People are very concerned that if a Democrat is elected they will see more restrictions on handguns and assault rifles.” Godell said. “I think as a result of that we have seen steady handgun sales, and there’s been an increase in the sale of assault rifles like AK-47s, as well.”
Given Lott’s More Guns Less Crime thesis, does this mean we can expect to see crime drops after elections when democrats were favored to win?