The Commanding Heights Revisited

Lemuel? Do you have any idea what he’s referring to?

No, the immediate context is the fact that Ireland guaranteeing all deposits had the effect of causing depositors to flee British banks for Irish ones, which is quite clear from the paragraph.

“If only there were experts in the field of trust studies, they could guide us in this task.”

I hear that Banco Istituto per le Opere di Religione is still solvent and seeks to work on both fronts

It is clear that the ideology of free market capitalism is taking a hit to its legitimacy for sure. However, there is no other coherent ideological frame that people can turn too, which is why I think the various bailouts seem so random. Like you say, politicians pay lip-service to taking control of the markets but I don’t think even they know what they mean.

The interesting question, I think, is will there be a ideological alternative that people can buy into. I think the success of movements like fascism or communism was that they could offer a whole other framework for ordering society. Is there an alternative to some variant of capitalism that exists these days (this is an actual question)? Are these European responses a difference in kind or degree?

There is a touching belief that you can choose your economic system, which is sort of like ‘choosing’ the kind of physics you use. There is no choice except the market: the real problem is the character of those who deal within it, and there I have no suggestions beyond public scorn for those who use it recklessly. Although, come to think of it, requiring all investments to be held for a minimum of three months before being sold would probably put a serious dent in attempts to game the system.

There is a touching belief that you can choose your economic system, which is sort of like ‘choosing’ the kind of physics you use.

Ummm, you can’t choose your physics, but you have a lot of choice in how your bridges and power plants are constructed, if you get the analogy.

which is sort of like ‘choosing’ the kind of physics you use.

Can we please dispense with the economics comparisons to physics? They are vastly different pursuits and making the comparison is almost always inept. It just confuses the discussion.

“to the three big US automakers… Privatized profits and socialized losses”

Did any of them make a profit over the last year? Look at the addons in the bailout, err… Rescue Plan, ethanol in particular.

What is overlooked in the excitement over collapsing financial markets is that institutional corruption in the US has been systemic, encompassing industry, government, journalism, and the financial industry. Spin is king in almost every organizational domain, where legitimized, no-fault falsehood is now the orthodox leadership style.

The current consensus on the financial meltdown is that nobody should be punished because everyone shares the blame. It is a guiltless crime of punishment-free robbery. America now leads the world in highly engineered immorality.

I want to touch on the earlier comment about the Korean financial crisis. Many American economists and commentators took that crisis to be an affirmation of the arms-length, equity market-driven Anglo-American business model over the closer “Japanese-Asian” model (as Harvard economist Jeffrey Frankel put it). However, the anonymity of the Angl0-America model may have made us more vulnerable because of the information problems it creates. We have witnessed a complete breakdown of monitoring and screening not just by regulators, but by debt rating agencies, the mortgage lenders (obviously), and the investment banks themselves. What puzzles me about this is, why on Earth were these people asleep at the wheel? Isn’t it in their self-interest to at least know what the hell is in the not-so-securities and credit default swaps that they were buying?

I also want to add that, unlike the East Asian countries, at least there’s nobody that can impose an austerity package on the US. There’s no fat cats half the world away telling us the problem was that liberalization didn’t go far enough, and that we need more orthodoxy.

Does this financial crisis lead to a new international regulatory framework, which many third world economists have been calling for since the many currency crises of the 1990s, now that the core has experienced what happens when the fox guards the hen house?

I’d also put progressive taxation on the list. It was never popular with the flat tax kids but perhaps now when people can see (1) the lottery aspect to high incomes, (2) the tendency of high income constituencies to run to the government teat when things go wrong and (3) the need to pay for (2), having higher rates of tax on higher income people must look pretty good. What exactly is the beneficial activity that we’re discouraging by having higher tax rates on these people?

Ummm, you can’t choose your physics, but you have a lot of choice in how your bridges and power plants are constructed, if you get the analogy.

But not extending to making them out of pixie dust.

Can we please dispense with the economics comparisons to physics? They are vastly different pursuits and making the comparison is almost always inept. It just confuses the discussion.

My point is that people aren’t infinitely malleable and do, by their nature, impose constraints on economic activity which are as real as, say, gravity, and which work out as ‘the market’. No comparison to physics was intended except as another system also subject to an external reality.

D^2 is correct. Asset pricing bubbles are common. Since the seventies, we have the sovereign debt bubble (remember Brady bonds named after who?), S&L crisis, Japan housing crisis, Asian financial crisis, internet bubble, and too many Latin American crisis to remember. Some of these bubbles were very socially costly. So what did countries learn from them? I am not sure very much. Part of the problem is that many people benefit from a bubble when prices are rising. E.g. individuals who want to buy houses during the current bubble. Politicians are loath to burst such a bubble. Who knows. Perhaps a new golden age is at hand. The Asian financial crisis was very costly for Indonesia. But how does a government generate consistent real consistent growth for over 200 million people? For China and India, its over 1 billion people. Ask the government to create jobs for them? While the market is crude, most governments just want to mitigate some excesses and to continue to use it.

D^2 is correct.

Judging by context, you mean Dan Drezner, right? There is someone else with another, better claim to that appellation . . .

For China and India, its over 1 billion people. Ask the government to create jobs for them?

o hai canadian! maybe you do not follow the news much. we are all keynesians in india.

thanks for playing!

The general bafflement about remedies is puzzling. If the core problem is highly evolved methods of deceit, the societal countermeasure is broadly mandated institutional transparency. Remove concealment from institutional actors and you suppress false dealing of all kinds.

Every public company should be required to stand naked with regard to its financial operations, with all internal management accounting publicly available. Every government institution should be similarly visible in its financial and decision making operations.

This open governance model will be at the core of the next wave of real political reform. Anything less invites the next mega-scam. The technology of organized deceit, the “spin” industry, has grown so powerful that it cannot be countered by the patchwork of laws and customs we have relied upon for centuries. A quantum leap in institutional transparency will be required to protect society from the highly evolved methods of fraud that have produced the current disaster.

HH If the core problem is highly evolved methods of deceit, the societal countermeasure is broadly mandated institutional transparency.

I am not an expert on financial matters. But there is a lot of debate about what the core problem is. One argument is that the core problem is that for years it was profitable to buy mortgage-backed securities due to continually rising house prices, so the long-term risk that house prices might fall was ignored. There is a lot of evidence that humans are bad at taking low-probability events into account in decision-making. In particular, bonuses are typically paid annually, which is a short-time frame when it comes to low-risk events. Increased transparency won’t address those problems.

Every public company should be required to stand naked with regard to its financial operations, with all internal management accounting publicly available.

As someone who has spent a fair bit of time trailing through public companies and government-owned companies’ financial reports, may I ask precisely what information will they be obliged to release that they don’t already and haven’t been for years?

Oops, wrong word in my last sentence. “And there’s no institution I know of that is legally required to bail out to the American government.”
I think there are some institutions that are required to hold a certain amount of their assets in US government debt.

Of course not. That is why they went begging for taxpayer handouts. Their stupid management earned profits in prior years by concentrating on gas-guzzling SUVs while Japanese competitors diversified their designs.

The U.S. car companies concentrated on SUVs and pickups because that’s where the Japanese were weakest and so that was the niche where the U.S. manufacturers might earn a profit. Given their much higher legacy and labor costs, focusing intensely on head-to-head competition with the Camry and Accord was certainly not a recipe for success — the Big 3 simply were not in a position build an equivalent car for an equivalent price (and their reputation disadvantage was such that — even if they could build such a car — they’d have to charge less for it). They’re closer to cost competitive now — maybe. They shed a lot of the legacy overhead with VEBA agreements. They’ve bought out tens of thousands of high-paid UAW members and are allowed to hire new workers at lower rates. BUT — they’re having to close plants at a rate so much faster than expected, so the buyouts aren’t deep enough, and they can’t actually hire any of those new lower-cost workers. And, of course, the buyouts drained billions from their remaining reserves.

Don’t sweat the $25B though — when it comes to the automakers, it’s really not all that much money (GM alone lost $39B last year). The $25B gets divided up among all three manufacturers and some parts suppliers too. Given how severely the car market has tanked, those funds will be gone very quickly — there won’t be any private profits deriving from that $25B.

Mq,

One can choose a different set of physics in virtual space….where much of this crap was hatched, measured, and sold. Many times sold.

On another note….if Dan D thinks the present crisis is on the same scale as the S&L crisis he is kidding himself. Or trying to kid us. Then again maybe it is his way of whistling past a graveyard.

One more note on the moribund US auto industry. For the last few decades, the American microprocessor and software industries have dominated world markets. Automobiles are excellent targets for the application of computer intelligence to improve performance, safety, and reliability. The US auto industry was IDEALLY situated to make aggressive use of the world-leading US computing technology base to build the most advanced automobiles in the world. Ask yourself what the automotive equivalent of an IPhone is, and the lack of that product is the clearest indictment of incompetent management of US auto firms.

Blaming the US auto workers for the stupidity of their sclerotic and brain-dead managers is a gross failure to assess responsibility. But no-fault leadership is now the norm in most American institutions, so why should the auto business be any different?

I admire Slocum’s ability to advance his side in class war at all times. If only the left had such commitment, then we’d have a bit of a contest, instead of the one-sided struggle we see today.

The cause is the failure of the UAW to organize the Asian and European transplant factories in the U.S. and impose higher-cost ‘pattern bargaining’ contracts on those operations.

This assertion is contradicted by the failure of the US auto makers to hold market share at the luxury end of the market, where labor costs are a negligible competitive factor. BMW, Mercedes, Lexus, and Acura have crushed the US luxury makes, largely because of the failure to innovate in product design.

If Asian automakers have a substantial labor cost advantage, what accounts for their superior manufacturing technology? Why did the Prius come out of Japan and not the USA? Assembly line workers do not make technology strategy decisions, no matter how lavish their salaries.

It is indisputable that the US auto makers were unprepared for the spike in energy prices and the resulting crash in market demand for their mastodon products. This fault lies with myopic management, which remains firmly in place after carrying off $25 billion in taxpayer money.

So US auto companies must inevitably fail because of class war.

Auto unions didn’t spring up in a vacuum. The negative-sum game developed over generations of management treating labor as enemies and not partners. Every time they got concessions because the company was in trouble and then bragged about their profits it made the next round harder.

Class war. Failing companies.

Given the distrust, could they succeed if all the records were available? If unions and suppliers could actually see how well they were doing? It would surely help. But in good times those people would see the profits and would want a share of them. That has to be OK. And they’d see how management is compensated, and that might easily turn into something for them to bargain over.

Without secrets they’d be more open to attack from foreign companies. Their strategies would be more visible. Kind of like what would happen in warfare if real-time satellite photos were available to everybody, it would change the game. It would have to apply to the american actions of all auto companies.

Does transparency really work? I noticed with SEI-CMM that it was utterly counterproductive to have engineers’ actions transparent to management. You find a problem. You try out multiple methods to fix it, and test the results. You choose the best one and document it. Management calls and asks, “Why did you waste your time on all those wrong ideas? Why didn’t you do it the right way the first time?” They saw experiment as waste. They also saw thinking time as waste. When you aren’t doing anything, how do they know you aren’t just goofing off?

There’s a lot of waste in the system. But if you make it transparent, how will outsiders know what’s waste and what’s productive stuff that looks like waste? We might generate a lot more waste trying to look like we’re getting things done.

So anyway, Slocum is right, we need to write off the traditional auto companies. They can’t adapt fast enough, they’re stuck in class warfare and they can’t get out of it quick enough.

This assertion is contradicted by the failure of the US auto makers to hold market share at the luxury end of the market, where labor costs are a negligible competitive factor.

Nonsense. If labor costs were negligible, then why did BMW and Mercedes build their U.S. plants in South Carolina and Alabama? Why did VW just pick Tennessee over Michigan for its new plant (you could not possibly find a place on the planet richer in highly experienced, readily available autoworkers than Michigan–why would VW pick a location where it has to attract and train workers from scratch?)

We all know the answer, and it’s obvious — labor costs, restrictive work rules, and the potential for production to be interrupted by strikes absolutely are a significant disadvantage which any sane automaker will avoid if possible.

I’m still a bit mystified why lefties would find it controversial that the Big 3 have been undercut by lower-cost, non-union labor. Certainly, lefties would have no political or conceptual problem with the idea that an American manufacturer might be at a disadvantage when competing with low cost labor in China — so why do think this wouldn’t also apply to low-cost labor in Alabama? You’re all seem to be hewing to a party line but the party line doesn’t even make any sense.

MarkUp: More or less, either way could work if they are done effectively.

And if wishes were horses beggars would ride.

Of course regulation could work if it is done effectively. That’s the definition of the word “effective”. The problem is actually doing it effectively. And we are talking about a situation in which there are often long lead times between regulation and eventual problem development, and little scope for small-scale experimentation. This makes me incredibly skeptical about our ability to do regulation effectively.

Hmm, so you’re advocating for less based on?

I advocate less regulation because it means spending less money on lawyers and accountants. Which means more to spend on really good chocolate. Or, alternatively, to spend on dealing with global warming.

Regulations are reactions to to past events put in place to to try and avoid them happening again and to, at one point, prescribe punishment[s] if/when they do.

Note the word “try”. However, there is a risk that regulations will fail to prevent past events from happening again. There is also a risk that regulations will cause new, unexpected events to happen. Then there is a risk that the prescribed punishments will also stop things that we actually want people to be doing.

There are lot of cases in human history of schemes being put in place to try to stop things from happening that probably helped cause future problems. The Treaty of Versailles being one example. Another is attempting to stop food shortages by putting caps on the price of food.

Why do we have all those pesky traffic signals and lines on the road?

Well, firstly traffic accidents sadly happen far more frequently than financial crises (judging by national death rates on the roads), so the learning cycle can be far swifter. Also the measure of failure is more obvious.

Secondly, the latest movement in traffic signals is to have less signs and signals. Apparently it leads to lower accident rates, though I’ve never looked into the data myself and would be interested to see a critique of the work.
See this guy: http://www.wired.com/wired/archive/12.12/traffic.html
http://www.timesonline.co.uk/tol/news/environment/article3359881.ece

Of course there is even less support that having less or no regulation will avoid crises either.

Since as far as I know no one has provided any support for the idea that having regulation will avoid crises, I don’t know how you can say that there is even less support for my argument.
Anyway, since regulation is expensive (it takes up the time of parliament, lawyers, accountants, courts, etc) the onus is on those advocating regulation to provide some evidence that the costs outweigh the benefits.

If you don’t like this idea that the advocates of doing something need to provide some evidence that it will work, consider an alternative policy measure. Sending me large amounts of chocolate will avoid future financial crises. Okay, I have no evidence to support this policy idea, but if that’s not a problem for advocates of regulation I don’t see why you would suddenly start worrying about it in my case.

I’ll also note that avoiding crises is not the only relevant criteria. Reducing the number of crises is also nice, and high living standards is valuable – the financial crisis in Japan did not cause half the suffering of the East Asian currency crisis because the Japanese were having a crisis from a far richer base.

It is design and leadership failures that have killed the US auto industry…

And what is your theory for why those supposed design and leadership failures have killed the US manufacturers only in North America but in no other market in which they operate? Why is Buick dying in the U.S. but thriving in China?

http://www.msnbc.msn.com/id/12801549/

How is it that GM execs are morons when it comes to the domestic market but smart enough when it comes to foreign markets?

Nobody’s arguing that the management of U.S. automakers have not made mistakes–all organizations of that size are bureaucratic and make many mistakes. Mercedes, for example, made a colossally expensive mistake in buying Chrysler. In the process, it also took its eye off the ball in its own operations and, for some years, produced Mercedes sedans that were among the least reliable cars on the market. VW has been fighting quality problems for years. Toyota, in the U.S., has made the mistake of investing heavily in pickups and SUVs and its sales have suffered for it. Also, its designs are widely criticized as bland and uninspiring (‘the ultimate driving appliance’) and quality is not what it once was. But because of its cost advantages, Toyota has a lot more room to make mistakes.

I don’t find the current crisis a major crisis for my underlying ideology of free market capitalism. My defence of capitalism is not that it’s perfect, merely that it’s better than any other economic system that humanity has so far tried.

Free market theory is mostly homologous to evolutionary theory and I like it. Get free competition and the best adapted prosper, the worst adapted go extinct, and evolution continues from there.

It tends to fail in real life because we don’t have enough competitors. You need at least a few thousand companies competing for the same niche if you hope for good results. Also the winners tend not to split into smaller companies that vary the winning strategy. Instead they get bigger and gain economy of scale. Market economy of scale is particularly important — the more market share they control the more they control the distribution channels etc and the better they can freeze out smaller competitors. So the very entities that have adapted the best tend to change things to make further adaptation slower and more arbitrary.

I think free markets would be much better if we had a limit on the size a corporation could get — when it gets too big it must split into two or more smaller corporations. What we lose in physical economy of scale we make up in speed of evolution.

Advocates of regulation have hardly made a convincing case that regulation will prevent future crisises from happening.

I don’t know how to measure that. We can look at how many years we go before the next crisis. Is that the measurement? There’s no way to measure the crises they prevented, the ones they stopped before they got started. We can only measure the failures.

Suppose we had transparent records. You could look at an executive’s plan for the worst case. Say it’s a manufacturer, you see “At time X suddenly for no predicted reason our product completely stops selling, and also we get lawsuits blaming our product for at least 30,000 deaths. We immediately shut down production, and we look for information on the tragedy. We perform studies to find out how our product could have been responsible, and just how small the chance is of that happening. We refer to our previous research that indicated such things would not happen, and check for errors. Call our lawyers, and with their permission issue a cautious denial. ….”

Maybe that’s too bad a worst case. “At time X for no predicted reason our product completely stops selling. We shut down production, and we try to find out why this has happened. We prepare to move money from short-term bonds to cash to meet immediate expenses. We prepare to move money from long-term investments in case it’s needed. We alert our advertisers that fundamental changes in the campaign may be needed. No comment to the press until we find out what’s going on. Calculate how long we can last with no sales, without a loan. When we find out what the problem is then we can look at how to fix it. ….”

If we actually looked at that sort of thing I’m pretty sure we’d see that our laws which promote hostile takeovers strongly discourage US companies from maintaining the financial reserves they’d need to weather a setback. A company that has those reserves is a takeover target; its management is too “conservative”. Corporations are instead supposed to borrow the money they need for expansion or to handle crises — which leaves them vulnerable to a credit crisis. Those laws should be changed but I’m not clear how they should be changed. It should be acceptable for a corporation to maintain cash reserves that it can use for its own expansion or crisis.

Blue chip stocks should offer slightly less payout and they should be less risky. It should be clear that this is the case.

There’s no way to prevent fraud or stupidity, but if individual companies are small then no one of them can do too much damage with fraud. And a whole flock of them can do something stupid in unison and fail together, but it should be obvious which companies are in and which are out of the risky strategy.

I’m not clear which sorts of regulation would help most, but no-regulation has been shown not to work. There was essentially no regulation for Teapot Dome, for example. I would strongly support regulation about some basic things, for example company size. Many small companies competing under free enterprise gives lots of room for evolution. A few large companies that control the market and that gain a lot of control over those who try to regulate them, give very little room for free enterprise to act.

Regulation is a control mechanism. It is not necessary to prove to most people that thermostats and smoke alarms are useful devices.

However, it is important that if someone asks whether or not a thermostat or a smoke alarm is a useful device, there be some data to back it up.

Before the era of extensive government regulation small panics could grow into massive disruptions of the economy.

Can you provide any reason to believe that after the era of extensive regulation small panics couldn’t grow into massive disruptions of the economy? And I would like to see your definition of “small panics” and “massive disruption”, I don’t want to drag out various examples of massive disruptions after the era of extensive government regulation only to be told that they were caused by something other than a small panic.

One need only consider the frequency and scale of historical financial panics and collapses to see the benefits of regulation.

Cool. Please provide the data we should be considering. Also please provide this for more countries than the USA. A number of people appear to be convinced that the US political system is uniquely corrupt, so its experiences are not a guide for the rest of the world.

All advanced countries have heavily regulated economies. Are they all under the grip of delusional thinking?

Firstly, I assume by advanced countries, you mean something like the UN’s Human Development Index (HDI).

Secondly, I am not sure on what basis you say that all advanced counties have heavily regulated economies. What are you comparing them with? The non-advanced countries have even more regulated economies (for those countries for which data can be gathered). Look at the Index for Economic Freedom at http://www.heritage.org/Index/.
For example, Iceland is number 1 in the world in terms of the UN’s HDI, and 14th in the world on the Economic Freedom Index, and gets 70% in terms of financial freedom specifically in the index. Australia is 3 in HDI and 4th in economic freedom, 90% financial freedom. Sweden is number 6 in HDI, and 27th in economic freedom, 80% in financial freedom. At the bottom of the list, Sierra Leone is 177th in HDI and 139th in terms of economic freedom, 40% financial freedom. Burkina Faso is 176th in HDI and 103 in Economic Freedom, 50% fiancial freedom. The main exception to the rule that more advanced countries have more economic freedom than less advanced ones is Botswana, 124th in HDI, 36th in terms of economic freedom. But Botswana is having its own drastically high GDP growth rates, just from a very low base. (And evidently has had a serious public health failure over AIDS, which must supress productivity by killing so many people of working age). You can define advanced countries as heavily regulated if you want, but if you do so you need to use some word like “really heavily regulated” for the rest of the world.

Thirdly, I suspect that one of the reasons that advanced countries tend to be advanced is that they often have, for all their faults, political systems that allow people to ask difficult questions about whether any particular regulation is justified.

”Note the word “try” …”

I think I saw that somewhere earlier, perhaps when I typed it, but sometimes the left hand of left-handed lefty gets a tad unforethoughtful ;) There’s risk just waking up in the morning, especially if a chocolate thief has been about.

“The Treaty of Versailles being one example. Another is attempting to stop food shortages by putting caps on the price of food.”

Of course both of those are better examples of ineffective regulation, largely due to varying political and economic desires. Effective regulation also has to counter the other factors in an equation. What is the environmental impact of no food price cap for example. It would be nice and simple if the building code simple said, “a house must be built so that the occupants are safe as are any that are in the immediate vicinity, and it is to be energy efficient.” Or perhaps even better, “builders must always do the right thing.” The latter could also be directly applied to doctors, landlords, CEO’s and waste collectors. Our biggest problem with effective regulation is in trying to keep up with the rapid increases in technology – the underlying behavioral problems are more or less the same as they were approx. 3,768 years ago. One could of course try and argue that since the advent of written law, the meting out of ‘justice’ has become more skewed.

The line on the road doesn’t stop one from crossing it, or catch one who does [though it won’t be long till it does] in past, present or future, same as the light at the intersection. Yes, there is good data that shows improvement with fewer traffic signals, but it is conditional – that is folks have to behave well. Long ago regulations were written prohibiting killing other folks. Obviously this has been ineffective due to the continuation of that behavior. Should we eliminate it?

The rich countries tend to have more economic freedom than the poor countries.

If you start watching midway through the movie things don’t make much sense.

Secondly, I am not sure on what basis you say that all advanced counties have heavily regulated economies.

You are quibbling about degrees of regulation because you can’t establish that regulation of financial markets is an unjustified fetish. A simple proof of regulatory efficacy is the US regulation banning stock trading on inside information. Some foreign stock markets have no such bans, and they are poorly developed because they are, rightly, considered unfair exchanges in which large investors fleece smaller investors through superior access to private information. If this regulation were suspended in the US, stock market activity would contract significantly because insiders would immediately abuse their advantageous information, and the losers in those trades would desert the exchanges. QED.

You really should consult a list of trading practices prohibited by the SEC before you make absurd claims about the uselessness of financial market regulation.

MarkUp Of course both of those are better examples of ineffective regulation, largely due to varying political and economic desires.

So we are agreed that just because a regulation exists is no reason to be confident that it will be effective?

It would be nice and simple if the building code simple said, “a house must be built so that the occupants are safe as are any that are in the immediate vicinity, and it is to be energy efficient.”

What do you think the costs would be of a regulation for which people cannot predict ahead of time if they are in compliance with it or not?

Or perhaps even better, “builders must always do the right thing.”

What ability do the courts have to determine if builders did the right thing? What happens if, for example, a builder dumps her boyfriend the lawyer, and he decides to get back at her using this regulation?

Effective regulation also has to counter the other factors in an equation.

Which is part of what makes effective regulation so bloody hard and so unlikely.

The line on the road doesn’t stop one from crossing it, or catch one who does [though it won’t be long till it does] in past, present or future, same as the light at the intersection. Yes, there is good data that shows improvement with fewer traffic signals, but it is conditional – that is folks have to behave well.

And in the case of traffic, a strong incentive to behave well is the fear of damaging your car or yourself in an accident (for some people the former being far more important than the latter). Yet removing traffic signals meant fewer accidents, if the data in question can be trusted, despite people still having the same incentive to behave well.

Long ago regulations were written prohibiting killing other folks. Obviously this has been ineffective due to the continuation of that behavior. Should we eliminate it?

Sigh. So one regulation isn’t 100% effective, so therefore we should pass numerous other regulations, without even bothering to look at any evidence that any of these new regulations will be effective? This is an even worse argument for more regulation than your previous one.

I will point out again the costs of regulations. They take up time. They take up parliamentarians’ time. They take up lawyers’ time. They take up accountants’ time. If you enforce them, they take up the justice system’s time. They cost money for the salaries of all these people. The more regulations we have, the less resources we have for dealing with other problems, such as global warming. The more laws the police have to enforce, the less time they can spend on the really important ones, like the ones against murder.
Also at some point, as regulations increase, people start losing the ability to follow all of them. And the more regulations you have, the more opportunities for conflicting regulations, which makes life really difficult.

You are arguing that the mistakes of the US automaker management have not been disastrous. You are asserting that greedy American auto unions have wrecked the industry.

No. Management and unions alike lived very well for decades. “Generous Motors” was generous to management and labor alike. Trying to get the maximum for their members is what unions do — self-interest (or greed if you prefer) is a constant. But the UAW has always been careful to use ‘pattern bargaining’ with GM, Chrysler, and Ford — imposing the same costs on all, so none would have an advantage (with occasional temporary variations when one of the companies ran into trouble). And they always picked just one company (the strongest) as the strike target. Which meant if GM was the strike target and it resisted the UAWs demands and took a long strike, it would be screwed as its factories shut down, but Ford’s and Chrysler’s kept humming away. On the other hand, if it signed a deal, the UAW would turn around an impose the same on Ford and Chrysler. Was GM going to sacrifice itself to benefit Ford and Chrysler? Not damn likely.

In fact, as long as all its competitors had to pay the same, none of the Big 3 really cared all that much what their labor costs were — just pass the costs on to consumers and everybody’s happy with a boat and snowmobile and cottage ‘up north’ (as we say in Michigan). Worked great (well, for everybody except the consumers anyway).

But this system broke down was when competitors arose outside the Big 3/UAW compact and managed to stay outside and didn’t have to sign the ‘pattern’ contract. The slide of Big 3 toward bankruptcy was a long slow process, though — there was a ‘lot of ruin’ in Detroit. It took a many years for the foreign companies to construct plants, build supplier networks, design vehicles to better match American tastes, build dealer networks, and so on.

Good to see that despite adverse conditions, output of internet BS shows no signs of slowing down.

I expressed my skepticism about whether tight regulatory structures will be any better at avoiding crisises than what we have now.

that depends on how long those structures last. all leashes snap eventually.

also, it’s crises not crisises. pls to use spellcheck :)

It is going to be hard for the unpaid message-board propagandists of unregulated markets to adjust to life in the dustbin of history.

Tracy
“What I am saying is that advocates of regulation have not made a case that it will stop future crises from happening.”

Is a ‘straw man’ an output of Intelligent design or and evolutionary byproduct only seen around Halloween? There is no way to adequately regulate/legislate human behavior – morality. You seem to be ok with the notion of evolutionary theory, but are you really? I sorta get the ‘it’s the Klamath salmon’s own fault they were ill equipped to evolve and flourish with little to no water’ kinda argument. I mean just how do I prove they would?

A request: can someone show me at least one (1) instance where engels has actually contributed something constructive to the discussions on this blog, rather than just insulting folks?

Effective regulations must be rather easy, there are tens of thousands of them on the books and have been for hundreds of years in all countries. Most of the ineffective ones have been removed.

The U.S. financial markets avoided a blow this severe from the Great Depression until now due to regulations, and I believe it is widely taken that the cause of the present problem is overleveraging in the mortgage and shadow banking system, which could have been avoided by regulations on transparency and margin requirements upon those financial “instruments.”

See the case of McCain’s economic advisor Phil Gramm, who inserted last-minute law into a huge Senate bill so that derivatives could avoid these requirements.

No doubt there are lots of details and lots of blame to go around, but presuming that stronger regulations aren’t in the offing and won’t solve the problem misses exactly one-half of the real problem. Any costs of regulations are figured against benefits, of course. And regulations work, as any institution does, by reducing uncertainty and therefore transaction costs. So by speeding up transactions, regulations can increase economic efficiency as well as personal liberty.

The example of traffic lights is apt, because removing them REDUCES the speed of traffic.

In the words of Herbert A. Simon, “What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention, and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”

We might add an additional factor: the continuing division of labor in advanced societies is causing all individuals to have an increasingly narrowed competence in information evaluation. Because you are in competition with others in your own field of expertise, it takes all your time just to stay up-to-date in that field. And many fields are slowly differentiating further.

This is “information overload + attention narrowing” (no one has created a good phrase for it,) — all because of a crowding and complexifying society.

Free markets won’t completely solve it because, contra Hayek, prices do not carry all the necessary information. For one thing, prices are restricted to conveying scarcity and wants, not underlying soundness of the assets nor environmental friendliness of the goods. For another, prices depend not only on supply but on demand — but if you don’t have full information beforehand, then you can’t accurately compose demand.

The only possible solution is a partial one: regulation by trained experts, vetted by democratic transparency, in concert with the market. The current situation in world markets demonstrates reliably that even in a world of agents and brokers performing some of our information specialties for us, we need regulations.

J Thomas: It tends to fail in real life because we don’t have enough competitors. You need at least a few thousand companies competing for the same niche if you hope for good results.

I don’t believe this. New Zealand is a first-world country in terms of the economy, even without a few thousand companies competing for the same niche anywhere.

And they do it with utterly inadequate competition, except as they face competition from imports.

This proves that they do adequately without free competition, that free competition is not necessary. But I say it would be a good thing.

As for your other criticisms, my argument is not that capitalism is perfect, it’s that it’s better than any other economic system humanity has yet tried.

That’s fine, let’s try it. With the single simple requirement that corporations should stay small enough that the top few don’t dominate their markets, we could create an effective capitalist society! I say we try it! It would be a lot better than the mostly-noncapitalist system we have now.

As for your other suggestions, I am not an expert in financial regulation but: – hostile takeovers are a good incentive for improved management performance –

How do you measure improved management performance? What I see is they are a good incentive for companies not to have assets. This is not the same thing at all.

I think you’d do better to stop with your first sentence.

As for your other suggestions, I am not an expert in financial regulation. Fixed.

You don’t know what you’re talking about, and you think that the rest of us should disapprove in general of all regulation unless we can persuade you to change your preconceived ideas by showing you convincing hard data in our blog comments.

I think if we could afford it, we’d do better by having free enterprise in regulation. Get different regulations different places and see which ones fail quickest and worst, and zero in on the regulatory structures that work. But our economy is not big enough to do that very well.

Luckily, free enterprise is not the only way to set up effective regulation. Unluckily, we don’t always use the methods that work.

can someone show me at least one (1) instance where engels has actually contributed something constructive to the discussions on this blog

A constructive contribution would be wasted on this thread.

fun watching Slocum accuse the unions of destroying the US car industry without once mentioning the US’s idiosyncratic health system.

Also fun to watch Slocum take this position on relative costs, without considering whether maybe the cooperative capitalist system in Japan doesn’t also impose significant costs on the Japanese car makers. They have unions in Japan too, Slocum.

I wonder if Tracy W got her university degree before NZ was privatised…? Most New Zealanders I know aren’t very happy with this type of free market ideology – they’re too busy watching their student loan repayments skyrocket along with the price of milk to complain about it though.

Henry:
Advanced industrialized economies are heavily regulated in comparison

In comparison to what?

and have well funded regulators who can do their job.

This claim is a surprise to hear in the middle of a financial crisis in advanced countries.
Also, are advanced countries advanced because they have well-funded regulators, or do they have well-funded regulators because they are advanced?

As Doug (who is as right wing an economist as you could hope to find) argues, rules may be costly, but they are essential to market exchange.

Not all rules. Some rules are bad for market exchange – for example price controls. And, I strongly suspect that at some point adding more rules, even if each rule in itself isn’t that bad, makes legal market exchange impossible. Also, the resources of the justice system are limited, so every rule that is added affects the resources available for enforcing the previously-existing laws.

More generally, you appear to be assuming that because I question the value of regulations and think their advocates have a burden of proof I am therefore opposed to every single rule you can imagine. This however is not my view.

Claiming this as some sort of global composite measure of the extent of regulation in an economy is – bluntly – talking smack.

Then what’s your measure of regulation between advanced and non-advanced countries?

If you don’t like the index of economic freedom, then how about the indices constructed in this paper? http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/02/07/000090341_20050207082757/Rendered/INDEX/wps3469.txt

I may be talking smack but at least I attempt to base my beliefs on evidence.

H Do you not believe that any regulatory response is appropriate to the collapse of America’s investment banks caused by over-leveraged investments and misrepresented risks? Why would you assume that new regulatory structures could not be justified?

Aaarrggghhh! Have you not been reading what I have been saying? The people arguing for new regulations are the ones who have an obligation to make an argument that their regulations will improve matters! I don’t assume that new regulatory structures could not be justifed, but I haven’t seen the justification that they will actually improve matters.

Look, medicine has made many advances over the centuries by introducing new treatments and drugs. Antibiotics have likely saved my life. But that doesn’t mean we should adopt every new drug that comes along without looking for evidence that it is effective. And, the promotors of a new drug are the ones who should be providing evidence that it is effective.

the promotors of a new drug are the ones who should be providing evidence that it is effective.

Duh! Are you suggesting that regulation of the US financial markets in the post-Reagan era was undertaken lightly and capriciously? In two terms, Dubya Bush steadily undermined the enforcement of EXISTING regulations at the SEC and other Federal administrative agencies. Take a look at your investment portfolio before you worry about the pendulum swinging too far the other way.

J Thomas: And they do it with utterly inadequate competition, except as they face competition from imports.
And the data behind this assertion is?
This proves that they do adequately without free competition, that free competition is not necessary. But I say it would be a good thing.
This is an odd claim when by the Index of Economic Freedom NZ is 6th in the world in terms of ranking.
You don’t know what you’re talking about, and you think that the rest of us should disapprove in general of all regulation unless we can persuade you to change your preconceived ideas by showing you convincing hard data in our blog comments.
Well, more precisely I think that people should in general disapprove of all regulation unless there is some good reason to change their minds. This is because regulation is expensive in and of itself, so it should only be undertaken if there is some good reason to think that the benefits will outweigh the costs.
I think if we could afford it, we’d do better by having free enterprise in regulation. Get different regulations different places and see which ones fail quickest and worst, and zero in on the regulatory structures that work. But our economy is not big enough to do that very well.
I think we are slowly doing this over the centuries and across the world.

SG – so basing regulations on evidence is a free-market ideology now, is it?

HH – I don’t know what’s going on with you. One comment you ask if I am suggesting something about regulation in the post-Reagan area in the USA, the next you are saying that I only take one position that ineffective regulation is bad. Please make up your mind about how many positions you think I am taking. As for regulation of derivatives, yes, I would require some evidence that regulation of this is a good idea (the evidence should of course take into account the limits of possible data, given our inability to conduct medical-style double-blind randomised trials on financial regulation). I am not sure what you are talking about when you talk about people who believe that government is intrinsically incompetent and malevolent, personally I think the competence of government depends on the matter in question – short, clear feedback loops make for more competence in nearly any organisation than long ones, regardless of how benevolent its members are. I do however think it is foolish to only look at current conditions when making regulations that will last many years.

Tracy>”Eight is not nearly enough. Fifty might sometimes be enough, a thousand is usually enough.
When there are too few competitors it’s predictable they’ll compete on random grounds…”

So after all that, it would appear that we need more regulation, a lot more, based on a much more random process and without any evidence that they will succeed or indeed needed. Sorta of a self regulating system of arbitrary regulation where the strong survive and the others become pirates in the Gulf of Aden.

The Japanese automakers built plants in the US to ease protectionist pressures, and to get around the “voluntary” quotas they agreed to with the Reagan administration. If they hadn’t built the plants here, they would surely be at the mercy of a high tariff by now.

Allowing people to speak but placing reasonable limits on the frequency with which they may do so–so that others can have their say as well–is not “censorship”.

shorter Henry: get a room, you two!

Slocum, isn’t that gold-plated package for American workers partly a response to things like the idiosyncratic health system?

No. Zero out of pocket is not the global standard either.

If the US government makes it too expensive for US companies to produce, then of course new entrants will adopt a different model.

But the U.S. government and the U.S. health system have clearly not made it too expensive to produce in the U.S. as all the Asian and European auto plants here demonstrate clearly. And these companies haven’t adopted a ‘new model’. They provide health insurance to employees along the same lines as the vast majority of companies here do.

I don’t see why you should blame the UAW for this when the UAW is just protecting its workers from the harsh conditions of the US healthcare industry.

When it comes down it it, having richer benefits and lower (or no) deductibles and co-pays is just another form of compensation. In the end, its about money and the form doesn’t really matter. What I do blame the UAW for is this:

1) Monopoly rent seeking. The UAW monopolized auto production labor and demanded (and received) monopoly rents. This did NOT, in general, harm the profits of the Detroit automakers for many decades. Who it DID harm were the millions of Americans who overpaid for their cars.

2) Short-sightedness. Once the non-union plants were in place and it was obvious UAW organizing was not going to succeed, the UAW should have tempered its demands to allow Detroit to match the costs of Toyota, Honda, et al in the U.S. Yes, it would have been tough to do, but the alternative was…well, what we’re seeing now — a decline in UAW membership that has reached ~70% (and still dropping), and the companies that employ the UAW possibly headed for bankruptcy.

Henry, in response to your criticism of the Heritage’s Foundation Index of Economic Freedom, I presented a link to the World Bank, which uses a combination of different indices. Admittedly, the World Bank index does use your despised Index of Economic Freedom, but it also uses five other indices. To quote: “Doing Business (The World Bank Group), Index of Economic Freedom (The Heritage Foundation), Economic Freedom of the World (The Fraser Institute), Labor Market Indicators Database (M. Rama and R. Artecona, 2000), The Corporate Tax Rates Survey (KPMG), and International Country Risk Guide (The PRS Group).”

I am rather surprised that you regard finding an alternative source of data, in response to criticism of the original source, a continuation of defending the original source of data.

I am not sure what you mean by “percentage of US economic growth dedicated to institutions that lower transaction costs” – did you mean to write “percentage of US economic growth caused by institutions that lower transaction costs?” Anyway, much though I admire some aspects of the USA, I do not think that one data point is enough to establish whether advanced countries are heavily regulated in comparison to ones in the Global South. For a start, wouldn’t it be useful to include a country in the Global South as a data point? Beyond this I thought fairly obvious point, variation between countries is vast, eg I would guess that the USA is probably more regulated than Somalia and less regulated than Zimbabwae or North Korea, and I would guess that a city state like Singapore is different again to the USA. (I say guess because I don’t have any comprehensive data apart from what I have presented before). Before I can conclude that advanced countries are more regulated than less-advanced countries I am afraid that I need to see something that covers either nearly all countries in both categories, or some sub-sets that don’t exclude countries on some basis that is likely to bias the conclusion. You are welcome to attribute my skepticism here to my standards of argument.

And if your only substantial point is that ‘too much’ regulation is a bad thing, then you’re battling a straw man.
Luckily for me, I do have another substantial point – that sometimes regulators, even well-funded regulators, make ineffective rules. The surprising evidence that accidents can be reduced by removing traffic signs and signals is one example. And regulation of traffic strikes me as an easier job than regulating financial markets – for a start you can do experiments, either in simulations, or in small parts of real life. Then sadly traffic accidents come along more frequently than fianancial crises (I say sadly because of the associated road fatalities), so the feedback loop is shorter. Your original post struck me as omitting the important question of whether the listed regulations and bodies would actually avoid or even reduce the frequency of future financial crises.

TA sweeping blade of flashing steel riveted from the massive
barbarians hide enameled shield as his rippling right arm thrust
forth, sending a steel shod blade to the hilt into the soldiers
vital organs. The disemboweled mercenary crumpled from his
saddle and sank to the clouded sward, sprinkling the parched dust
with crimson droplets of escaping life fluid.
The enthused barbarian swilveled about, his shock of fiery
red hair tossing robustly in the humid air currents as he faced
the attack of the defeated soldier’s fellow in arms.
“Damn you, barbarian” Shrieked the soldier as he observed
his comrade in death.
A gleaming scimitar smote a heavy blow against the
renegade’s spiked helmet, bringing a heavy cloud over the
Ecordian’s misting brain.

Shorter Tracy w: If you may not have perfect regulations, it’s better to have no regulation at all.

Seriously, though, I think the world will be a better place if people stopped treating themselves like public policy experts just because they’ve read Reason Magazine for 6 months. What happened to analysing the facts of the case, looking at the mechanisms at work, and then checking whether there are any specific areas where information asymmetries can be resolved and incentives realigned?

Or do these self styled experts prefer to make their decisions according to irrelevant semi-detached anecdotes about traffic signs?

J Thomas – I agree with you about the value of looking for a better way, and trying it in a way without major risk. But this is one thing to do with things like smoke alarms, and traffic regulations, which you can simulate (in ways ranging from burning toast and seeing how long it takes the smoke alarm to start, all the way up to fancy driving simulators). It’s harder to do with financial regulations that seek to prevent low-frequency events from occurring.

I also note that a danger of regulations is that many business people are aware that a regulation is a good way of creating a monopoly, or some other version of the “Send Tracy W chocolate” intervention, but more expensive and with the self-interest slightly more disguised.

Arthur: It is more precise to summarise my views as that if we don’t have a decent reason to think that a regulation will have benefits that exceed the costs, it is better to have no regulation at all.
I think on the whole you underestimate the advantages of not knowing things – I never could figure out what advantages private-public partnerships, or PPPs, were meant to offer over the government just building it directly, and judging by recent news in the UK, that was because they don’t. After that experience, I’m not going to be dazzled by financial regulations that, as you point out, are not even specified.
Thank you for the suggestion about US monetary history, I will have a look for one of those books.

Tracy, the same argument you make would apply just as well to housing codes. The government wants to prevent things like houses burning down or collapsing unexpectedly, so they specify rules about how well houses have to be constructed. We have had very bad results with houses that don’t meet code.

There could be a technological fix for this. We could have house designs that leave the construction details exposed so that anyone who knew how could see them. If a house is so badly built that no one wants to buy it, then the owner can fix it up or burn it down, his choice. But we have not developed that construction technology.

Similarly with traffic regulations. In my observation the traffic rules mostly don’t work because traffic police aren’t willing to use much judgement about reckless driving. If they see you doing something debatable they let it go. They go after specific broken rules — speeding, drunk driving, running red lights, etc. Things they can easily measure. And then the result is punitive and not educational. They collect money, and they try to get drivers to be afraid of losing money. They don’t help train new habits.

A technological fix might involve letting traffic police (or anyone else) take videos of the traffic on the road, and publish examples of bad driving. People who get caught driving badly could go into training centers and get their videos analyzed and explained, and look at videos of bad accidents that happened when other people did the same things, and drive simulations where they’d get the chance to face dangerous situations and respond well. We could release the simulations so that kids could practice safe driving before they actually get onto the streets. But we haven’t started on that.

The natural approach for americans when we see people do things we don’t like, is to tell them they have to quit and then try to make them quit. Sometimes there might be alternatives that would work better. But often regulation works pretty well. If you figure a patrol car costs $100,000 a year including maintenance etc, and policemen to drive the thing cost $80,000 a year each, they definitely save the economy money if they prevent five serious accidents a year. Really they save money at three serious accidents. They don’t have to do all that well before they do more good than harm.