The Commanding Heights Revisited

by Henry on October 6, 2008

When I suggested a couple of weeks ago that the intellectual hegemony of free market capitalism was under threat, Dan Drezner expressed polite skepticism.

Is this the beginning of a norm shift in the global economy? It’s tempting to say yes, but I have my doubts. The last time the United States intervened on this scale in its own financial sector was the S&L bailout — and despite that intervention, financial globalization took off. The last time we’ve seen coordinated global interventions like this was the Asian financial crisis of a decade ago — and that intervention reinforced rather than retarded the privilege of private actors in the marketplace. In other words, massive interventions can take place without undercutting the ideological consensus that private actors should control the commanding heights of the economy.

Contradicting evidence began to emerge the weekend before this one, at least on the rhetorical level. First, this statement by Germany’s Finance Minister:

The minister, who has spearheaded German efforts to rein in financial markets in the past two years, attacked the US government for opposing stricter regulations even after the subprime crisis had broken out last summer. The US notion that markets should remain as free as possible from regulatory shackles “was as simplistic as it was dangerous”, he said.

Language like this – from politicians in countries that chafe most under the current ideological consensus – isn’t entirely unexpected – it suggests that they think they can get away with thumbing their nose at the speculators, but not that they are necessarily changing their minds (since they probably didn’t like the deregulated capitalism model in the first place). Perhaps more convincing are Gordon Brown’s condemnation of ‘the dogma of unbridled free-market forces’ and abnegation of ‘light touch regulation’ at his party’s annual conference. Not that Brown is necessarily convinced of the case against unbridled free markets either – but he clearly needs to say he is. Even more compelling as a short term rhetorical indicator was the Financial Times’ decision to turn their editorial the Saturday before last into a manifesto (in extra-large type) for the benefits of free markets – they wouldn’t be doing this if they weren’t spooked.

But we’re now moving from the realm of rhetoric into the realm of practical action – and everything seems to be pointing to a sea-change in government attitudes to market intervention. The UK (which has pushed some aspects of financial market liberalization further than the US) is now seriously considering partially nationalizing its banking industry. European business leaders are now complaining that the EU isn’t regulating enough – that is, it isn’t engaging in coordinated action to stop its own financial markets from tanking. The reasons for EU inaction lie in the lack of any structures that would militate towards concerted action to address problems of market confidence, in large part because European financial markets are even less regulated than their US equivalents (as I’ve noted before the EU is typically more interested in liberalizing markets than restraining them, contrary to the general impression in the US). The lack of EU level institutions means that states like Ireland and Germany are taking individual actions that are intended to shore up their own banking structures, but may have beggar-my-neighbour implications for their neighbours.

As with everything I write, I could be wrong. Still, if I had to lay bets on what will happen in the next 2-4 years, they would be on the following outcomes.

(1) Continued high level involvement of the US government in shaping financial markets, not only through regulation, but through manipulation of antitrust law, selective granting and withholding of government support, and substantial ownership stakes in major enterprises over the next several years. I imagine that these stakes will be wound down eventually – but the ever-present possibility that the US will do this again will fundamentally reshape the incentives of market actors in difficult-to-predict ways.

(2) A much tighter regulatory structure emerging at the EU level, hastening the kinds of processes that my former colleague Elliot Posner has examined in his academic work. The hostility of the UK to EU level structures is already much less surely grounded than it was, and is likely to become less grounded still over time. More speculatively, I might predict a UK-German consensus emerging on financial market regulation that would be intended to stave off French efforts to re-open the questions of EU constraints on fiscal policy. If such an implicit agreement emerges, Ireland and other smaller states will find it difficult to resist.

(3) The creation of formal – but weak – international structures, intended to ensure greater explicit coordination of regulatory policy and consultation over state actions that may potentially have international ramifications. These structures might or might not become stronger over time.

(4) The effective abandonment of international efforts to try to limit state involvement in the economy through tighter international rules on procurement etc, and the weakening or collapse of internal EU rules on permissible state aid.

These aren’t the only possibilities of course – another, perfectly plausible outcome might involve the collapse of international efforts at coordination, and the adoption by major states of beggar-thy-neighbour policies in a more systematic way. Nor do these possibilities necessarily imply the resurgence of social democracy – equally possible are various forms of managerial capitalism, of a return to economic nationalism, or even of a mild or less-than-mild resurgence of fascism. Whichever transpires, I still reckon that Dan is wrong in suggesting that there isn’t much to see here (he may of course have updated his priors given the events of the last couple of weeks) – this is a major crisis for the underlying ideologies of free market capitalism, and whatever emerges is likely to be quite different from what transpired before.

{ 118 comments }

1

lemuel pitkin 10.06.08 at 3:36 pm

the adoption by major states of beggar-thy-neighbour policies

This is a, um, neutral and objective way to cahracterize the alternative to continued financial integration….

2

Walt 10.06.08 at 4:00 pm

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

3

lemuel pitkin 10.06.08 at 4:14 pm

The immediate context is finance. Thus my reply.

Obviously, what beggar-thy-neighbour usually refers is to tariffs and other trade restrictions adopted in the 1930s. This is because the conventional view is that the only purpose of such restrictions is/was a zero-sum game of stimulating domestic demand with trade surpluses.

The conventional view is false. The trade restrictions adtopted in the 1930s had very little to do with producing surpluses (and in fact countries with more restrictive trade policies did not, in general, move significantly toward current-account surplus.) Rather, *they allowed countries to adopt expansionary policies without running into balance-of-paymennt constraints.* In the absence of a coordinated stimulus across all trade partners — certainly not practical in the 1930s, nor, necessarily, today — trade restrictions were a precondition of any kind of expansionary policy — the goal was not to move the external account toward surplus, but to increase incomes while leaving the external account unchanged. The “beggar-thy-neighbour” characterization doesn’t fit this reality.

Similarly, it is false today to suggest that the only purpose of restricting trade or capital flows would be to attempt to win a zero-sum game of trade surpluses, as henry seems to. (Another point in favor of heterodoxy.)

So, Walt, yes I do.

4

Walt 10.06.08 at 4:19 pm

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.

5

HH 10.06.08 at 4:50 pm

We need to restore trust to the world financial system. If only there were experts in the field of trust studies, they could guide us in this task.

6

MarkUp 10.06.08 at 5:03 pm

“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

7

Lee A. Arnold 10.06.08 at 5:04 pm

Henry we’re talking about three different things at the same time: (1) economic theory, (2) political rhetoric, and (3) economic reality.

(1) Economic theory has been rudderless for decades with regard to normative statements about the real economy.

(2) Political rhetoric (at least in the United States since Reagan) has been predominately libertarian, claiming a basis in an economic theory which was outgrown long ago, and dancing between arguments about “liberty” or “efficiency” as the case may be.

(3) Economic reality (again, in the United States) is that a smaller portion of the world’s product is being produced simply because the rest of the world is growing economically, and U.S. consumers have been keeping pace by the “wealth effects” of a short series of asset bubbles — federal debt, stocks, mortgages — partly held aloft by the rest of the world’s willingness to invest in the same.) I have found no commentators willing to speculate on what the much-vaunted U.S. economic growth over the last 25 years would have looked like without it.

What is going to come out of this is:

(1) a theoretical emphasis on the value of focused institutions to solve specific problems. These institutions may be regulatory or redistributive, and may be temporary or permanent. Institutions work by reducing transaction costs, giving everyone the same set of rules and expectations, and putting everybody back on the same playing field, so increasing freedom and efficiency. In the U.S. for example, we’re going to see a stronger movement toward financial regulation and toward universal health coverage.

(2) The political rhetoric of libertarianism as an overriding principle of economic relations will become defunct. Most likely to arise is a combination of social democracy and managerial capitalism, hopefully avoiding the more fascistic aspects of, say, China.

(3) Economic reality in the future is harder to guess, not merely because no one knows the future, but because it is contingent on non-economic factors: war, environment, etc. Ceteris paribus I think that the United States is going to have a tough time for a while avoiding a drop in living standards if the rest of the world objects to its becoming a global rentier.

8

Davy 10.06.08 at 5:11 pm

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?

9

HH 10.06.08 at 5:33 pm

The interesting question, I think, is will there be a ideological alternative that people can buy into.

Someone will configure a political movement based on honesty and transparency of institutional action. The seeds of it are in the open source norms arising in the software development community, which astute observers like Larry Lessig have already extrapolated into the political domain.

Greed and game theory are greatly inhibited by transparency, and transparency is very easily implemented. All that is needed is to break down the cultural inertia of institutional secrecy, and the sledge hammer of economic depression is about to fall.

10

PersonFromPorlock 10.06.08 at 5:51 pm

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.

11

MQ 10.06.08 at 6:24 pm

I think it’s pretty clear that the Asian financial crisis did result in a hit to the intellectual credibility of “free-market capitalism” (whatever that means). It’s just that the loss of credibility happened among Asian (and Russian) intellectuals and governments. It had a big effect on policy, helping Russia to distance itself from Western advice, adding to the neo-mercantilist consensus in China and some other Asian countries, etc. I think of the Asian financial crisis as the beginning of the end for the “Washington consensus” internationally. Typically, though, American intellectuals were too provincial to notice that. We tended to emphasize the “crony capitalism” analysis of the financial crisis, but I think Asian countries themselves tended to see the issue as too much exposure to short-term international capital flows.

12

MQ 10.06.08 at 6:26 pm

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.

13

HH 10.06.08 at 6:45 pm

You want to see “crony capitalism?” Check out the almost unnoticed $25 Billion government “loan” to the three big US automakers, without any strings attached, and no change of management required. Privatized profits and socialized losses: that is America’s economy today, and it is shameful.

14

Watson Aname 10.06.08 at 6:51 pm

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.

15

J Thomas 10.06.08 at 6:51 pm

To some extent you get to choose your institutions. Usually that is a small extent. Organizations run on tradition and when you try to change the traditions they resist.

So for example in russia after the revolution the new secret police wound up being modeled directly on the old secret police, and after some early experiments the new courts were modeled on the old courts. The new laws were like the old laws except everybody got treated like serfs.

You can’t just set up new markets to compete with old markets — the old markets have tremendous economy of scale. So for example if you buy or sell on the new market and the price is different from the old market, somebody got cheated — whoever got the worse deal could have done better on the old market. The only way to avoid that is if the new market can offer a tighter big-ask spread and/or smaller commissions, and those are hard to arrange while you have less business, though easy after you get the majority of the business.

Hard to set up new financial institutions that compete with old ones — the old ones have the capital and the contacts.

Hard to set up new insurers to compete with old ones.

Etc.

The ideal time to do any of that is when the old institutions are stuck in gridlock, that might not affect the new ones. If we’d been discussing that for the last ten years waiting for this opportunity we might have been ready, but during the last ten years it seemed like there was no chance for change.

So if we start thinking about how we want our institutions to work starting now, we might be ready to jump when the next big crisis comes.

16

MarkUp 10.06.08 at 6:58 pm

“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.

17

HH 10.06.08 at 7:29 pm

Did any of them make a profit over the last year?

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 GM board just gave their bumbling CEO a vote of confidence. In the Bush era, failure is consistently rewarded. Heck of a job, Waggoner!

18

HH 10.06.08 at 7:35 pm

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.

19

MarkUp 10.06.08 at 7:53 pm

”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.”

In the sense “We” are the gov’t [industry, institutions], we do share in it’s failures. Congress abdicated many of its’ duties and We did the same as voters, as shareholders, as participants. No, We are not all directly guilty. Calpers didn’t take too hard a look at Enron until the share price went down.

20

Geoff 10.06.08 at 8:01 pm

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?

21

lemuel pitkin 10.06.08 at 8:41 pm

Does this financial crisis lead to a new international regulatory framework

The point I was trying to raise, maybe a little intemperately, in my initial comments, is, isn’t it at least worth asking if there might not be productive responses to the crisis on a national as well as (or instead of) an international level?

Given that some of the main tools of macroeconomic policy — especially those around wages and distribution of income generally — really still operate only on a national level, and it’s very doubtful whetehr the mechanism exist to employ them in a coordinated way, maybe the best thing that can be done internationally is too get out of the way of national responses? (I’m thinking especially of demand management but the same probably goes for a lot of financial regualtion.) Similarly, given that political democracy only exists on a national level (very partial exception for Europe), aren’t new national regulatory frameworks more likely to serve the broad public iinterest than international ones? Rather than replacing the “Washington consesnsus” with some other consensus (of more or less the same people/institutions), perhaps we should be open to weakening some of the linkages between economies so there is more scope for national solutions.

Or are we sure that any unilateral response to the crisis is going to be some kind of “beggar-thy-neighbor”?

22

P O'Neill 10.06.08 at 9:02 pm

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?

23

MarkUp 10.06.08 at 10:08 pm

”why on Earth were these people asleep at the wheel? Isn’t it in their self-interest to at least know …”

Remember the game of musical chairs? Play that in a room full of revolving doors.

Knowing and doing are different. There is no way our resident scholar of the Depression did not know; he could have been in an irrationally exuberant state of optimistic denial [doctors note needed], or perhaps just didn’t even give hoot about those that did pollute until the unforeseen happened and the masses started to notice. Otherwise relatively, he makes GWB truly exceptional in his MBA prowess – the Best of the Best of the Best, Sir!

24

PersonFromPorlock 10.06.08 at 10:29 pm

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.

25

Righteous Bubba 10.06.08 at 10:53 pm

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’.

It certainly sounds like these real and immutable constraints should be understood and perhaps harnessed. Is anyone working on that?

26

Canadian 10.07.08 at 12:09 am

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.

27

virgil xenophon 10.07.08 at 12:48 am

PersonFrom Porlock is quite right. One of the common quips about Marx is that his major errors can be attributed in large part to the fact that he wrote before Freud (Leaving aside the minor fact that much of what Freud divined we now know is largely esoteric BS.) In other words, one of Marx’s main failures, so the critique goes, is that he did not take into account the role that human psychology plays in setting the dimensions within which the warp and woof of everyday life for everybody–the big kids as well as the little people–takes place–be it economic, political, diplomatic, etc.

Seen in the above light, when combined with J Thomas’ sensible observations about how the nuts and bolts of how life evolves and how truly difficult it is to introduce
totally new systems that effective both eclipse the old ones and are also superior from jump street–suggesting that raging incrementalism is not only probably a long-term fact of life, but practically an iron law of societal development.

28

rea 10.07.08 at 1:31 am

D^2 is correct.

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

29

burritoboy 10.07.08 at 3:07 am

“However, there is no other coherent ideological frame that people can turn too, which is why I think the various bailouts seem so random. “

Precisely. This is the core of the issue, and everything else is merely dancing around the question. That’s why there was not that much change after 1872, because there were no other coherent ideologies to turn to. Of course, there were rumblings and undercurrents produced by the 1872-1873 depression and panics, but they took no coherent form (certainly not at the level of national government policy) for decades afterwards.

30

almostinfamous 10.07.08 at 5:14 am

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!

31

almostinfamous 10.07.08 at 5:15 am

for like serious statistics and stuff, the horse’s mouth is also available. lord only knows why our government doesn’t create some jobs in the web-design field cause all their websites are generally horrendous.

32

HH 10.07.08 at 7:20 am

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.

33

Tracy W 10.07.08 at 10:26 am

The question that this raises to me is will the tighter regulatory structure be any better at avoiding crisises than what we have now?

Take this story by Warren Buffet about regulators. If it’s right, 200 employees to regulate Fannie and Freddie, and they wrote reports every year saving everything was fine.
http://www.marginalrevolution.com/marginalrevolution/2008/10/regulation-a-di.html

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

European business leaders are now complaining that the EU isn’t regulating enough

When was business dominated by free market theorists? Businesses nearly always want government intervention on their side. There have been some famous exceptions, but on the whole saying that European business leaders are now complaining that the EU isn’t regulating enough is like saying that the bars in the central city are now busy on a Friday night.

34

Tracy W 10.07.08 at 10:34 am

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?

35

Tracy W 10.07.08 at 10:44 am

Geoff: 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.

An austerity package can be imposed on the USA, for at least some meanings of the word “imposed”. The way the World Bank or the IMF “impose” austerity packages is by offering cheaper terms overall to would-be borrrowers than those of other lenders. If the American government can’t continue to borrow money, then it will have to implement austerity measures (be this raising taxes or cutting spending). And there’s no institution I know of that is legally required to lend to the American government.

36

Tracy W 10.07.08 at 10:46 am

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.

37

SJ 10.07.08 at 10:56 am

Tracy W Says:

I don’t find the current crisis a major crisis for my underlying ideology of free market capitalism.

Of course not. In much the same way as creationist’s beliefs aren’t particularly shaken by the discovery of a new fossil, it doesn’t mean that you have anything interesting or useful to add to the conversation.

38

Slocum 10.07.08 at 11:26 am

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.

39

Tracy W 10.07.08 at 11:41 am

SJ

Of course not. In much the same way as creationist’s beliefs aren’t particularly shaken by the discovery of a new fossil, it doesn’t mean that you have anything interesting or useful to add to the conversation.

It is useful to point out that no one advocating regulation has provided any evidence that more regulation will avoid future crises. Even if many people would prefer to ignore that. Whether it is interesting depends I think on the reader.

The difference between me and creationists is that there’s an alternative to creationism with a history of empirical verification – the theory of evolution. Of course I may be wrong, it may be that there is some decent evidence that more regulation will prevent future crisises. What’s your equivalent to the fossil record, or molecular biology, or antibacterial resistance amongst bacteria?

40

jonst 10.07.08 at 11:45 am

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.

41

HH 10.07.08 at 12:41 pm

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 correct strategy was to take profits from SUV sales and invest then in next-generation vehicles that would leapfrog the Japanese competition. The US auto companies did not do this. Regarding your argument on wage cost disadvantages, note that European auto makers also fast high labor costs but lead the US auto companies in technical innovation.

The US auto industry is technologically stagnant compared to its Asian and European competitors. The blame for this weakness plainly rests with the management, not with labor.

42

HH 10.07.08 at 1:21 pm

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?

43

Slocum 10.07.08 at 1:32 pm

The correct strategy was to take profits from SUV sales and invest then in next-generation vehicles that would leapfrog the Japanese competition. The US auto companies did not do this.

It’s not that the U.S. manufacturers lack the technology. They have the more advanced systems — (overhead cams with variable valve timing, the 5 and 6 speed transmissions, etc) in U.S. cars. But they don’t have them at the mid and low price points. Similarly, they have all that technology in the cars produced by their European divisions (Opel, Vauxhall, Ford, Saab, Volvo). But they haven’t been able to build cars in the U.S. at low enough price points that include these technologies and still make money. The Japanese manufacturers can do this in the U.S. because their cars are assembled in lower-cost, non-union plants in right-to-work states in the south. The same goes for European ‘transplant’ operations — the same lower-cost, non-union plants in the south.

Regarding your argument on wage cost disadvantages, note that European auto makers also fast high labor costs but lead the US auto companies in technical innovation.

When working on a level playing field in Europe, Ford and GM have competed very successfully with both European and Asian manufacturers. As they have elsewhere in the world. It’s ONLY in North America, where they face significant structural disadvantages, that they’ve been steadily bleeding market-share.

If you want a short explanation for the cause of the recent failures of the Big 3, it is this:

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. Without that equalization of labor costs (and restrictive work rules), there was little chance the Big 3 could compete over the long term. Once the transplants were in place, the foreign producers were immune to trade restrictions and currency changes that might otherwise have helped the Big 3 (they also bought a lot of political protection from the senators and representatives of those southern states). Even if fuel prices hadn’t spiked and SUVs sales died, it was still only a matter of time, since the Japanese makers were becoming much stronger in pickups and SUVs as well.

44

Walt 10.07.08 at 1:46 pm

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.

45

MarkUp 10.07.08 at 2:07 pm

”Of course I may be wrong, it may be that there is some decent evidence that more regulation will prevent future crisises. ”

More or less, either way could work if they are done effectively. How many times can a Corporation lie, cheat, and steal and still be a chartered corp? Too big to fail also means too big to regulate. Just think if we were on the hook say for a bad 700 billion drug deal, I’d imagine we’d be getting some new Capital crime laws passed post haste with little INS type detention facilities specially set up to house the evil-doers.

”advocating regulation has provided any evidence that more regulation will avoid future crises.”

Hmm, so you’re advocating for less based on? 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. Why do we have all those pesky traffic signals and lines on the road? Of course there is even less support that having less or no regulation will avoid crises either.

46

HH 10.07.08 at 2:10 pm

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.

47

MarkUp 10.07.08 at 2:22 pm

”The cause is the failure of the …

…instead of the one-sided struggle we see today.”

And here I thought the chicken/egg argument had been settled. One can argue why the unions failed and became as inflexible as the corporations they were reactions too – whether is was due in part to being forced in to a hard walled box or a near parallel assimilation to the dark side lust for power and money. Bear in mind that the union benefit to the broad masses was the precursor to trickle down economics.

48

J Thomas 10.07.08 at 2:31 pm

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.

49

HH 10.07.08 at 2:39 pm

The cultural disease of industrial class warfare is indeed an important factor in the decline of the US auto makers, but who bears the greater responsibility? Managers set policies and priorities. They are ultimately responsible for the character of their labor relations. The auto worker’s unions cannot be blamed for technological stagnation and bad product strategies. The buck stops with management.

CEO compensation in American corporations has skyrocketed, even when performance has been mediocre. Now these overpaid mediocrities go begging for taxpayer handouts and blame their workers for their difficulties. This is crony capitalism in action. The concept of an honorable resignation is an Asian leadership custom that would be most salutary if introducted to Detroit.

50

Slocum 10.07.08 at 2:44 pm

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.

51

HH 10.07.08 at 2:56 pm

Nonsense. If labor costs were negligible, then why did BMW and Mercedes build their U.S. plants in South Carolina and Alabama?

Let me try to explain this again. A wealthy car buyer is insensitive to the small difference between German and US unit labor costs. If the American luxury car is superior, it will beat the German luxury car in the market, even with a significant cost delta. Why can’t Cadillac beat Mercedes? The answer has to do with design decisions governed by management.

You confuse marginal advantages in labor costs with decisive determinants of strategic success. It is design and leadership failures that have killed the US auto industry, not high unit labor costs.

52

Tracy W 10.07.08 at 3:05 pm

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.

53

HH 10.07.08 at 3:14 pm

Regulation is a control mechanism. It is not necessary to prove to most people that thermostats and smoke alarms are useful devices. Before the era of extensive government regulation small panics could grow into massive disruptions of the economy. Today, the Federal Reserve acts to prevent such disruptions. It is the post-Reagan undermining of the efficacy of US financial regulation that has led to our present difficulties. One need only consider the frequency and scale of historical financial panics and collapses to see the benefits of regulation.

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

54

Slocum 10.07.08 at 3:23 pm

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.

55

PersonFromPorlock 10.07.08 at 3:23 pm

MarkUp:

Regulations are reactions to to past events put in place to to try and avoid them happening again….

Would that they were, but regulations frequently are just some damn fool riding his hobby horse and using any bad situation to justify enacting his prejudices into law. We will have more regulation or less out of this crisis, depending on who gets to write the law, but the chance Congress will respond to the actual situation is small.

56

J Thomas 10.07.08 at 3:25 pm

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.

57

HH 10.07.08 at 3:33 pm

Nobody’s arguing that the management of U.S. automakers have not made mistakes

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. But your argument neglects that fact that the US auto industry thrived when the cost delta between US and Japanese workers were proportionally greater. American makes lost the market share war with Japan because of design quality issues, not cost issues.

Regarding superior European and Asian operations of US auto firms, these are often staffed with local top and middle managment, who are less addled by the debilities of US top management. Thus their design decisions and labor relations are much better than those of their American peers.

58

Tracy W 10.07.08 at 3:43 pm

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.

59

gdr 10.07.08 at 4:00 pm

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…

… leaving a pile of corpses in its wake.

60

MarkUp 10.07.08 at 4:15 pm

”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?

61

Tracy W 10.07.08 at 4:19 pm

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.

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.

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.

So you measure the failures before the regulation and you measure the failures after the regulation, and you compare the results. And you do this over a number of different countries, as you can’t do controlled experiments like in physics. It’s not perfect, but it’s a starting point, and it’s far better than just making intervention based on no evidence at all (unless of course you want to try the “sending Tracy W loads of chocolate” intervention, I entirely favour people implementing this one based on no evidence at all).

I’m not clear which sorts of regulation would help most, but no-regulation has been shown not to work.

And too much regulation has been shown not to work either. See my reply at comment 58. The rich countries tend to have more economic freedom than the poor countries.

There was essentially no regulation for Teapot Dome, for example.

I just looked up Teapot Dome on Wikipedia. I don’t understand what you mean about no regulation. To quote from Wikipedia,

The investigation led to a series of civil and criminal suits related to the scandal throughout the 1920s. Finally in 1927 the Supreme Court ruled that the oil leases had been corruptly obtained and invalidated the Elk Hills lease in February of that year and the Teapot lease in October of the same year. … Albert Fall was found guilty of bribery in 1929, fined $100,000 and sentenced to one year in prison, making him the first Presidential cabinet member to go to prison for his actions in office. Harry Sinclair, who refused to cooperate with the government investigators, was charged with contempt, fined $100,000, and received a short sentence for jury tampering.

If there was no regulation, how did the US court system take those actions? To me the Teapot Dome scandal sounds like people broke regulations or laws that were already existing, like people have been breaking existing laws against murder for all of recorded human history.

As for your other suggestions, I am not an expert in financial regulation but:
– hostile takeovers are a good incentive for improved management performance
– “Blue chip stocks” should offer slightly less payout – read The Black Swan – we don’t have good data for assessing how large a risk is if the normal distribution doesn’t apply. And the normal distribution doesn’t apply to financial risks.
– Small companies argument, I don’t see how this would prevent bubbles. Again, I am not an expert on financial matters, but before the invention of the limited liability company, there were financial crises as well. Though we have lousy data from those times.

62

Righteous Bubba 10.07.08 at 4:27 pm

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.

63

MarkUp 10.07.08 at 4:33 pm

Porlock

“Would that they were, but regulations frequently are just some damn fool riding his hobby horse and using any bad situation to justify enacting his prejudices into law. We will have more regulation or less out of this crisis, depending on who gets to write the law, but the chance Congress will respond to the actual situation is small.”

Life is an imposition, ain’t it? Your tossed coin does have a flip side; one can [attempt to] regulate out their neighbors prejudices. We don’t outlaw just murder of rich folk [though at time one does wonder] so they can be ‘neutral’. As far as you last line and being in a centrist mood, I say well get both; more regulation that does less, but I’m an optimistic centrist.

64

HH 10.07.08 at 4:36 pm

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.

65

MarkUp 10.07.08 at 4:37 pm

Tracy
“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.”

So it has nothing to do with the ‘freedom’ past empire building afforded them, sort of a pre-modern CDS?

66

Tracy W 10.07.08 at 4:38 pm

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.

67

Walt 10.07.08 at 4:38 pm

Conservatives have been so addled by the propaganda that they’ve been fed that I honestly worry that we’re doomed.

68

Slocum 10.07.08 at 4:50 pm

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.

69

Tracy W 10.07.08 at 4:54 pm

HH: You are quibbling about degrees of regulation because you can’t establish that regulation of financial markets is an unjustified fetish.

Really? I didn’t even know that I was trying to establish that regulation of financial markets is an unjustified fetish. Anyway, whatever my motives, the data is that advanced countries as measured by HDI are less regulated on the whole than the non-advanced countries.

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.

And this has done *such* a good job of preventing financial crises in the USA.

You are attacking a strawman here. I expressed my skepticism about whether tight regulatory structures will be any better at avoiding crisises than what we have now. I did not say that all regulations are failures. What I am saying is that advocates of regulation have not made a case that it will stop future crises from happening.

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.

It’s absurd to claim that we should have some evidence of likely effectiveness before passing regulations? If so I’m in favour of absurdity.

70

engels 10.07.08 at 5:10 pm

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

71

almostinfamous 10.07.08 at 5:37 pm

infact monsieur engels, it has gone radically up.

72

almostinfamous 10.07.08 at 5:39 pm

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 :)

73

Henry 10.07.08 at 5:42 pm

Tracy W – If you really want to claim that advanced industrial economies are less regulated than ones in the Global South, you really don’t know what you’re talking about. Advanced industrialized economies are _heavily_ regulated in comparison and have _well funded regulators_ who can do their job. This is the source of much of their advantage – see e.g. Douglass North’s work (for which he won a Nobel). 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. You can argue until the cows come home over whether LDCs have the _right kinds_ of regulation – but that is an entirely different kettle of fish. Nor, contrary to your claims, is the so-called Index of Economic Freedom a good measure of whether a country has ‘less’ or ‘more’ regulation – at the very most, a couple of its indicators refer to _specific_ forms of regulation that the authors believe are bad. Claiming this as some sort of global composite measure of the extent of regulation in an economy is – bluntly – talking smack.

74

engels 10.07.08 at 5:45 pm

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

75

MarkUp 10.07.08 at 5:46 pm

“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?”

That’s rhetorical, correct? We do know though that many, especially large entities do indeed make the calculations of costs to adhere or not and will choose the not side regularly when profitable, out own auto industry is a prime example, and in a bit more smoky way big tobacco as well. So you could say that giving them the ability to factor the costs of using a known defective part is ineffective regulation as they can readily build in a price rise to cover the risk, and they did/do.

“What ability do …. to get back at her using this regulation?

Exactly why they tend to run more than one sentence. Also why there are various bodies that do what they do to attain data to in effect proscribe new/updated to try and keep up. Building code for example sets the minimum level acceptable [for most areas], not the optimum or premium. Look at CAFE standards as another example. It took much effort and time to get increases in the min. R values for a residential building even though the benefit has been long known, same with CAFE. It’s wasn’t a lack of data or knowhow that stalled and perverted the process, and left to own both industries regularly did the wrong thing[s] and those are costs that just keep on giving like our current bailout [and circumstances that brought it on] will do.

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

So giving up and hoping is your suggestion? Seems to be where you’re heading.

”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,”

Data is [AFAIK] accurate, but conditional. If I can dig up [links to] some others I will post. Let’s follow your line though, if we eliminated insurance would that not be an even more beneficial incentive? Bear in mind we are really talking about modifiing the few in most caes – not all drivers or Corps or builders [seek to] do damage or cheat the system.

”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.”

Sigh, sì. You make a rather blind assumption with regards to “w/o bothering.” So be it.

“I will point out again the costs of regulations….”

Feel free, but until you figure the cost of not doing it’s pointless. I’d dare say that esp right now very few lawyer or accountants would care to see reg’s that keep them employed eliminated with the baby down the tub drain. There are three areas that have to be managed; bad behavior, regulation to control, and enforcement. The latter two, like the former are obviously are subject to our human fallibilities. These past few weeks have pointed to two of them in a very painful way and reiterates the adage of the few bad apples in the barrel and what can happen when attempt to ascertain the original bad one become the focus.

76

MarkUp 10.07.08 at 6:03 pm

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?

77

HH 10.07.08 at 6:15 pm

It’s absurd to claim that we should have some evidence of likely effectiveness before passing regulations? If so I’m in favour of absurdity.

All regulations hinder free market activity to some degree. It is a matter of professional and political judgment where to set regulatory barriers. 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?

78

notsneaky 10.07.08 at 6:17 pm

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?

79

engels 10.07.08 at 6:26 pm

I think somebody got out of bed on the wrong side this morning.

80

Lee A. Arnold 10.07.08 at 6:40 pm

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.

81

a. y. mous 10.07.08 at 7:05 pm

So, if Dilbert increases revenues and reduce costs, he makes better profits? Doh! Darned gosh! You bethcha! I finally got it! Thank you Slocum, Tracy, et al. That was one drilled down exemplementary and enlightenmentful debatery! Good job. Wink!

82

J Thomas 10.07.08 at 7:05 pm

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.

83

geo 10.07.08 at 7:06 pm

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.

Tracy, you’ve made this point times beyond number. But for some reason you rarely or never go on to acknowledge that among the reasons regulation so often doesn’t work are that, since those who write the regulations so often come from and return to the regulated industry, the regulations are written with many absurd exceptions or without penalties commensurate with damages; that the regulated industries have crafted intricate legal strategies to frustrate enforcement; and that regulatory agencies are pitifully underfunded,above all by Republican administrations, precisely in order to prevent them from being effective? These are not arguments against regulation; they are arguments for democracy and against business domination of American politics.

84

lemuel pitkin 10.07.08 at 7:17 pm

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.

85

a. y. mous 10.07.08 at 7:22 pm

A constructive contribution would be wasted FULL STOP

The way things are going here, there and everywhere, there seems to be a massive amount of zero-sum theory infused into anything man does. Being a realist, I am beginning to accept that at face value and work from there.

86

sg 10.07.08 at 7:45 pm

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.

87

Sebastian 10.07.08 at 8:47 pm

“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.”

Is the relevant unit ‘company’ in this case? I’m not totally sure. I’m tempted to say that relevant unit is competitive transactions. If two companies engage in thousands of competitive transactions a year, when one of them makes an advantageous gain, the market will reward them and the system will evolve.

The argument against that is, I suppose, that an improvement in one area might get swamped by a bunch of bad things a large company does in other areas.

Anyway, I’m not totally convinced you need thousands of different corporations doing the same thing to see emergent/evolutionary behavior.

88

Tracy W 10.07.08 at 9:29 pm

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.

89

MarkUp 10.07.08 at 9:31 pm

“J Thomas: You need at least a few thousand companies competing for the same niche if you hope for good results.”

We here got a good dose of how well that competition can work when GWB rejiggered medicare and we all those lovely new ‘supplemental’ plans to choose from. Such fond memories. But the we do have a choice of 4,732 iPod covers. What part of the system does a ‘niche’ fit in? Only finished consumer products? Durable and non? Does 100 variations of GM mean we also need a 100 variations of Delhi and American Axle and that to be sure they are truly competitive Ford and Chrysler have their own unique sets of 100? Perhaps thousands was a bit of an exaggeration?

90

Tracy W 10.07.08 at 9:33 pm

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.

91

Tracy W 10.07.08 at 9:39 pm

geo: the main reason I didn’t go on to acknowledge most of those points is that I am already in the habit of writing overly long comments. However, on the topic of the specifically-American points you make, I know the regulatory process in NZ. The same problems apply, and often in the UK too. To quote Adam Smith, a Scot writing in the 18th century. “To widen the market and to narrow the competition is always the interest of the dealers … The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted, till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. “
I don’t think there’s anything special about the USA (apart from the Grand Canyon and bagels).
As for under-funding, can you please get together with Henry and decide between you if regulators in rich countries are well-funded or under-funded?

92

HH 10.07.08 at 9:55 pm

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.

93

HH 10.07.08 at 10:02 pm

I attempt to base my beliefs on evidence.

The only position you seem to take is that ineffective regulation is bad. This is hardly controversial. What you seem to be doing is conducting a sniping campaign against ineffective oversight, heedless of the enormous damage we are currently experiencing because of insufficient oversight.

Phil Gram worked to exempt derivative securities markets from Federal regulation. As a result, nobody now knows the full magnitude of America’s exposure to unsound derivative securities. Would you now support regulation of derivatives, or do you still need proof that this is a good idea?

People who believe that government is intrinsically incompetent and malevolent should look around at the current conditions on Wall Street before fear-mongering about the return of aggressive regulation of financial institutions.

94

Tracy W 10.07.08 at 10:28 pm

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.

95

J Thomas 10.07.08 at 10:31 pm

“J Thomas: You need at least a few thousand companies competing for the same niche if you hope for good results.”

Perhaps thousands was a bit of an exaggeration?

Markup, I suppose I should review my reasoning. Obviously one is too few, that’s monopoly. And two is too few, that’s oligopoly. Three is too few, that’s oligopoly. Surely most economists would agree you need at least six. But if you have six and two are approaching bankruptcy already, those two aren’t in shape to compete well. Better have a couple of spares, that brings you up to eight.

Now in comparison to biological evolution, there’s nothing remotely like mendelism in business. What we have is more like bacterial evolution with asexual organisms competing — and they share methods by hiring employees from each other and by hiring the same consultants who transmit ideas from one corporation to another, those are similar to bacteria sharing plasmids and phages etc.

Bacteria evolve fast because they reproduce fast and on average half of them are lost every generation. There’s often a large random element in the choice of which are lost. Like, an individual cell could do everything right and get destroyed by accident just by being in the wrong place at the wrong time. Eight competing corporations is not nearly enough for mutation-and-selection. What if one company tries out a great new idea but they fail because they had one big customer who went out of business at the wrong time. Likely nobody else will try the great idea. “Company X tried that and it didn’t work.” If there are a hundred companies and ten of them try out the idea, that does much better at screening improvements and finding which of them actually work.

But what if there are ten new ideas in the air at one time? Some companies will try one of them, some will try two, some won’t try any. How do we find out which succeed because of their improvements and which are just lucky?

If you happen to be the CEO of the biggest company in your industry, and under your management the company prospers, is it because of something you did? Or is it just that the largest company has a big collection of advantages? It can do the same amount of advertising at less cost per unit. The same amount of lobbying costs less per unit. The same amount of bribery. Etc. It can start a more-or-less-frivolous lawsuit against a competitor and it costs less per unit. Etc. Big companies have economy of scale for advertising, lobbying, bribery, lawyers, negotiating with customers and suppliers, etc. So there’s nothing like a level playing field for testing innovation.

To actually have free competition that works, you need to arrange that none of the competitors is big enough to have much influence on the arena they compete in. Ideally they should be required to split up when they get too large — then there is only a two-fold variation in size. Ideally there should be many competitors. 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 and actual change will follow a random walk. It can be asserted in each case that the winners were better at something or other than the losers, but the way they actually won may not be anything their customers etc would want if they understood it.

96

Tracy W 10.07.08 at 10:33 pm

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.

97

HH 10.07.08 at 10:46 pm

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.

These are your own words in #52. Please tell us if you are opposed to any further regulation of US financial markets. Then tell us if we should reduce existing regulation of US financial markets so that we can afford more chocolate.

98

MarkUp 10.07.08 at 11:02 pm

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.

99

Henry 10.07.08 at 11:07 pm

Tracy – there isn’t any good index that I am aware of, but North does do some back of the envelope calculations of the percentage of US economic growth dedicated to institutions that lower transaction costs, which is a fair bit more than you’ve provided. And if your only substantial point is that ‘too much’ regulation is a bad thing, then you’re battling a straw man. Not that I’m telling you anything that you aren’t likely already aware of. And as for your (apparently continued) claim that the Heritage Index is a good proxy for different national levels of regulation …. I regret to say that it is simply indefensible, and the fact that you apparently continue to defend it says quite a lot about your standards of argument.

100

Henry 10.07.08 at 11:09 pm

And for future reference, both HH and Tracy are limited to a global maximum of one comment a day on my posts so as to help keep up the intellectual standards around here a bit. They can have their say – but they had better think it through first because they won’t have a chance to add to it or rebut counter-arguments for 24 hours. Comments in excess of their limit will be deleted on sight (and I ask other commenters not to respond to them).

101

Slocum 10.07.08 at 11:32 pm

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.

Yes, of course they have unions in Japan (and in Europe, too) but that’s irrelevant in this case. The cars that are taking down Detroit aren’t built in Japan or Europe, they’re built here in non-union factories in Ohio, Indiana, Kentucky, Tennessee, South Carolina, Alabama, Georgia and Mississippi. Every one of the high volume models (Camry, Accord, Altima, Civic, Corolla, etc) sold by Japanese companies are built in the U.S. with U.S. workers (and with U.S. health insurance paid for by the automakers). The same goes for minivans, SUVs and pickup trucks. No, those workers don’t have the gold-plated zero-deductible, zero-co-pay insurance that the UAW has had (but then that, too, has been part of the cost differential).

102

Walt 10.08.08 at 12:33 am

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.

103

HH 10.08.08 at 12:35 am

And for future reference, Henry, I will not post on your threads. Your censorship caprices reveal an attitude toward discourse that I find highly repugnant.

104

engels 10.08.08 at 12:47 am

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”.

105

MarkUp 10.08.08 at 1:38 am

“is not “censorship””

Freedom from speech.

Perhaps a total word count would be fairer though perhaps harder to manage on this board.

106

almostinfamous 10.08.08 at 5:02 am

shorter Henry: get a room, you two!

107

sg 10.08.08 at 6:39 am

Slocum, isn’t that gold-plated package for American workers partly a response to things like the idiosyncratic health system? You can rest assured Australian and Japanese workers don’t get those kinds of gold-plating in their work conditions. If the US government makes it too expensive for US companies to produce, then of course new entrants will adopt a different model. 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. Surely that is the fault of those who think the US worker should be thrown to the tender mercies of the healthcare system?

108

Slocum 10.08.08 at 11:00 am

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.

109

engels 10.08.08 at 1:23 pm

I don’t blame ‘libertarians’ for being grouchy right now, really. It must be getting pretty smelly in there.

110

Tracy W 10.08.08 at 5:09 pm

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.

111

J Thomas 10.09.08 at 3:14 am

I do have another substantial point – that sometimes regulators, even well-funded regulators, make ineffective rules.

Sure. And sometimes businessmen, despite their careful best efforts, lose money.

In each case the proper response is to look for a better approach, and look for ways to try it out without major risk, and then maybe attempt a smooth transition.

It can take a year or more to make a significant change in a product line. But unless there are long-term contracts the customers can change their minds in a day. They are inside your OODA loop. You have to hope you can predict them, because you can’t possibly react as fast as they can.

Similarly, regulators have to react slower than the regulated. If regulations change faster than the regulated can keep up they have a valid complaint. So the regulations have to be designed so that the regulated have evolutionarily stable responses that are acceptable, because if there are loopholes that let them get something for nothing some of them *will* exploit those strategies.

There’s nothing special about that. Any time human beings do things they might make mistakes. (This is the fundamental argument for nuclear disarmament. We have gone 60 years with nukes in the hands of governments, without a single major mistake so far! How long do we want to depend on that lucky streak to last?) We know that the result of free enterprise is inevitably monopoly whenever entry barriers can be constructed, so that gives us a baseline. When the likely cost due to possibly-mistaken regulation is less than the cost of rampant monopoly, we are better off with regulation.

The surprising evidence that accidents can be reduced by removing traffic signs and signals is one example.

Why not bring up the Laffer curve, which is analogous? Just as there is some amount of taxation which is too much, there will be some amount of traffic signs which will be too much. You might find examples of too much.

Also, since one out of every twenty published studies with p<0.05 is actually completely bogus and got that result by sheer chance, your traffic signal study may be one of the bogus ones. No telling how many similar studies failed to get a statistically significant result and were declared unpublishable.

112

seth edenbaum 10.09.08 at 3:54 am

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.

113

seth edenbaum 10.09.08 at 5:47 am

The pathetic screeches of the shaman groveling in dejected
misery upon the hand hewn granite laid pavement, worn smooth by
countless hours of arduous sweat and toil, a welter of ichor
oozing through his clenched hands, attracted the purturbed
attention of his comrades from their foetid ulations. The
actions of this this rebellious wench bespoke the creedence of an
unheard of sacrilige. Never before in a lost maze of untold eons
had a chosen one dared to demonstrate such blasphemy in the face
of the cult’s idolic diety.

114

arthur 10.09.08 at 6:01 am

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?

115

arthur 10.09.08 at 6:36 am

Also Tracy W, stop pretending to be a hard headed cost benefit analyst by saying all that blahblahblah about medicine and evidence. You know nothing about cost benefit analysis. And I mean nothing. Yes, you may not be satisfied with the evidence, but you would have to be an idiot to be willing to take the massive and certain cost of doing nothing over the uncertain benefits of doing something.

And don’t hold everyone else accountable for your ignorance. Stop asking for people to spoonfeed you evidence of successful regulation when it is all over the bloody place, if only you bothered to find out. Read any book on US monetary history and you’ll realise that currency crises occurred much less frequently after the right to print money was regulated. And ditto for that bullshit talking point about there being no evidence that financial regulation will work. The specifics aren’t even out yet, of course there will be no evidence! Evidence of what? Evidence for regulation sub specie aeternitatis?

You know nothing, get out.

116

Tracy W 10.09.08 at 9:47 pm

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.

117

sg 10.09.08 at 10:21 pm

Tracy W, you really are dreaming if you think that this current crisis is anything but an argument for more regulation. It’s your lack of regulation which has shafted my superannuation and stolen my colleague’s life savings. You talk of having opinions based on empirical facts – well I’m looking at the nose-diving value of my nest egg and the banks absconding with other people’s money, and I’m seeing some pretty solid empirical evidence against the current system, which is under-regulated and full of deceit. Only a mad libertarian would bother to claim anything else.

118

J Thomas 10.11.08 at 3:31 pm

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.

Comments on this entry are closed.