Against Political Capitalism

Somehow I have neglected my duty of blog self-promotion. Here’s my column for The Week, which went online Thursday. Here’s the bit on political markets, which I think looks even better today, with the announcement of the Treasury plan, than it did last week:

Political markets — less enabled by government than made by it — operate according to fundamentally different, and less trustworthy, principles. Propped-up by subsidy, structured by central diktat and created ex nihilo by edict, political markets may arise from noble aspirations but in the end are instruments always of the privileged and powerful. 

Take contemporary financial markets. (Please!) These are not so much regulated by government oversight as they are constituted by the convoluted web of regulation that dictates who may sell what to whom and on what terms. The shape of our financial markets has emerged from the gradual accretion and rare subtraction of political intervention. But it is now brutally clear that financial markets are not stable simply because they are framed by law and watched by bureaucrats. It is not so hard to see why.

In political markets, the battle for competitive advantage is in part a battle over the rules of the game. That, in turn, is a battle for the hearts of minds of regulators, who generally know less, and are far less motivated, than the industry insiders they regulate. It is no surprise when regulators come to confuse the interests of the powerful (for whom they might someday wish to work, after all) with the interests of the public. As we have recently witnessed, the heavily regulated nature of our financial markets did not keep them from going haywire and taking the entire economy down with them. Appointing a better breed of bureaucrat fixes nothing. Even now, in the morning of the Obama era, Washington remains convinced that the country is best served by “rescuing” its self-immolating Wall Street wards.

It is the failure of this capitalism that accounts for the suffering of millions and explains our bitter decline. Yet President Obama asks for more.

I go on to argue that cap and trade markets represent political capitalism on steroids.

What Do Recent Nobel Prize-winning Macroeconomists Say about the Prospects of the Stimulus?

I decided to ask!

I talked to Edward Prescott and Edmund Phelps the day Obama signed the stimulus into law and wrote about it in my latest column for The Week.

I’m persuaded that the general logic of Prescott and Kydland’s work on time inconsistency applies to the present situation (and I don’t think you need to accept the strict rational expectations framework to see how it applies), but I was especially taken by Phelps’ concerns about the potentially damaging effects of the stimulus on entrepreneurship and innovation. Please check it out.

Talking to these giants of macro has convinced me that we need to be talking about is how to get the institutions right and keep them stable. What the government is now doing amounts to a pretty radical restructuring of our scheme of economic institutions, but with shockingly little deliberation about or regard for the optimality or stability of the overall incentive structure. This mess was precipitated by what turned out to be a disastrously unstable alignment of incentives. That fact would seem to prescribe taking a lot of care in thinking through how various large interventions might ramify through the system before jumping in. But our government’s behavior increasingly looks a bit like a zealous small-town narcotics squad, excited by its slick new SWAT gear, that’s just kicked down the door to a meth house and has started shooting at anything that moves.

We Need Cynics

Starting today, I’m part of The Week magazine’s new online Bullpen, where I’ll be joining David Frum, Bob Shrum, Brad Delong, Daniel Larison and several others as a regular columnist. Here’s my inaugural effort, discussing Obama’s inaugural and defending the idea that we’ll all be best off if we don’t just roll over for popular presidents in times of crisis. It starts like this….

By late September of 2001, George W. Bush was the most popular president of modern times. The tragic shock of 9/11 awakened a sense of patriotism, common purpose, and deference to government entirely new to Americans who came of age after Nixon. The President displayed comforting steel in the wake of the terrifying attack. He was a uniter, not a divider. And never in recent memory have Americans been so united. Congress trembled in the face of Bush’s mighty approval ratings. Nor was the media eager to gainsay the national mood. 

And so it was that America gave Bush most of what he asked for. In return we got Iraq, crushing budget deficits, waterboarding, the ire of the world, and, finally, collapsing financial markets. It’s not what we had in mind. 

Maybe it would have been better had we been less united, had we been more skeptical of grand plans, had more of us pushed back when so many of us pushed forward in the same direction.  …

Check it out, and please let me know what you think!

And hey, why not subscribe to The Week which smartly and entertainingly “distills the best of the U.S. and foreign press into 44 pages.” Perfect for those on the go who need to stay in the know!