In response to Niall Ferguson

The latest Newsweek cover article has managed to goad me into blogging again. In the article, which is best characterized as a rant against the Obama Administration, Niall Ferguson tries to demonstrate his mastery of international affairs. Unfortunately for him, and with sometimes amusing arguments, he falls far short of the mark.

We can work through the article from the beginning. Ferguson starts with a quote from the famed German statesman Bismarck, but his comparison of the situation in which Bismarck found himself in the 19th century and that which confronts Obama today in the Middle East is utterly without merit. Bismarck was chiefly able to direct the “wave of mid-19th-century German nationalism” because he operated within the political system in which that wave rose up. Obama, however, does not operate within the political systems that are currently being challenged by the waves of unrest within each of the countries facing popular unrest in the Middle East. The United States, influential as it is, cannot really be expected to be able to capture and direct popular movements within other countries.i One may as well argue that the United Kingdom or France or Russia should have been able to counteract Bismarck and direct the wave of German nationalism in a way that would be more to their liking.

Ferguson then moves to the real issue—how to understand the actions taken by the Administration relating to Egypt. He presents two possible courses of action: Obama could try to ride the wave and direct it towards ends favorable to the United States; or Obama could do nothing and let “the forces of reaction” rule the day. As he chides him for taking the latter step in Iran in 2009, Ferguson seems to believe that the United States should have forcefully entered on the side of the protesters and called on Mubarak to leave post-haste. He states, as others have also argued, that the Obama Administration was remarkably unclear and muddled in its response, some days saying one thing and some days the other.

Of course, there was indeed an element of confusion in the responses offered by the Administration—Biden suggesting that Mubarak wasn’t a dictator, Clinton saying that the regime was stable, Wisner offering his own opinions in Berlin after meeting Mubarak, and Obama never quite being publicly clear what he meant by “transition.” Two things, though, were extremely consistent (aside from the boilerplate calls for nonviolence and restraint on both sides): the Administration never explicitly called for Mubarak to step down (at least publicly); and the Administration called for the Egyptian government to respond, at least in some way, to the protesters’ demands. The United States never “exhorted Mubarak to leave” one day and “recommended orderly transition” the next. An orderly transition was always desired.

Thus, the call for transition to begin “now,” while arguably a veiled instruction for Mubarak to leave, was never in the context of supporting a chaotic transition. Had Mubarak more clearly transferred real authority to a respected third party, or lifted the emergency laws, or freed political prisoners and disbanded some of the internal security forces, we probably would have seen the Administration hail these initial steps of transition and call for more action. However, we never saw that, so we can never know. To argue that “transition” meant simply “Mubarak leaves” is disingenuous at best. Although the crowds seemed that they would ultimately be satisfied with nothing less than his departure, Mubarak leaving is not the only aspect of a transition.

Ferguson argues that, by taking the path it did, America has alienated everyone, and now no one will care to work with the United States. This almost requires a double-take—the same man who holds up Bismarck as an example of fine international statesmanship throughout his article is apparently unfamiliar with realpolitik. Israelii and Saudi Arabia will both suddenly reject the most powerful country in the world because it didn’t do what they wanted it to do? The current military leadership in Egypt, largely on good terms with the United States, will ignore it now? All of these parties will find it in their interest to continue to listen to the United States whether they are confused by our recent actions or not, because the United States remains, in crude terms, the world’s 800-pound gorilla. Our consistent, yet veiled, support for the masses who gathered in the streets may cause some feelings of alienation amongst the Egyptian people, but any new government, short of a hard-line Islamist one, will still find it advantageous to work with the United States.

The next paragraph seems innocent enough, aside from the subtext of condescension towards “other correspondents.” However, Ferguson suggests that, at Herzliya, he found a consensus of opinion “among the assembled experts on the Middle East” that we were witnessing a “colossal failure of American foreign policy.” This broad conclusion invited investigation. Apparently, about 250 people attended the Herzliya Conference as speakers alone, including Ferguson. The fact that he was able to derive a consensus from among 250 people in only 3 days is really quite remarkable. Of course, in all likelihood, he didn’t gather the opinion of all the experts there, but rather talked to a subgroup amongst them. One must wonder, of course, whether a certain selection bias affected this “consensus.”

The discussion then turns to Obama and his advisors. It is largely unremarkable stuff, except for the last bit. Ferguson leads us to believe that James Jones, Obama’s former National Security Advisor, was ignorant of the former Ottoman Empire: “A big, bluff Marine, [Jones] once astonished me by recommending that Turkish troops might lend the United States support in Iraq. He seemed mildly surprised when I suggested the Iraqis might resent such a reminder of centuries of Ottoman Turkish rule.” What is more likely—Jones being surprised because he didn’t know of the Ottoman Empire having once included now-Iraqi territoryiii, or Jones being surprised because Ferguson basically suggested that the mindset of the Iraqi people today is dominated by political realities that ended about 85 years prior?iv It is also interesting that Ferguson seems never to have opposed British troops supporting the American presence, despite the potential for lingering bad memories from the time of the British Mandate that followed Ottoman rule. As a historian, he should know that there was a significant revolt against British control and, following that, general dissatisfaction with British influence in the country.

The paragraphs on American policy under Nixon and Kissinger can be dealt with easily. In the cited examples, Americans were working at the elite political level, and it is an easier task to influence a small number of people to get things done than to deal with a headless mass movement. One can have a more coherent strategy when you have smaller number of factors to work with. Comparing working with the Soviets to achieve a goal to trying to capture a popular movement in another country is ludicrous, but Ferguson does it anyway. Perhaps a strategy that recognizes that America cannot control popular movements in other countries is what is needed.

Ferguson then indicts the Administration for apparently never spending time strategizing on an Egypt where Mubarak falls from power after a revolution. If this is true, it is indeed unfortunate, but it wouldn’t be wholly surprising. Although the U.S. government was certainly aware of the factors of instability within Egypt—it could hardly not know of the poverty, repression, and other such issues—there was apparently no credible indication that there could be a true challenge mounted to the government (at least judging by the administration official quoted). Ferguson commits an unfortunate fallacy at this point, suggesting that because the government didn’t conduct strategy sessions including this scenario of revolution, they must never have considered the chance of it happening. He completely ignores the possibility that the assessment was that Egypt was very unlikely to face such a scenario in the foreseeable future, so it was not worth including it in the day-to-day strategic planning. While the assessment turned out to be wrong, trying to suggest that they completely ignored the possibility of revolution in Egypt because it wasn’t included in the strategic planning sessions is foolish. It is entirely possible to consider and dismiss a potential event, rightly or wrongly, and to then create your plans without it.

Finally, we return to the potential of an Islamist government taking control of Egypt. Ferguson, rather surprisingly, suggests that the result of Obama’s “bungling” might be that the Muslim Brotherhood would take over Egypt. Note how Ferguson effectively makes Obama’s actions the key to a Muslim Brotherhood takeover, even though he acknowledges that the Brotherhood is the largest and most well-organized movement in Egypt today. Somehow, Ferguson is able to conceive of Obama as the prime actor in this drama, suggesting that if he had just been more clear, then there’d be no chance of the Brotherhood coming to power. It is supremely misguided to believe that American actions over an 18-day span are the lynchpin of Egypt’s future—in my eyes, Egypt’s future is more likely to be the result of the actions of the Egyptian people.

In any case, what would he have had the Administration do? Prop up Mubarak to prevent the Brotherhood from taking over? Immediately call for Mubarak to leave, thereby siding with the protesters but without really knowing what direction the movement would end up taking? Calling for concrete steps of orderly change, as the Administration did many times, was really the best option available.

Ferguson closes by condemning the apparent lack of a grand strategy. This is surprising, coming from a man chiefly concerned with economics. Perhaps Obama’s grand strategy focused on international economic issues, rating them of greater importance than the “freedom agenda” in the Middle East. Judging by the problems most salient at the beginning of his term, Obama could quite reasonably have made this determination, and actions early in his Administration confirm the priority given to economic issues, both international and domestic. Ferguson acknowledges the multiplicity of issues to confront and the need to prioritize, but then wants to condemn Obama for actually having chosen issues to prioritize that didn’t include the latest crises in the Middle East.

As in so many areas, it seems that the President would be in for criticism from someone no matter what he did. Ferguson’s criticisms, though, are as thoroughly lacking in merit as his writing style is unnecessarily pugnacious.v Perhaps he should stick to writing about economics and economic

i Even those who would—foolishly—argue the existence of an imperial America that completely controls foreign elite politics cannot argue that the U.S. could direct a popular-nationalist wave in another county.

ii Ferguson also leaves out, willfully or through ignorance, that Netanyahu seems to have been against Mubarak leaving, and, at the least, wanted the United States to curb criticism of him. To suggest, as Ferguson does, that simply having a clearer position would make Israel happier with the United States is likely wrong.

iii Remember, Iraq didn’t exist as a country at the time.

iv No year is provided for this exchange between the two men, so I’m taking a rough guess.

v I use a similar style in this piece, though, so I guess that is mildly hypocritical of me.

vi Given some of his unusual economic beliefs, perhaps he should stay away from that, too.


Riding the Tiger

Apparently, the Republicans are going to bring up the balanced budget amendment again this fall, conveniently prior to the elections. Although I don’t really believe that this actually has any chance of passing, either now or after the election, I thought I’d make a couple comments, one purely based on political sensibility, the other on more neutral economic grounds.

I’ll start just by noting that, of course, we do need to balance the budget and reduce national debt, via both spending cuts—where appropriate—and tax increases—in some cases, significant ones. It isn’t going to happen without both. Anyone who says otherwise is most assuredly either delusional or given over entirely to mendacity.

On its face, pushing for a balanced budget amendment is not necessarily a bad thing. However,  unless properly conceived with exceptions for certain circumstances, it makes the government’s job that much more difficult when the economy or country as a whole is in duress. If we fall into a recession and tax revenues decline, does one really want the government to less able to fund “safety net” programs, or national defense, or any of a number of other items? Would it be possible for the government to, say, implement a national “rainy-day” fund to bolster federal spending during a recession? Yes, it would be possible, but how long would such an idea last before someone says, “Why should the government get to hold more of my money than it needs?” At that point, the lower-taxes-now crew would come in and propose refunds for any tax revenue that exceeds spending, and the fund would be gone.

Could we rely on people’s common sense to show them that such a fund would be in everyone’s interest? I would doubt it. Let’s look at how people think of government spending now. Many people would suggest that there are lots of things that the government could cut, but, as it turns out, we’ve been to this dance before–for the most part, people want cuts in things that we don’t spend any significant amount of money on. If people are unable or unwilling to understand what needs to go into cutting the federal budget, are they really going to understand what needs to go into supporting it during lean times? I’m not optimistic on it.

As for political sensibility, a balanced budget amendment would be quite a challenge. How would we get from the current budget to a balanced budget? Would there be a grace period, or would it come in effect in one fell swoop? Do the Republicans (and the Blue Dogs who also seem to be supporting this) really think that they can balance the budget, not raise taxes, and still get re-elected after they make either the large cuts in national defense spending or in Medicare/Medicaid/Social Security that would be required? Would there be exceptions in the case of a national emergency resulting from terrorism, or natural disaster, or war? Would certain programs be able to be supported above-budget? If any of these are true, how many exceptions are too many? At what point would such an amendment become so many meaningless words?

In the current situation of imbalance, no one wins politically by carrying through a balanced budget amendment. It is great to campaign on, because people love to hear about it, but it would be politically disastrous for the first majority party that actually has to deal with it. Thus, I’m not altogether convinced that this isn’t just campaign bluster to capitalize on our current Tea Party zeitgeist—riding the tiger of fiscal reform. If such an amendment actually passes, the riders may very well become the tiger’s lunch.

A Rejection of Libertarianism

As those of you who know me are aware, there is relatively little love lost between me and libertarian political philosophy. Most of the time, this becomes apparent in random snide remarks and short comments in response to articles/actions of the day. So, I thought I’d try to define my rejection of libertarianism in the United States more thoroughly and, perhaps at the same time, grow to understand it a bit better myself.


Perhaps it is easiest to begin with what was one of the scandals du jour: Rand Paul’s comments on how businesses should have been permitted to discriminate in deciding to whom to provide their services. Essentially, his argument was that the marketplace would deal with such behavior itself—these companies would lose the opportunity to have, say, business from black people, and white people would find the company to distasteful to use, causing it to fail. Prejudice would be excised as business interests came to dominate personal preferences. Any attempt by the government to enforce a change not supported by all the people—thus trampling on what some would regard as the right to discriminate—is illegitimate, because in promoting the rights of some it would be limiting the rights of others.

Effectively, Paul, and most—but not all—libertarians would seek to promote the constraints imposed by the “marketplace” as the method by which a society governs itself internally. Government can provide for common defense from external threat and enforcement of contracts between individuals, and, maybe, fire departments, but that is about it. Social standards would develop in response to, and personal behavior would be constrained by, the ability of other people to refuse to interact with you based on your preferences. Intervention, for what could be regarded as positive or negative reasons depending on the individual, is to be prevented, since it would necessarily place an unnatural—i.e. non-marketplace-induced—restriction on personal freedom. While this may describe a consistent system of thought, at least for the most part, it is not a desirable one—consistency cannot be our sole measure of desirability.

Indeed, libertarianism in this sense is actually quite reprehensible. In substituting the “marketplace” for the ability of the government to promote or discourage certain behaviors, it leaves a society with little else other than to suffer under the tyranny of the majority belief in any particular area. Functionally, in a community where there is an established majority mindset, any behavior that is detrimental to the lives of the resident minority (short of, say “natural crimes” like murder) could not be acted against or expected to disappear—the government would not be permitted to intervene, and an established majority would, naturally, not feel any economic pain from accommodating its own views.

In reality, the very idea of eliminating minority discrimination would only gain traction in accordance with either the growth of that group’s economic power or the potential slow evolution of a more accommodating mindset among the majority. Such majoritarian rule is precisely in opposition to what the United States was created to be—a pluralist state with respect and equal treatment for all people, not a state in which the lives of its citizens were subject to the whims of the dominant social group of the time.

Of course, I do not mean to suggest that government intervention can be unerring—policy as implemented or conceived can be just as wrongheaded as the views of any individual. However, maintaining a government charged with actively protecting the rights of minority groups, in whatever form they take, I regard as vastly preferable to living within a state that leaves the determination of social policy to the “marketplace,” a creative term meant to obscure the essential reliance on majority tyranny that forms a crucial leg of libertarian political philosophy.

Gun Rights – McDonald v. Chicago

As most people no doubt know, the recent Supreme Court decision in McDonald v. Chicago effectively broadened the application of the 2008’s District of Columbia v. Heller decision to laws within states and cities. I have some objection to this decision, and, as was the case in the Citizens United decision, Justice Stevens effectively states in his dissent (beginning on page 123 of that pdf) the essence of my feelings as well:

“Of course, owning a handgun may be useful for practicing self-defense. But the right to take a certain type of action is analytically distinct from the right to acquire and utilize specific instrumentalities in furtherance of that action. And while some might favor handguns, it is not clear that they are a superior weapon for lawful self-defense, and nothing in petitioners’ argument turns on that being the case. The notion that a right of self-defense implies an auxiliary right to own a certain type of firearm presupposes not only controversial judgments about the strength and scope of the (posited) self-defense right, but also controversial assumptions about the likely effects of making that type of firearm more broadly available. It is a very long way from the proposition that the Fourteenth Amendment protects a basic individual right of self-defense to the conclusion that a city may not ban handguns” (emphasis mine).

The law in question in this case did not ban the possession of firearms. It restricts (restricted) the possession of handguns specifically. Ownership of shotguns—which many people agree are the superior home defense weapon—and rifles was not prohibited under the law in question, although certain variant weapons (sawed-off shotguns, for example) were also prohibited. In this sense, there was little to no inhibition of the right to self-defense, which was stated to be at the core of McDonald’s case against the city.

I am not specifically against the private ownership of weapons. I grew up in a home with two rifles and a pistol; I have  experience in target/skeet shooting with handguns, rifles, and shotguns, activities which I enjoy. However, I am willing to acknowledge that there is a legitimate societal/state interest in controlling, to a certain extent, the availability of weapons within that society/state. Few disagree with banning the private ownership of fully-automatic machine guns, for example. As such, it is generally recognized that there are legitimate reasons to specify certain weapons as acceptable for personal defense and other weapons as unacceptable for personal defense.

So, what to make of handguns? Handguns are, of course by nature, much more portable and easy-to-conceal than long guns (rifles/shotguns). They are more likely to be used in the commission of violent crimes. They are not the most effective weapons for personal defense. As such, it would not seem unreasonable to restrict their possession, in a manner similar to that of machine guns, as such restriction does not seem to cause any materially significant harm to the self-defense ability of the individual.


It should be noted that this discussion does not revolve around self-defense in the open—that is, outside of one’s home. Laws regarding concealed carry/open carry of weapons on one’s person are not the topic here, but perhaps they will be written on in the future.

Dubai: Fine?

So, I’ve decided to retool this a little and begin blogging again. I left up a couple old posts, but for the most part they were eliminated for one reason or another. We’ll see what sort of consistency I can arrange for postings, but I have enough ideas to write about, as some of you no doubt know. With that said, a new post.


“Dubai and Abu Dhabi and the rest of the emirates are fine.”

This was the pronouncement of Sheikh Mohammed this past Thursday. Needless to say, it is justifiable to have some doubts about how accurate an assessment this really is. Of course, it is necessary for national leaders to act as cheerleaders for their countries in one way or another. It would not do to have one’s leader act like there will be no positive change (as people often wrongly accuse Carter of doing in the “malaise speech”). Markets, amongst other characteristics, can be extremely open to psychological manipulation—a topic within the field of behavioral economics—and the cheerleading, or message-shaping, or what-have-you that surrounds a country’s (or company’s) economic endeavors can certainly have a real and independent effect on the ultimate economic success achieved. However, Sheikh Mohammed may be playing this hand a bit too strongly, given the circumstances.

The fantastic growth of Dubai in particular depended on significant and consistent foreign investment—especially in the real estate market—and loose banking habits. A situation like the past is unlikely to emerge again soon, if only because there is simply a lot less money available out for investment purposes there than there used to be. The relatively anemic recoveries so far in the United States and Europe underscore this point. A lot of on-paper money went away over the past two years, and even as it comes back, it is likely that much more will be held onto instead of rapidly (or rashly) invested.

Of course, one could say that Europe and the United States are the past, economically-speaking. The general line of this argument holds that the major center of future foreign investment will be China. Of course, China is certainly pouring money into the Middle East, Africa, and Central Asia, trying to stake out economic claims, so to speak, while the Western countries deal with the consequences of their latest round of excesses. One problem, however, is that China is likely itself to come under increasing economic strain soon—speculation continues about the potential fallout of a collapse in the very hot real estate market in major cities; the export-obsessed economic model that has provided China its growth in the past is likely to need a retooling, which even they now admit and which will likely entail a period a reduced prosperity; and the country will soon need to ramp up its efforts to deal with an increasingly-aged population even as the country continues to develop, the consequence of initiating the one-child policy in 1979. Of course, this last issue is less relevant at the moment, but it remains something to be aware of over the next 15 years, as the aging of China becomes more acutely apparent.

So, the era of easy foreign money that enabled the incredibly rapid development of Dubai is unlikely to be encountered again in the near future. Does this mean that Dubai will be unable to get itself back on track? Not necessarily, but it does suggest that the track may have to be adjusted—the flashy real estate projects and other such investments cannot reasonably be continued in the near future. What is needed is a program to develop a domestic economy that is far more self-sustaining than the previous one was. This is a problem more or less common to all of the Gulf countries, as they are all facing the need to diversify their economies in order to make them more resilient and, thus, less reliant on the good graces (and good fortune) of external economic actors and the ups-and-downs of the oil market. Dubai needs to be able to give the world something besides man-made islands and the tallest building for sustainable economic development.

Is Dubai’s economy “fine?” I wouldn’t say so—that is too cavalier an assessment. Is it doomed? Certainly not. Rather, it is in that middle stage between falling-out and getting back on its feet, and it fortunately has a big brother around to lend it money. The current period of adjustment, financed by Abu Dhabi, will have to result in Dubai getting used to a more pedestrian lifestyle, and significant work will be needed to get the emirate back on a solid footing for future growth, but one could certainly imagine worse fates.

Preferences and Morality

I was prompted to this particular area by reading this post on a friend’s blog. At the risk of misunderstanding part of that post, what I mainly seek to comment on is the relationship between preferences we have as individuals and the judgments of morality.

I would think that expressed moral judgment would indeed require or rely upon expressed or latent preference, whether that preference is indeed for something that we judge good for ourselves or bad for ourselves. We can easily have a preference for something that “hurts” us in a sense if we feel that it is the more “moral” choice–in the most extreme case, take the example of an aged invalid who kills himself in order to free up more resources for the community. If he prefers for his community to prosper, and regards himself as too-heavily a net consumer of resources, then his preference would dictate that the moral judgment is not to go on living. On the other side of the coin, we may certainly reject what  can be perceived as “good for us” as immoral based on preference–one only needs to look at people who choose to vote in favor of increasing their own taxes. The individual would benefit from having more money, but his preference for society to provide more services requires him to reject such a benefit as too self-serving.

In the absence of any preferences, I’d think that it would be impossible to form a moral judgment–how could one express what should be done without having a perception of, and desire for, the results of whatever it is that should be done? The very concept of normative argumentation, or arguing for what should be, requires expressing a preference for or against a proposition.

Certainly not all preferences lead to moral considerations: my preference for mint-chocolate-chip ice cream really does not lead me to make any moral judgment of other ice creams or other people. That, however, argues from the wrong direction: not all preferences must lead to moral considerations, but all moral considerations would seem to have their roots in expressed or latent preferences, even (and especially) those preferences wherein the individual in question “loses” but others have the opportunity to gain.

D.C. Voting Rights

As promised, here is a non-economics-related post. The Congress is remarkably close to granting voting rights in the House to the D.C. delegate, effectively ending the situation emblazoned on virtually all of the license plates one sees from the District. Now, of course, this bill will certainly be heard before the Supreme Court, as its constitutionality is in question.

To state the problem briefly, the Constitution declares that voting rights in Congress shall be granted to representatives  “of the several States.” D.C., of course, is not a state but a federal district. Strict interpretation of the Constitution as it stands would require that D.C. never receive voting rights in Congress, and numerous people have argued this to be the case.

In the 1970s, an amendment to grant D.C. voting representation was proposed. It passed Congress but failed to garner the approval of 38 state legislatures, and thus expired after 7 years in limbo. Often it is argued that, if D.C. wants voting representation, then another amendment should be proposed. Anything less, it is declared, would violate the dicta of the Constitution.

Of course, I must agree that, literally, the Constitution only allows for voting rights in Congress to go to the representatives of the several states. In this sense, I do tend to agree that one way to resolve the problem would be to pass an amendment. However, I feel that I have to point out something I find rather interesting with the literalism espoused by those who declare that the D.C. Voting Rights Act is unconstitutional.

The First Amendment says, and I quote, “Congress shall make no law…abridging the freedom of speech…”. Look at that phrasing again: shall make no law. That is as absolute a statement of legal restriction as can be made. However, we abridge free speech all the time. Incitements to imminent lawless action? Criminal. Libel and slander? Criminal. Various kinds of obscene or pornographic material? Criminal. These laws are all violations of the Constitution when read literally. There is no wiggle room with a literal interpretation of “shall make no law.”

This is why I do not read the Constitution literally. I think incitements to imminent lawless action should be criminal; libel and slander should be criminal, etc. Allowing D.C. a voting representative, while in a  literal sense unconstitutional, is certainly at least as reasonable an action as criminalizing slander. So, literalists, which way do you want it: D.C. gets voting rights and we keep laws I’m sure most of you want to keep, or we continue with your literalist fetish and, along with denying D.C. a vote, strike down every single law which abridges the freedom of speech (and that is just for a start).

Pick one.

A follow-up to the previous post…

So, I realized that I didn’t include a pontentially useful tidbit in my previous post. This has to do with recognition of market failures, such as those which result from incomplete information. Neoclassical economists–at least, the serious ones—acknowledge that markets do have failures, but they tend to believe that markets will tend to sort themselves and that rational decisionmaking will dominate irrational decisionmaking. Unfortunately, there is no good evidence that this is the case, making it another belief. I don’t think anyone would claim that the present crisis is the result of rationality, or that the S&L crisis, particular sub-crises of the Asian financial crisis of 1997-1998 (Hong Kong in particular)…I could keep listing them, but I think the point is evident.

Of course, government is more than capable of failure, as it is another collection of people just like a market. Just to pre-empt people, I certainly do not advocate a centralized, dirigiste economy. Rather, I’m looking for reasonable controls to protect people from our collective ability to be completely irrational…

Self-restraint, Greenspan, and Beliefs

There are several issues which I tend to have with Alan Greenspan’s economic ideology, most of which center around his strong tendency to believe in things. Now, I have nothing against believing in things per se, but, when it comes to believing in things against all available evidence, then I begin to have a problem. I could write several posts about different aspects of this—which I reserve the right still to do—but for now I’ll just have a brief comment on this observation of his:

“We need not rush to reform. Private markets are imposing far greater restraint at the moment than would any of the current sets of new regulatory proposals.”

So, the justification for not rushing to reform anything is that private markets are “imposing far greater restraint” than any regulatory proposal? Okay, we should not be too hasty in assembling new regulatory schemes—I can agree with that—but is not this “far greater restraint” which the private markets are exercising simply the flip side of what got us here in the first place? We have gone from the irrational exuberance of the tail end of the Greenspan era/beginning of Bernanke and into a  time of irrational suspicion and doubt. Even though he admits that heightened regulatory rules will be necessary, Greenspan still believes that restraints on the market should be based on the assumption of a rational market controlling its own urges—this is precisely contradictory to all available evidence. Markets do not function rationally as a norm; indeed, it seems that irrationality predominates and has throughout history.

Markets are collections of people, all of whom are acting without coordination, with incomplete information, and with a distinct preference for maximizing personal gain. None of the preceeding is meant as a value judgment. Rather, it is a simple definiton which leads to some distinct conclusions. The orthodox/neoclassical economics to which Greenspan subscribes requires that rational decisions be the result of this mix—I would question why anyone would come to such a conclusion. Without complete information, one is at best approximating rationality when one makes a decision—one cannot know that it is rational without knowing the entirety of the situation. Without coordination, people can make individually rational decisions but are unable to control the actions of others. To use a basic example, you may have the perfect information required to know that your bank is illiquid but solvent, but you cannot stop everyone else from engaging in a run which breaks the bank. In the neoclassical world, bank runs on solvent institutions would never occur—but they have in our world (in order to pre-empt such irrational actions, the FDIC was created, because it was understood that people would not tend towards rationality).

If irrational behavior is present in even very simple situations like the one just illustrated, it boggles the mind to imagine that highly educated, intelligent people can believe that rationality predominates in far more complex situations. This is where we return to the issue of belief—neoclassical economics has a very strong belief  in the rationality of actors in the market and thus in the market itself tending towards rationality. Designing a regulatory system based on this assumption, which Greenspan prefers, is foolish.

Instead, what is needed is an assumption of irrationality with which to guide our development of new regulations—whether that leads to attempts to provide information and coordination abilities to enhance the possibility of rational decisionmaking or whether it leads to tight constraints on the complexity and independence of the market from control, it will have a better end result than a regulatory scheme which has as its basis a patently false assumption.

How big is big? – or – A trillion here, a trillion there, and soon you’re talking real money…

So, we’ve all been hearing about the various fiscal stimulus packages which governments around the world have been putting together. Most economists—indeed, virtually all of them except for the outer fringes—believe that such stimuli are necessary to restoring the global economy to some semblance of order. The debate now is largely over how large these packages will be and how much spending will be required to restore that sought-after order.

If I recall correctly, President Obama will be meeting with Congress today–a phrase which two years ago I didn’t expect I’d be writing—to discuss the fiscal stimulus package. As it stands, the package involves $825 billion, of which $550 billion is spending (the balance is tax cuts). This is in addition to the $700 billion accorded to the EESA/TARP bill. Ignoring the other expenditures made—because I cannot find them all in the short amount of time I want to write this—this amounts to $1.25 trillion in spending. Certainly appears large, doesn’t it?

Now consider that the estimated GDP of the United States is $14.85 trillion (from the CIA World Factbook). The $1.25 trillion (or $1.525 trillion to count the total cost to the government’s coffers) makes up a “mere” 8.4% ( or 10.3% for the larger figure) of GDP. Now, I am not a professional economist, but some quick examination of past financial crises would seem to indicate that we will be very lucky indeed if this is all we have to spend. A World Bank paper by Caprio and Klingebiel (available here) lists a significant number of financial crises which have occured around the world since the 1970s. Most of them were only resolved with expenditures significantly over ~10% of GDP. Of course, many also involved the deadly “twin” crises of currency and financial collapse, which the US almost certainly will not face. However, many did not have significant twin crisis effects–indeed, to take the example of the US savings and loan crisis, which was vastly smaller than the present crisis we are in, one can see that expenditures of 3% of GDP ultimately proved necessary to restore health to the economy. Then, 3% of GDP was $180 billion; now, it is $446 billion, so expenditures up to that amount shouldn’t even have been in doubt (recall the massive controversy over the $700 billion TARP).

Ultimately, this is all to say that, in my at least mildly-educated opinion, we will be lucky to escape with spending totalling only $1-to-2 trillion over the whole extent of the crisis.  We had a lot of money going into this, and it will take a lot of money to get us out.