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Wednesday, June 24, 2009

Lemieux: The real systemic danger is Barack Obama

This week, Pierre Lemieux takes on President Barack Obama's plan to bring "systemic regulatory reform" to the U.S. financial system. Obama proposes

"a set of reforms that require regulators to look not only at the safety and soundness of individual institutions, but also -- for the first time -- at the stability of the financial system as a whole."

Drawing on history and economics, Lemieux argues that the real blame for American's shaky financial situation lies in the hands of the politicians and bureaucrats who now claim to be able to salvage it. Not only that, but instead of bringing "stability" to the U.S. financial system, these new government reforms are likely to make things worse.

Why is the government so inept at managing the economy? In an interesting passage, Lemieux endeavors to answer this question.

Why is government intervention so expectedly inefficient in promoting economic growth and stability? The short answer is two-pronged. First, politicians and bureaucrats don’t have the incentives to fix, or not to break, the economy. Second, there is an insuperable information problem, which Nobel laureate Friedrich Hayek’s work put in clear focus: the state (the whole apparatus of government) simply does not have the information necessary to intervene efficiently. The business cycle is a complex phenomenon on which generations of brilliant economists still don’t agree. How could we expect that campaigning politicians and bureaucrats in committees will resolve the problem?

What I found interesting about this passage is how Lemieux brings to bear both public choice economics (in his observation that politicians don't have the right incentives to fix the economy) and Hayek's work on the role of dispersed knowledge. Both these issues make it highly unlikely that the government's attempt to impose "systemic regulatory reform" will succeed.

In some sense, President Obama is like a blind man suddenly put behind the wheel of a speeding car. There are several things he could do to "fix" the economy, and almost all of them would be bad. That's if you assume that he's well-meaning, with the right incentives, but stymied by Hayek's knowledge problem.

If Obama's incentives are more like the incentives of other politicians, the problem is even worse. His attempts to "fix" the economy will either fail, or succeed only in lining the pockets of a few special interest groups.

For example: who do you think is going to benefit most from the billions Obama plans to invest in high-speed rail? According to Cato's Randal O'Toole, the price tag works out to about $1,000/taxpayer, at a minimum, but California is likely to get most of the money. Perhaps that's a nice reward for a big blue state.

As Lemieux consistently points out, this pattern is not an aberration, but the rule. Systemic regulatory reform to the financial system will be no exception. We can expect the regulations to either make the situation worse, or to be tailored in such a way that special interest groups, and not taxpayers, benefit from them.

Read all of Pierre Lemieux's column here.

Posted by Terrence Watson on June 24, 2009 in Current Affairs | Permalink


You may be right. But remember that the key drivers behind markets and recovery are non-monetary - that being hope and positive feelings and expectations.

Obama can provide this in abundance and it must be considered.

Posted by: epsilon | 2009-06-24 5:20:46 PM

Don't forget a little voodoo. It could be a significant factor in economics. Chicken bones across the table have meaning.

Posted by: dewp | 2009-06-24 8:43:22 PM

Hope, feelings and high expectation can indeed be powerful motivators. FDR gave them in abundance but Epsi, he didn't solve the Great Depression.

Posted by: DML | 2009-06-24 11:26:49 PM

Sorry Epsilon, but no. Hope and optimism do nothing if the correct incentives are not present.

Obama will increase regulation and taxes. His stimulus package won't stimulate anything and Americans will be left with the debt. There are only two ways to repay debt. The honest way and the inflationary way. Which method do you think they will choose?

Posted by: Charles | 2009-06-25 6:53:18 AM

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