Sclerosis
Felix Salmon has a nice piece on the banking system that includes this paragraph:
Still, he’s indubitably correct on the subject of the “Geithner plan” — which is one of those phrases that genuinely belongs in scare quotes:
As far as I can see there is no detail – and if you don’t have detail you don’t have a plan.
This is one of the reasons I’m becoming increasingly convinced that we’re turning Japanese: given how hard it is to do something bold, it’s always easier to faff about and do something woefully insufficient. Unless and until Geithner announces a plan worthy of the name, we’ll have to assume that to be the base-case scenario.
So why are we “turning Japanese”? [And, if you know the rather vulgar origin of that phrase, you’ll know it works on several levels.]
I think it boils down to something I wrote about in my post on Geithner’s public self-destruction: intense political battles between interested groups, namely politicians intent on getting their hands on the banking system to turn it into a literal piggy bank for funding their causes and pals, and incumbent bank managers who want to retain the status quo as long as possible.
That is, the inaction is a consequence of the kind of sclerosis that Mancur Olson identified as the bane of mature polities and economies in his Logic of Collective Action and The Rise and Decline of Nations.
The impression that “leaders” are fiddling while the banks are burning is palpable. The press is agog with stories of Obama playing hoops, or going to Chicago for a romantic dinner. He is lionized for getting a stimulus bill passed by stoking fears. BFD. He gets a liberal Democrat Congress to spend money! He peels off three of the wettest “Republicans” on the Hill! Wow. I’m so impressed. What’s his next Herculean labor? Getting hungry sharks to attack bleeding tuna?
All the while, the bank problem festers and metastasizes. Obama punts the problem to Wonder Boy–who flubs it. Going on a week later, Geithner gets spanked by the G-7 finance ministers (well, at least he did better than the drunken Japanese guy), and still nothing.
I think it’s because Obama and pretty much everybody else is a political animal (go figure), and the politics have seized up because of the distributive implications of any alternative that has a chance of mitigating the problems. That’s what happened in Japan. Political pressures from banks, and from the zombie firms that the banks kept alive, prevented the government from cutting the Gordian knot.
So, what is going on now, to the best I can figure, is that we have clatches of squabbling interest groups and politicians arguing over just how best to untie the knot. That’s not gonna happen, and it’s not gonna work. Somebody has to cut the knot. And I think that somebody is too much of a politician to do it.
Correct me if I’m wrong, Professor, but, it seems to me and God knows economics isn’t my field that we end will end up with zombies banks just like Japan after all of the bluster with the Dem’s misguided stimulus plan. It’s the banks, stupid!
I swoon when I think about the financial, retail and tech sector unemployed folks being directed to build highways, bridges and installing solar panels as re-employment. Let’s get real. We have morons in Congress directing this folly.
Our only hope as I see it is mid-term elections to Congress when the economically stupid won’t be as galvanized by ACORN or some lefty utopian agenda or moneyed liberal hubris into voting the Messiah vote again and we may pick up a few Republicans with fiscally conservative brains.
Comment by penny — February 16, 2009 @ 11:04 pm
It’s the banks stupid is exactly right. Ever been in one of those nightmares where you are screaming something and nobody can hear you? That’s what I’m screaming, and nobody hears.
Instead, as you note, Congress turns into a Bacchanalia, spending money based on theories based largely on the assumption that investment bankers, computer geeks, and sandhogs are all interchangeable. And in so doing, they p*** away scarce resources that could and should be used (preferably through the private sector) to address the main problem.
Right after the election, I wrote a rather dyspeptic post that gained some visibility on the net. (John Fund made it his quote of the week on the WSJ political journal.) In it, I toyed with the (Leninist) thought that “the worse, the better.” That is, let Congress/Obama indulge their wildest fantasies, mess things up completely, and pave the way for the return of some sanity.
I had two reservations about that. One is that a lot of damage could be done before the adults return. I think that’s happening. The second is that the Republicans are brain dead too. They are, for the most part, as wedded to the same government-centric nostrums as the Democrats. They have returned to their pre-Reagan, or actually pre-Gingrich, form of agreeing on (bad) principles, but just wanting to spend a little less on them. The Republicans need a purging as badly as the Democrats.
Professor:
I’d like to get your thoughts on an idea I have been toying around with in my head.
Can we agree that the solution to our economic woes in the medium to long term is to create millions of good jobs? All workers are, by definition, consumers but not all consumers are necessarily workers (employed). While it great for many to talk about Green technologies being an engine for job creation, the reality is that solar, wind, renewable, etc. technologies will not power our economy forward. Instead we need to find ways to create jobs for the middle class that pay enough so Americans can live stable and comfortable lives.
There are many who argue that the off-shoring of manufacturing jobs over the past 30 years is a good thing. I agree that there are many benefits but I would also argue that most of those benefits accrue to stock holders who realize higher profits from lower labor costs. Again, while great in theory to talk about how economies “naturally” must progress to higher and higher skilled jobs (knowledge economy) the reality, as I see it, is that even in the most advanced economy there still needs to be jobs for millions of folks who, for whatever reason, are not qualified to fill those knowledge worker jobs.
Therefore, what’s the solution to creating more manufacturing jobs in the US? As we have learned from many examples, protectionist laws will be skirted and companies will find ways to avoid them. Regulation, in this instance, will probably cause more harm than good.
However, what if the G20 countries were to implement a 3 tiered Global Minimum Wage (GMW) with the goal of having a single GMW in 15 to 20 years? If Chinese workers were paid the same as Americans making the minimum wage in America then it would, in many instances, become attractive financially for many corporations to locate production facilities closer to where the ultimate consumption occurs.
I understand that prices of all goods previously manufactured in low wage countries would rise. But if our countrymen and women don’t have jobs then they won’t be able to afford even those lower cost items.
What are your thoughts regarding this idea?
Comment by Timothy Post — February 17, 2009 @ 7:14 am
Could we, if we are to spend public money, spend them on something that would eventually pay for itself? What is (except the Green resistance, of course) wrong about government-sponcored program to build 20 to 40 nuclear power plants in remote desert areas of the country? How about building power transmission lines to tie them all into a unified grid? Is there a problem to use that excess electric power to initiate a gradual electrification of all the major US railroads? Could we start phasing out the old and dirty coal plants and use extra coal supply to produse sintetic fuel? Could we offer tax incentives to people who would switch from gas to electric heating in their homes?
It may be a stupid idea, but look how many good things (environment, foreign energy dependence) can be done for the same money that would be used to create jobs… Not to mention that power plants, electric grids and coal-processing outfits eventually pay…
Comment by LL — February 17, 2009 @ 1:28 pm
LL, nuclear power plants wouldn’t help anything if they are located in remote desert locations. Less lives have been lost to the nuclear power industry than lost extracting coal from mines or in the oil fields. Nuclear is a safe energy source. And, coal can be cleaned, the technology is there. We have a 200 year reserve of coal in NA. Nuclear is being obstructed by the misguided not-in-my-backyard folks. It provides 80% of France’s power grid and it isn’t hidden in deserts there. Natural gas is readily available here. It has been displacing coal at power plants.
Here’s one of the best in a nutshell summaries of why throwing money into alternative energy which our idiots in congress are capable of doing will not work:
http://chizumatic.mee.nu/ghosts_of_my_past
Professor, your thoughts on this comparison between Japan’s experience and our present banking crisis.
http://blog.atimes.net/?p=598
Comment by penny — February 17, 2009 @ 3:44 pm
Shortly after class, an economics student approaches his economics professor and says, “I don’t understand this stimulus bill. Can you explain it to me?”
The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.
At the agreed-upon time, the student showed up at the professor’s house. The professor stated that the weekend project involved his backyard pool.
They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.
The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told.
The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.
The confused student asked, “Excuse me, but why are we doing this?”
The professor matter-of-factly stated that he was trying to make the shallow end much deeper.
The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.
However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, “All we’re doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”
The professor put down his bucket and replied with a smile, “Congratulations. You now understand the stimulus bill.”
Comment by elmer — February 19, 2009 @ 9:27 am