Reply to Comments--May 4 to May 8

I respond here to a number of the substantive comments received in the first week of my Atlantic blogging. I have not attempted to respond to all of them; to some I do not have a good reply!

Gabriel Sanchez's comment (follow link for full comment): I take it that you are not arguing that deregulation per se is bad or necessarily prompted by ideological commitments which may, in fact, be out of touch with reality. Even so, there appears to be a general suspicion now of deregulation which goes far beyond the financial sector. The "public utility" view of airlines has crept back in and one wonders if it couldn't lead to elements of reregulation on the general (and I believe faulty) assumption that deregulation as a whole has been a mass failure.

My response: My concern about deregulation of financial markets has not spilled over to other deregulated industries, such as airline, train, and truck transportation, telecommunications, oil pipelines, natural-gas production, and wholesale electric power. My concerns about deregulation of financial markets focuses on conditions peculiar to those markets, and in particular the potential of a crash in banking (in a broad sense, to encompass financial intermediation in general) to trigger a severe recession, or even (as I believe we are in now) a depression. Compare the airline industry. Like banking, it is inherently risky; the reason is that it has very heavy fixed costs, that is, costs that do not vary with output. And therefore when demand falls and the airlines have to reduce their output, they cannot reduce their costs proportionately to the fall in revenue. And so because air traffic fluctuates they are constantly teetering on the edge of bankruptcy. The unexpected and very sharp fall in demand caused by the 9/11 terrorist attacks brought the industry to its knees; it was saved by a modest federal bailout; but in subsequent years, there were bankruptcies, most notably the bankruptcy of United Air Lines in 2002. Yet because the airline industry is relatively small, and, more important, because it does not have the same centrality to the entire economy that banking does, airline bankruptcies, even when widespread, can at worst spark a very mild recession. To put it differently, the airline industry has little macroeconomic significance, and this is also true I believe of the other deregulated (in some cases, such as telecommunications, partially deregulated) industries. If they are being underregulated, it is for reasons distinct from those that persuade me that the banking industry is underregulated, although to repeat what I have said in the blog I do not think this is a good time to try to reregulate the industry, because the task of reregulation is immensely complex and sensitive.

jsc224's comment: I believe that utility deregulation is a failure because there is insufficient customer choice to restrain utilities. For example, a car customer can chose not to buy a new car if prices are raised too much. An electricity customer must buy new electricity every time he turns on a switch. Utility deregulation has not led to any "innovations" which benefit consumers. Similarly, deregulation of the financial industry has resulted only in "innovations" which have benefited only the financial industry. Shouldn't both industries be strictly regulated for the benefit of the entire economy and society as a whole?

My response: A "natural" monopoly, that is, a market in which competition is infeasible and thus unavailable to protect consumers, presents a traditional case for regulation of the public-utility or common-carrier type. But banking is not a natural monopoly. It is naturally competitive--in fact that is part of the problem. Competition in banking can be, as we have seen in the last year, "ruinous" in the sense of leading to a near collapse of the industry with resultant severe damage to the economy as a whole.

Kurt's comment: Which sectors of the economy will have the potential for a surge that will pull the economy out of this depression? The engine of the past US economic triumph, the manufacturing sector, has been systematically shipped abroad for cheap labor, while the housing bubble was deliberately created to provide temporary employment opportunities to fill the gap. Now that it has run its course and came to grounding halt, where do you expect we would create well paying jobs producing tangible goods?

My response: This comment points to the decline of manufacturing and notes correctly that heavy borrowing enabled at least an illusion of continued prosperity, although I do not agree that the housing bubble was "deliberately created." The comment is very pessimistic about the nation's economic future. I am neither optimistic nor pessimistic, but merely very concerned.

Calvin Jones's comment: Cramdown won't happen because the banks don't want it. Second, the rest of it is all well and good for those who still have their jobs. What about those that lost their jobs or who remain unemployed because of the upcoming jobless recovery (of the lame recovery there will be)?

My response: This comment expresses concern about the plight of the unemployed "because of the upcoming jobless recovery." There is indeed, as I discuss in a later blog entry, the risk of a "jobless recovery" in the sense that many jobs may disappear permanently, meaning that those who have lost those jobs will have to find a different line of work. I attribute this possibility to the fact that people have reacted to the depression by changing their consumption patterns. Even after an economic recovery is well under way, they may decide they like their new pattern of consumption and so will adhere to it.

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Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.

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