Reply to Comments--June 5 to June 19, 2009

There were a number of interesting comments. I cannot discuss them all and my failure to discuss a comment should not be construed as criticism. I pick out a few to discuss where I think a restatement or response may be useful, and I shall discuss these in the order in which they were posted, rather than grouping them by subject matter. I would like to note at the outset, however, my policy on approval of comments, in light of a comment in this batch criticizing other economic bloggers for disapproving comments. My policy is that I will approve any comment that does not contain threats, obscenities, or other unlawful matter (I have yet to receive such a comment). The fact that a comment is critical, or that I disagree with it, would be the worst possible reason for refusing to approve it.

The first comment I wish to mention is on a statement in my book that it is lucky that social security was not privatized, as, had that happened, the savings of people who were retired or were approaching retirement would have been depleted by the fall in stock prices, which would have produced an even greater fall in personal consumption expenditures than we have experienced. The comment points out that, assuming (properly) that social savings accounts in a privatized regime would resemble 401(k)s, as people approached retirement they would tend to shift from stocks to bonds and so would not have taken as great a hit as my statement in the book might have implied. The commenter further points out that because the value of social security benefits grows very slowly, the net value of a privatized social security account might well exceed that of the governmental account, depending, however, on when one had started investing in stocks in the privatized account. I add that it was never intended that one's entire social security account be privatized, so there was no danger of being left with no social security benefits no matter how badly the market crashed.

The next comment points to Erving Goffman's theory that all a regulator should attempt to do is, after the fact, remind the public of the mistakes that gave rise to the fraud or excessive risk taking that the regulator had not detected (had perhaps not even tried to detect) in advance. I don't think this is adequate when one is talking about the kind of economic crisis that has engulfed the nation. Nor indeed is there evidence that people "learn their lesson" and so need only be reminded of the lesson from time to time. The housing bubble followed fast on the heels of the dot-com bubble, the bursting of which had little effect on people's tendency (which I argue in my book is rational) to treat rising prices as a signal for further buying.

A comment about my blog entry on unemployment points out that the circumstances in which a person becomes unemployed (as inferred by prospective employers) may affect his chances of finding a new job. They may be dim if prospective employers infer that he lost his job because the economic downturn caused his employer to cull his least productive workers. A further problem is that he will find himself in a job-seeking competition with young workers who have been laid off plus more young workers entering the work force for the first time as they graduate from school, and employers may prefer young workers for a variety of reasons, including lower expectations of pay. Hence for many older workers who become unemployed, unemployment may mean involuntary early retirement from the work force.

Another comment points out (if I understand it correctly) that if the unemployed are pessimistic about their future employment prospects, this will reduce the amount of effort they put into looking for a new job--which in turn will further reduce those prospects.

Another comment, noting my emphasis on regulatory failure (including the deregulation movement, unsound monetary policy, and lax enforcement of remaining regulations) as the main cause of the current depression, points out correctly that the financial industry is politically powerful and pushed for deregulation, and so is deeply implicated in the regulatory failure. That is certainly true and it is also true that the proximate cause of the financial crisis that precipitated the depression was the conscious (I believe) taking of high risks by bankers, other investors, and consumers. So they cannot escape responsibility for the macroeconomic consequences. But it is government (albeit heavily influenced by the private sector) that creates the economic environment that in turn shapes the utility-maximizing behavior of private individuals. If risk-taking is utility-maximizing, the risk takers should not be criticized too harshly for refusing to sacrifice their personal utility for the greater social good.

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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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