Response to Comments of May 27-June 5

More

I received many very interesting comments on a variety of my posts. I regret that I cannot reply to all of them. I will respond to those that I am guessing hold the most general interest for my readers.

A number of comments deal with the question of who is to blame for the economic disaster. I believe it is decisions by the federal government, specifically mistakes of monetary policy by the Federal Reserve in the early years of this decade and a combination of deregulation and regulatory laxity. Several commenters think the major blame should be assigned to the banking industry because it had more information than government about the risks the banks were taking. I think the banks knew they were taking risks that in theory could bring down the industry, but thought the risk small because the government kept telling the industry that the risk was small.

I also disagree that "the regulator never has the job to prevent, only to clean up in a satisfactory manner." That is like saying the government should do nothing to prevent an epidemic, just swing into action after the epidemic hits. On the contrary, the government through production of vaccines, medical research, and early-warning networks right engages in precautionary activity before an epidemic strikes; and the same should have been true, mutatis mutandis, with regard to the financial "epidemic" that brought on the current depression.

One comment suggests that the blame for the current economic situation should fall on Reagan for adopting an economic policy of "borrow and spend" and that Reagan's declaration that "government is the problem" can be "pretty accurately translated as 'grownups are the problem.'" That is well stated, but I think exaggerates the impact of political rhetoric. Politicians generally follow rather than form public opinion. Liberals responded to Reagan by calling the 1980s a decade of greed, yet Clinton chose to adhere to the "Reagan Revolution" in economic affairs--and the deregulation of banking had begun in the Carter Administration.

Paul Krugman, in a column that I criticized, had blamed our current economic troubles on Reagan, and I explained in a recent post why I disagreed. One commenter says that by calling Krugman "partisan" I merely made myself sound partisan. I hope not, for by "partisan" I meant strongly committed to a political party, in Krugman's case the Democratic Party; and I have no party affiliation or loyalty. My point was only that Krugman's unquestioned political partisanship had led him to an oversimplified diagnosis of the economic situation, blaming the situation entirely on the most popular Republican president of recent times.

Several comments focus on the prospects for inflation in the wake of the current depression--one of the "aftershock" dangers that I have emphasized. One comment points out that if interest rates keep rising, and hence the price of bonds falls (which it will do so that the purchaser obtains a higher return than the rate specified in the bond, as otherwise he would buy a new bond rather than one that has already been issued), the Federal Reserve may not be able to sell the Treasury bonds, and the other debt that it has bought, for the amount of cash that it paid for them; and this will limit its ability, by sucking up all the cash that it previously injected into the economy, to prevent inflation.

Another comment ingeniously suggests that if China continues to pursue an export-first policy by keeping the ratio of the value of its currency to that of the United State low in order to increase the demand for the goods it exports, our government will have an excuse for reducing the value of the dollar;. That will create inflation by making imports more expensive; and inflation will reduce the burden of our soaring national debt. (Speaking of national debt, I should offer a clarification of the numbers that I use in my book and in my blogging. The national debt is almost $11 trillion, and that is about 80 percent of Gross Domestic Product. Yet most economists say that the percentage is only about half that. The reason is that they, but not I, exclude from consideration the amount of the national debt that is owed to federal government agencies, for example to the Social Security Administration to fund social security and Medicare payments. That debt could in principle be cut "easily," just be reducing social security and Medicare benefits. But such cutting is easy only if politics is ignored; if it is not ignored, then there can be no confidence that the national debt will be pruned by reductions in highly popular federal benefits programs.

A number of comments are fiercely critical of the bailout of General Motors. One contends that I exaggerate the consequences of liquidating rather than reorganizing (with a $50 billion assist from the federal governmnet) General Motors--that after layoffs made pursuant to the reorganization it will have only 115,000 employees, both salaried and hourly, in North America, and that if you divide $50 billion by 115,000, you get an extravagant number reprsenting the cost of saving one job.

But in the criticized passage I was talking about the consequences of a liquidation of General Motors and Chrysler in December of last year, when the bailouts began in an effort to forestall immediate liquidation. At that time, there was talk that three million jobs in the auto industry were at stake. That number was indeed exaggerated; but when one considers the total GM and Chrysler work force of last December and add employees of auto parts suppliers and auto dealers, whose jobs would disappear as a consequence of the liquidation, the number of several hundred thousand is accurate.

I defend the initial bailouts, amounting to more than $25 billion, for GM and Chrysler, to keep them going until the economy stabilized. I am skeptical about giving the companies more than $30 billion (the additional money that GM is to receive) in an effort to revitalize them. The economy has stabilized to a degree, and though a liquidation of GM would still be a shock and delay the economy's recovery, there is little ground for confidence that GM will recover. If there were grounds for optimism in this regard, private investors would have bought the company.

One comment asks pertinently: what if the average variable cost (or, better, marginal cost) of a General Motors vehicle exceeds the price that GM can obtain for the vehicle? I had said that if that price exceeded marginal cost, the firm should not be liquidated, because every sale at that price would contribute to reducing the company's fixed costs, consisting mainly of debt. If at all possible levels of output price is below marginal cost, the company should liquidate. I should have made clear that, when considering the company's prospects, one cannot ignore the cost of any future debt that the company will have to take on to keep in business. The company's revenues have to cover all the costs that it will have to incur to remain in business, as distinct from those costs, such as unsecured debt, that can be wiped out in reorganization in bankruptcy. 

Jump to comments
Presented by

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.
Get Today's Top Stories in Your Inbox (preview)

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

CrossFit Versus Yoga: Choose a Side

How a workout becomes a social identity

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Business

From This Author

Just In