I have been remiss in responding to comments, many very interesting, that I have received in the past six weeks. I hope that readers of this blog will read the comments as well. Although comments cannot be posted without my approval, I have approved all but a couple that were either irrelevant or unintelligible.
There are too many comments for me to be able to respond to each one individually, but I will note some points that deserve emphasis, and respond to a few individual criticisms.
I like the comment (by Indy, June 26) that analogizes higher reserve and capital requirements for financial firms that create systemic risk (that is, that could bring down the financial system as a whole if they went broke) to strict building codes for earthquake- and hurricane-prone areas. The problem, as the comment points out, is that if the first line of defense--the reserve and capital requirements--fails to avert a collapse (just as building codes can fail to prevent serious damage from an earthquake or a hurricane), there would need to be "tremendous discretionary powers vested in some agency to respond and shut down [risky financial] activities in order to forestall a crisis." Vesting any agency with such powers is problematic, especially the Federal Reserve (where the Administration wants to vest them) because it would undermine the Fed's properly prized political independence. The comment also suggests that if the agency drafts contingency plans to deal with a future crisis, those plans should be made public so that the business community knows where it stands and can plan accordingly.
In a July 5 comment, the same commenter (Indy) expresses skepticism (as did I) that the proposed consumer financial protection agency would "promote significant changes in behavior among consumers...It is one thing to say 'people should save more, spend and borrow less' and another to add 'and they "would' if only they were better informed in simplified, easy-to-understand ways." Indy adds that "observing the magnitude in which consumer saving, spending, and borrowing behavior has changed recently during the economic downturn (and without any significant change in the types of financial products offered or the manner in which they are marketed) leads me to believe that economic conditions matter much more than anything the proposed agencies and new authorities can do." I agree.
UjK points out (July 13) that consolidating federal regulatory agencies or abolishing the financing of such agencies by fees imposed on the regulated firms will not eliminate shopping for lax regulators as long as banks can continue to choose whether to be regulated by state or federal banking agencies. This argues for preempting state banking regulation, but that is a radical step that will not be taken--at least not until the next financial meltdown.
Indy (July 20) wishes to distinguish between macroeconomic theory and practice, arguing that the failure of the macroeconomists was not noticing what was happening in the housing market. That was a serious failure, but I think the theory itself is defective because of the neglect of Keynes's theory of the business cycle, which I discussed in a blog entry on July 27. That entry gave rise to several interesting comments about the Austrian theory of business cycles. Members of the Austrian school of economics, such as Friedrich Hayek, argued that depressions can arise from unsound monetary policy--a policy that forces down interest rates, creating an artificial boom. Obviously I am sympathetic to that argument. But my impression (no more than that) is that, at least in the 1930s and perhaps still, Austrian economists do not advice any interventions designed to stop a depression--they regard the depression as just punishment for the unsound policy that precipitated it. That seems to me to give too little weight to the immense costs that a depression can impose on a society. But I am no expert on the Austrian school, and invite correction.
Greg Ransom, in a July 28 comment, calls my suggestion that liberal and conservative macroeconomists ignored Keynes until the banking collapse of September of last year "not only false, it's ridiculous." He argues that the tax credits in the spring of 2008 were a Keynesian stimulus and that the Greenspan-Bernanke policy of low interest rates in the early 2000s were Keynesian. I disagree. I tried to explain that what passes for Keynesian theory nowadays (or at least until the crash of last September), left or right, bears little resemblance to Keynes's actual theory of the business cycle, which emphasizes the role of uncertainty, of fear or lack of confidence, of the hoarding of cash in lieu of productive investment, and of recovery through deficit spending on public works (which he believed produced a multiplier effect on income)--not tax credits or other transfer payments.
The debilitating effect of depression-induced uncertainty on economic activity is well expressed in the very next comment, by gman (July 28): "As a small business owner I can tell you that this [my summary of Keynes's theory] describes today's reality. Our most recent fiscal year ended with record sales and profits, but trended downward during the last six months. Both our customers and suppliers are doing the same thing as we are--waiting. As a consumer, I am doing the same thing. The uncertainty is tremendous. Will any short-term recovery be snuffed out by a rise in interest rates? As far as I'm concerned, the recovery doesn't exist until we see what happens to interest rates once demand for credit returns."
Indy (July 28) has a long comment criticizing the mortgage-relief program. It is persuasive, but too long to quote, so I merely remind readers interested in the program of the comment.
Another interesting comment by Indy (August 1) criticizes the "cash for clunkers" program. He (if it's a he, as I am guessing) points out (something I had missed, perhaps because I don't like old cars) that many of the cars eligible for the program are so old that they would probably have been traded in within the next couple of years even without the inducement provided by the program. He expresses concern that, in that event, there may be a plunge in sales in a year or two, at which event there may be pressure for a new "cash for clunkers" program, and so on ad infinitum. It is a danger with the overall stimulus program. As he puts it, if "spending does not accomplish the goal of changing investors' moods and consumers' behaviors, then it merely brought forward government demand by means of debt which has to be paid for eventually out of future consumption...Without changing behaviors, without being able to get there in the absence of huge and extraordinary government expenditures, and without any obvious future 'growth engine' in the economy to remedy the huge amount of unemployment, getting to 0 doesn't seem to be such a cheery occasion."
My blog entry of August 1--"When Does a Recession or a Depression End?"--provoked several comments, including one by anne on August 3 in which she tells me: "Come down from your ivory tower and you'll realize there isn't a single person on 'Main Street' who defines 'recovery' as jobless, or ties it to GDP. Most people outside of Washington and Wall Street define 'recovery' as becoming gainfully employed in a job that will show real increases in income over time, not in a job that provides stagnant wages over decades." But as Max (August 3) replies to anne: "Isn't that the point that Posner was trying to make? That the ivory tower economists aren't using 'recession' and 'depression' in ways that really reflect the impact the economy is having on ordinary people's lives?" Yes, it is my point.
Charles (August 4) has an interesting comment: "Is there any correlation between the return of economic growth to previously-expected levels and job growth? The media always claim that job losses tend to continue after a recession is technically over, but I wonder if it's because they are using an inaccurate assessment of 'over.'" Precisely! It's misleading if not absurd to think that a recession or depression is over when unemployment is continuing to increase.
Pwnce (August 4) says that my statement that "singling out a particular class of taxpayers for higher taxes will be highly resented and strongly resisted" (as in the suggestion of a 1 percent surtax on persons earning over a million dollars a year, to pay for the Administration's proposed health care program) "makes no sense" because all progressive income taxes by definition single out particular classes of taxpayers to pay higher taxes. That is correct, but I see a difference, if perhaps only in a greater appearance of class conflict, between altering marginal rates in a progressive income tax system and imposing a special tax on the wealthiest people.