November 1, 2010

Time of transition...

Obama's economists missed what voters plainly saw | Washington Examiner:

...In post-World War II America, voters regularly moved toward the Democrats in recession years.

There's a difference, however, that has escaped Obama Democrats but perhaps not ordinary voters.

In recessions caused by oscillations in the business cycle from the 1940s to 1970s, voters were confident that the private-sector economy could support the burden of countercyclical spending on things like unemployment insurance and public works projects.

That spending would stimulate consumer demand, the thinking went, and once inventories were drawn down manufacturers would call workers back to the assembly line. The recession would be over.

But it's been a long time since we've had a major business cycle recession. The recession from which we've technically emerged, but which seems to most voters to be lingering on, is something different, the result of a financial crisis.

And financial crisis recessions tend to be a lot deeper and more prolonged than business cycle recessions, as economists Carmen Reinhart and Kenneth Rogoff argue in their 2009 book "This Time is Different: Eight Centuries of Financial Folly." "The aftermath of systemic banking crises," they write,"involves a protracted and pronounced contraction in economic activity and puts significant strains on government resources."

The very able economists in the incoming Obama administration seem to have ignored the difference between these two kinds of recessions. Council of Economic Advisors head Christina Romer was surely sincere when she promised that passage of the stimulus package would hold unemployment under 8 percent.

Similarly, administration economists evidently thought the private-sector economy could bear the burden of a national debt that doubled over a decade. It would bounce back like it usually does in a business cycle recession.

Tea Partiers took a different view -- and before long so did most voters. They seem to believe that permanent increases in government's share of GDP will inflict permanent damage on the private-sector economy -- and won't do much if anything to move us out of this prolonged financial crisis recession. The evidence so far seems to support them....

My belief is that the cause of the recession is deeper than just the financial crisis. That crisis is itself a symptom of deeper problem, which is that part of our world has made a transition to the Information Age, and part—government and quasi-governmental organizations —have not.

and one part of the transition that needs to be made is the realization that government regulation of financial institutions doesn't really work anymore. The complexity and wierdness of financial instruments that it is possible to create when computers can manipulate millions of variable is beyond the power of man to even understand, much less regulate.

The better way to regulate finance is just to require that financial institutions and their top employees themselves invest in whatever they sell, and hold the investments. Then the system would become self-regulating.

Posted by John Weidner at November 1, 2010 12:26 PM
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