"Government as Deux Ex Machina"?

Mark Thoma Economist's View July 29, 2010

« Puzzled | Main | Income Inequality, International Payments Imbalances, and Crises »

Dave Henderson has responded to my post earlier today (responding to a post of his), and I probably did overreact to the title of his initial post -- the title I chose for my post was clearly motivated by his title choice. The title was based upon what seemed to me to be a mischaracterization of my views, and that was a large part of what prompted my response (so in his description below, if annoyed=hurt feelings, he has it right). Also, the feeling that he was trying to paint me into an ideological corner led me to return the favor, but I was overly stark in my characterization.

So I appreciate this:

I don't have time to deal with this directly at the moment by writing something new, but the implicit suggestion that I have ignored these issues is also part of what prompted my initial reaction. Here's one example that comes to mind showing that the suggestion that these issues are "never" discussed doesn't hold up. This relates to his call to discuss how the incentives associated with a government program, and how the incentives will be set up so that it works:

That sure seems like a "textbook" analysis of the incentives and outcomes surrounding a potential government policy to me, including why it works to reduce consumption. And, though that was the first example to come to mind and it's a bit dated at this point, there's plenty more where that came from (e.g., today's post called "Puzzled" brings up the topic of market-based regulation which gets at the heart of the incentive problem -- I've explained in the past why I favor a market-based regulatory approach -- and this version of the original post from Schmalensee and Robert Stavins has an extensive set of links to research on the topic). Should I ask to see his blog entries going into this much detail when he objects to government programs? Nah, I won't do that. But I will keep the suggestion to discuss the incentives in mind as I write about these issues in the future. So thanks for that.

Update: A comment suggests:

mark the knock is on regulators motives and incentives not on the impact on citizens

I thought the challenge included government policies as well, and since this is getting tiresome -- I didn't start all this and I'd like to do something else today -- I thought I'd stop there. But ok, I'll briefly address this. One of the points of market-based regulation mentioned above is to help with the regulator incentive problem, and I've talked about the incentives of regulators many times in the past. This may not be the best example, but a very quick search brings up:

regulators of these markets were captured by powerful forces that wanted the game to continue. The power of regulators, and the will to enforce the regulations, must match - in fact exceed - the will and power of those being regulated to resist having constraints placed on their behavior. I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present. Therefore, if the current anti-trust legislation is adequate to the task, then yes, let's give regulators the power to enforce it, and ensure we have people in place with the will to do so. ...

It's perhaps not expressed as clearly as I'd like, and may not talk enough about how to solve the incentive problem, but the term "will" is meant to refer to the incentives regulators face along with their underlying regulatory philosophy. And it does suggest that breaking up politically powerful banks under existing or, if necessary, new legislation will help to prevent regulatory capture and improve incentives (by removing bad ones). So a solution to the incentive problem isn't altogether ignored either. Anyway, that's enough time on this. Once again, even though I'm convinced I've addressed these issues in the past, I will keep this in mind as these issues come up in the future.

Posted by Mark Thoma on Tuesday, July 27, 2010 at 04:50 PM in Economics, Market Failure, Regulation | Stumble, Digg, del.icio.us, Reddit, Share, Like | Permalink Comments (22)

Comments

You can follow this conversation by subscribing to the comment feed for this post.