Sunday, September 13, 2009

Tyler Cowens Hits a Home Run

...with a slight stumble around third base, but it looks like he has even learned how to hit the curve ball for power.

In today's NYT, Cowen writes:
For years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating....

....we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.

Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill. Much of the competition was cleaned out by bank failures and consolidation, so giants like Goldman Sachs and JPMorgan had an easier time getting back to profits.
Here's where he shows he can hit a curve ball:
The Federal Reserve has been lending to banks at near-zero interest rates while paying higher interest on the reserves the banks hold at the Fed.
Just a couple of weeks ago, Cowen didn't see this curve ball from the Fed. Cowen then rounds second:

We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction and not heeding the basic lessons of the financial crisis. Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.

One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That’s another example of creating favored beneficiaries through politics...In finance and health care, a common political dynamic has created similar trends, namely, out-of-control costs, weak accountability, and the use of immediate revenue patches to postpone dealing with fundamental problems.

Even worse, these political deals threaten open discourse. The dealmaking may be inhibiting some people in health care from speaking out in opposition to the administration’s proposals. Robert Reich, who served as secretary of labor in the Clinton administration, deserves credit for complaining about this arrangement, but not enough people are asking where such dealmaking might stop.

The banking sector has been facing similar constraints;; if bankers criticize the Treasury or the Fed, they risk losing their gilded cages and could get a bad deal when the next bailout comes. When major economic sectors can be influenced in this way, are we really very far from the nightmare depicted by Ayn Rand in “Atlas Shrugged”?

Here's where Cowen stumbles a bit rounding third:
In health care, the Obama administration should drop its medical sector deals and try to sell a reform plan — in whatever form Mr. Obama chooses — on its own merits. That’s not only good for health care, but also good for the American polity.
The problem with any "reform" is that it will create power points in the government that the bad guys will co-opt for their own purposes. The only solution is removing government involvement in health care, not reforming it. Reform is getting an alcoholic to drink whiskey instead of beer.

But Cowen recovers quickly as he heads for the plate:
In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of “too big to take a pay cut,” especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis, and we’re still moving in the wrong direction pretty much across the board.


  1. Wenzel,

    One way I seperate libertarians from other people is by their use of the ambiguous "we". Anyone who wants to try to tie me into the doings of "our" representative government and other malicious private individuals who I do not associate with, is no individualist and no lover of liberty deep down so long as they think in collective terms.

    Cowen strikes me as someone who is too smart for his own good, another academic modeler like Scott Sumner.

  2. Bob,

    Speaking of Tyler Cowen, how is your book on intellectual property coming along? I'm looking forward to it.

    I like the term "conditional use" - meaning you can use my intellectual property under my conditions or you cannot use it at all.

    Simple contract language - "offer and acceptance" based upon mutual voluntary exchange.

    Maybe that's all you need...without having to go through the trouble of writing a whole book! :o)


  3. Hi Steve,

    I'm almost finished. I think we are looking at a December or January publication date.

  4. Taylor,

    Yes, I call that "collective speak". It's easy to fall into that trap and we must constantly watch for it. Oops - I did it again!!!


  5. Tyler Cowan made some of the same points on "Reason TV" (see here)