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Misery, Tuition, and Inequality

Post #1691 • May 2, 2014, 11:41 PM • 1 Comment

William Powhida directed me to this post of Ed Winkleman's (which you'll need to read if you want the following to make proper sense). That in combination with other social media discussions prompted Ed to insist that I address this concern:

In my opinion, those who would have let the banks fail in 2008 (potentially leading to dramatic runs on them, drastic drops in consumer confidence, even wider unemployment, and extended economic recovery time) are willing to risk such misery because of a firmly held but entirely unverifiable belief in "the Invisible Hand of the Market," the Adam Smith metaphor for the theory that, left to it's own devices, capitalism will always, always auto-correct. ... Personally, even if such advocates are correct, I feel a focus on the extremely academic argument that we have to stop QE and possibly even dismantle the Fed ... and let the Invisible Hand of the Market work its magic is blocking them from seeing that income inequality in the US has evolved past being merely a symptom of a larger problem into being a new and potentially self-perpetuating problem in and of itself.

And so I do. But with some caveats.

One, that the market will auto-correct has been verified over and over again. Sometimes it will auto-correct right into the ground. In fact it will do so in spite of every attempt to regulate it into not doing so. For the sake of the fiscally miserable I would like things to be different, but they are not.

Two, nothing in the history of economics has shown an ability to perpetuate itself indefinitely when left to its own devices except for compound interest. What is called correction in this context could just as easily be called renegotiation, and sooner or later all deals are either consummated or called off.

Three, Karl Rove, of whom I'm not a fan, nevertheless made a useful distinction ten years ago between the administration at the time and its allies on one hand, and the reality-based community on the other. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors ... and you, all of you, will be left to just study what we do."

Ten years ago, the administration and its allies—whom for convenience I'll refer to as the State Will—was spinning narratives about the wars. The current State Will is spinning narratives about the economy. In this environment of indifference to un-scare-quoted truth, debate is an exercise in surrealism. Krugman, for instance, will write six impossible things before breakfast, and those of us who can provide citation-backed counterarguments are being accused of name-calling and worse. The State Will will not suffer contradiction, even by fact. (Krugman's especially unctuous about this. For whatever reason it's dandy when he calls his opponents idiots but when James Pethokoukis characterizes Piketty's Capital as "soft Marxism" it's name-calling that invalidates every other critique in existence.)

Four, any honest discussion of hypothetical misery that would have been caused had the TBTFs been allowed to fail has to take place in light of the actual misery that did occur when the state intervened on their behalf, twice, and then shot the monetary base to the moon. No fiscal conservative thinks we're in a legitimate recovery, and increasingly neither does anyone else. Food and fuel prices are high and the employment numbers are terrible. It may be that the only reason the U3 is coming down is because the LFPR is the lowest it has been in 35 years. And this is five years after the Great Recession technically ended. I'll spare you the anecdotes of the people in my life and economic tier, but trust me that their situations are precarious, especially in light of the favors done for the banks. I remind you that Bernanke thinks that this is just a perception problem on my part.

So, on to misery. I don't know why Andrew Lilico says that the banks shouldn't have been bailed out, but I've seen other arguments to that effect, such as Jeffrey Miron's. The TARPs were implemented to fix a solvency problem. George Selgin suggests that instead they made it worse. The QEs were implemented to goose the economy into a recovery. Manuel Hinds demonstrated convincingly that they did nothing of the sort for most people. The rich have a greater portion of their wealth in equities than everyone else, so historical highs in the equities markets do in fact explain non-finance CEO wealth, and even Kevin Drum is not ready to die on the hill of dynastic capital that Piketty staked out.

Whether Fed inaction would have caused greater misery overall is beside the point of Andrew Lilico's argument, that for sound moral and economic reasons, lending money should entail risks, and when the state mitigates those risks it ends up worsening inequality. This is true even by Piketty's own reasoning, as he demonstrates, and it's true even if you think that the state interventions were meritorious things to do on behalf of the poor.

This is worth considering in light of those ever-rising tuitions. They go up faster than inflation every year because we have generous Federal loan programs with low interest rates and low selectivity. Easy loans stimulate demand, and higher demand drives up prices. You may think that the colleges should steel their wills and ignore the fundamental dynamic of the market, but as James Howard Kunstler put it, capitalism is not a belief system that you can subscribe to or drop out of, it's more like gravity. Let that process continue for decades and you'll put tuitions through the roof, with wildly different consequences for the rich and the poor. In other words, the state worsens inequality by mitigating the risks of lending. This isn't academic (sorry) at all. It is a consequence that will keep repeating itself until we quit causing it.

Lilico came back today and said that inequality isn't really even a thing. Unfortunately for him he's in the reality-based community and the State Will is perpetrating a different narrative.

(Update May 3: Greetings once again, David Thompson readers. You're looking especially sharp today.)




May 3, 2014, 11:44 AM

Via Twitter, Andrew Lilico responded by providing some links to his published analysis, all PDFs: Annex VII, p.109 of this paper, his 2009 report What Killed Capitalism?, and Incentivising boring banking: an alternative approach from 2010, which he says has mainly been adopted wholesale in the new EU bank resolution rules.



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