Gigantism in Lawmaking

by Chidem Kurdas

Here’s another aspect of Obamacare. Last week we witnessed a demonstration of how politicians benefit from a massive law. President Obama signed the vast bill – 2409 pages – with great fun fare.  A video of the signing was all over the web.   The media was full of gushing reports.  Mr. Obama was explicitly praised for refusing to take small steps.

Had it been a more modest measure, it would not have generated all this hoopla and its signing would likely not have been applauded as a historic landmark. For politicians, a colossal piece of legislation has the built-in advantage of providing dramatic theatrics. But that’s not all. Giant laws have other benefits as well for the powers-that-be in Washington.

The Moral Paralysis of Obamacare

by Mario Rizzo  

The perceptive Alexis de Tocqueville argued that Americans are not as keen on “free speech” as it may first seem. Before an idea or proposal is passed into law they will argue, use invectives, claim that proponents or opponents are bad people, and so forth. But after a law has been passed and the dust settles much becomes unquestionable.  

Further Diagnosis

by Mario Rizzo

Brad DeLong continues his long-distance diagnosis of my mental and moral character.

UPDATE: Steven Landsburg has a different take.

Hayek’s Knowledge Problem, as Applied to New Paternalism

by Glen Whitman

Mario Rizzo and I have recently published another article on the new paternalism, titled “The Knowledge Problem of New Paternalism,” in the BYU Law Review. (Mario briefly blogged about it here.)  The article lacks an abstract, but here’s a lightly edited portion of the introduction:

The “new paternalism” spawned by behavioral economics faces a severe knowledge problem akin to the knowledge problem that Friedrich Hayek argued afflicts centrally-planned economies. If well-meaning policymakers possess all the relevant information about individuals’ true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough.

Diagnosis

by Mario Rizzo

The latest from Brad DeLong on my mental health.

The Dilemma of Obamacare

by Mario Rizzo  

The very factors responsible for the passage of Obamacare may make it impossible to fund it adequately. There are certain myths about medical care that make it difficult to contain costs. The central myth, in not very exaggerated form, is that any care less than the best for anyone is the result of a contrived scarcity. If insurance companies were not so greedy for profit people could have the best care they deserve.  

Canada Beats the U.S.

by Jerry O’Driscoll

No, I’m not offering up a delayed report on the Olympics.  But I am following up on earlier post on why Canada avoided a banking crisis. 

In today’s (March 19) Wall Street Journal, AEIs Alex Pollock provides an important piece of the puzzle.  Canada avoided a housing crisis, the progenitor of the U.S. banking crisis. It did so by having sounder banking and housing policies. Above all, it had no Fannie Mae & Freddie Mac.  

Canada isn’t a free-market paradise.  But it beats the U.S. in banking and housing policies. I commend Alex’s article to you.

Dodd Liquidation Panel

by Chidem Kurdas

There is one new regulation that is truly needed—a way to wind down, without major disruption to markets, failing broker-dealers and other financial companies. The new financial industry bill introduced by Senator Christopher Dodd claims to do this and solve the “too-big-to-fail” problem.

Reading the particulars of the bill, however, makes one queasy. To use a metaphor, what’s needed is a commitment to defensive war when necessary. What this and a related bill  sneak under the radar is authority for pre-emptive war—with all the wide-open discretion that implies.

Lehman Brothers’ bankruptcy in September 2008 had a big impact on markets largely because the assets of its clients got tied up in courts, not just in the US but in the UK. With their capital frozen in years-long litigation, the clients – in particular hedge funds – sold securities to raise money. This selling put downward pressure on markets.

So, instituting a process by which large financial companies can be shut down without a lengthy bankruptcy case would reduce the impact of failures and get rid of the notion that investment banks need to be bailed out—expeditious and orderly winding down of a failed firm is the obvious solution.

While this process may be similar to established procedure for dealing with insolvent commercial banks, broker-dealers don’t have Federal Deposit Insurance Corp.-insured deposits. Their customers get only limited aid from the Securities Investor Protection Corp.—as the Bernard Madoff investors discovered.

The bill would establish a liquidation fund financed by the industry and authorize the appointment of FDIC as receiver for insolvent companies, with SIPC acting as trustee for broker-dealers. All that sounds reasonable. You don’t notice the danger until you’re deep into the 1,336 page bill.

Mysterious Moody’s Move

by Roger Koppl

The Christian Science Monitor reports that Moody’s is considering downgrading US government debt.  (HT: Mario Rizzo)   Is that a credible threat?  Moody’s is one of ten “Nationally Recognized Statistical Rating Organizations” (NRSRO) officially recognized by the SEC.  Moody’s, S&P, and Fitch are the big three and do most of the rating.  Would they downgrade the same entity that ensures their continued monopoly power?  Why would they make such a threat in the first place?   What is the public choice explanation for Moody’s (empty?) threat?

The Fed’s Coming Indiscretion?

by Mario Rizzo  

There seems to be broad agreement among economists that the current recovery from the recession will be characterized by a slowly falling unemployment rate. This makes a good deal of sense since the problem that created the recession was a misdirection of resources into a number of sectors including housing construction and the financial industry.  

Reallocation of resources takes time. The government is not helping matters in trying to prevent adjustments by various (but not very successful) efforts to slow or reverse the rate of fall in housing prices. It is also difficult for market participants to determine the effect of possible new policies like Obamacare or any further jobs-stimulus legislation.