John Quiggin's new book
By Arnold Kling
It is called Zombie Economics. It is a polemic against conservative and libertarian economics. I agree with some of it, which might be considered a rave review. But really, I am still waiting for a book that attacks us without engaging in caricature and without dodging our most important arguments.
Consider two theories that Quiggin associates with us. First (p. 36)
The Efficient Markets Hypothesis justified, and indeed demanded, financial deregulation, the removal of controls on international capital flows, and a massive expansion of the financial sector.
Second (p. 179)
the rise of the “public choice” theory of politics popularized the idea of “government failure.” It was argued that, because of the systematic distortion of the policy process by interest groups, the costs of government intervention were greater than the cost of the market imperfections that government policies were supposed to remedy.
Quiggin connects the Efficient Markets Hypothesis to the financial crisis, but not Public Choice Theory. I see it the other way around.
If regulators believed in efficient markets, then they would have looked to market instruments, like subordinated debt, to promote bank soundness. Instead, they used–and continue to use–the notion of risk-based capital, which is a quota system that ultimately resembles the central-planning model that failed in the Soviet Union. The Shadow Financial Regulatory Committee, which is much more market-oriented than the bank regulators, was clear on the problems with risk-based capital twenty years before the crisis hit.
On the other hand, the Public Choice story is quite compelling. I can explain the growth of mortgage securitization in terms of the capture of bank regulators by Wall Street. In fact, it is hard to explain mortgage securitization any other way.
More below the fold.On p. 16, Quiggin writes,
The “one size fits all” systems of single-payer health care and retirement income provision introduced in the aftermath of the Great Depression and World War II were attacked as bloated bureaucracies that crippled individual choice. Instead, it was argued, ordinary households should make their own provision for health insurance and retirement. The public sector “safety net” was reserved for the indigent and improvident, and soon began to fray.
Quiggin is an Australian, and although he seems quite familiar with American politics and such (much more familiar than I am with Australia, certainly), he makes generalizations like the one just quoted that I find unsupported. He is talking about the period known as the “Great Moderation,” and he is making a case the market liberalism took undeserved credit for what turned out to be a temporary period of macroeconomic strength.
I agree that market liberalism deserves little or not credit, but that is because I see little or no market liberalism. Off the top of my head, the liberalizing policies were decontrol of oil in 1981 and tax reform in 1986 (under Reagan), deregulation of airlines and trucking (under Carter), and welfare reform (under Clinton). However, I can also recall major anti-liberalizing policies, such as Sarbanes-Oxley (under Bush).
As far as health care and retirement are concerned, the facts run counter to Quiggin’s story. The share of health care spending paid by individuals declined over the period, fairly dramatically. Medicare was expanded (prescription drugs, for example), and so was Medicaid.
It would have been useful for Quiggin to make a list of major policy changes in various countries and classified these as liberalizing or anti-liberalizing. Instead of offering and then attacking the bedtime story that we liberalized and lived happily ever after (until 2008), tell a more nuanced tale. Which of the liberalizing policies turned out well, and which turned out badly? Which of the anti-liberalizing policies turned out well, and turned out badly?
The next chapter is on the Efficient Markets Hypothesis. I think that Quiggin and I agree on the hypothesis itself. That is, in its weak form it is probably right, and any individual should approach trying to beat the market with great doubt and humility. However, the view that markets are always locked in on fundamentals is probably wrong.
Implicitly, though, he is saying that government officials can reliably tell when financial markets are wrong. But it’s not so easy. Look at Ken Rogoff, who seems to me inclined to believe that gold is in a bubble right now, but who nonetheless cannot rule out the possibility that the speculators are correct. I myself am convinced that gold is a bubble, but you don’t see my putting any money on that view.
Next, Quiggin has a chapter on Dynamic Stochastic General Equilibrium, otherwise known as Dark Age macroeconomics. I probably agree with 90 percent of this chapter.
The next chapter is “trickle-down economics.” I agree with Quiggin that tax cuts do not pay for themselves. However, the point of view that the distribution of income is something that government should or can manage is one that I do not share. If you have something against poverty, that is fine. Suggest ways to alleviate it, and I’ll be happy to listen to what you have to say. But whenever I see the word “inequality,” that usually means that you have something against rich people. I don’t have that issue. My resentment is against politically powerful people.
Next, comes the issue of privatization. On p. 187,
Internationally, a number of major privatizations have been reversed. The British government was forced to renationalize its rail network after the failure of the privately owned operator. In Australia, dissatisfaction with the privatized telecommunications monopoly has led the government to announce that it will get back into the telecommunications business by constructing a publicly owned national broadband network. New Zealand, where market liberalism was implemented in a radical form in the 1980’s and 1990’s, renationalized its national airline in 2001 and its railways a couple of years later.
This is what I would liked to see more of from Quiggin. Specific examples that support his thesis, rather than rhetorical assertions. I felt that I learned something from this paragraph, and I am curious to know even more about these examples.