Two Good Links from Megan
By Arnold Kling
1. A panel at The University of Chicago, featuring John Huizinga (my former classmate at MIT), Kevin Murphy, and Robert Lucas.
Huizinga makes three points. First, we are hearing a lot of Keynesian macro being tossed around now, and it’s not clear why. Second, so far this is not such a calamitous recession. The number of jobs lost is high, but relative to the size of the economy it’s not out of line. (I would say that the media hype is greater for this recession. It’s like the way that media magnify the horrors of war.) Some people forecast a long, deep recession, but it’s a bit weird to base policy on a forecast of a long stagnation, when such forecasts are highly uncertain. The third point is that a fiscal deficit has costs as well as benefits. It will cut into national saving, which is not really a good thing long term.
Kevin Murphy points out that for fiscal stimulus to be cost-effective, the government has to make better use of resources. This is plausible when government uses unemployed resources, but it is implausible when government takes resources out of productive uses in the private sector. But if there is a 7 percent unemployment rate, then 93 percent of resources *are* being used, so the chances seem pretty high that a lot of the government spending is going to draw on resources that already are employed.
It’s easy enough to argue that any single bank yields a superior result when that bank is nationalized rather than bailed out, for reasons ably discussed for Matt. The problem comes with the banks that sit on the margin, namely the banks that do not yet need either nationalization or a major bailout.
I agree that adding political risk is not exactly a way to attract capital to the banking sector. But I would go further and argue also against bailouts and re-capitalization.
Where I differ with Tyler, and with most nearly everyone else, is that I am not anxious to recapitalize banks and get lending started again. I think we need to transition away from a highly leveraged financial sector and instead have an economy where the nonfinancial sector finances expansion out of profits and by raising funds in straightforward ways from investors, without clever financial intermediation. The de-leveraging of the financial sector needs to be overseen in such a way that people do not lose access to basic banking services. But don’t think in terms of re-invigorating the massive financial intermediation that existed a few years ago.