Monday, March 9, 2009

No Guns and No Strollers

Those were the only two things you could not bring to the Golden Gloves matches held at the Armory in my hometown several years ago - I kid you not. Apparently some smart Army reservist had decided that preventing the widespread distribution of these two dangerous tools of destruction among the crowd would make us all safer. So can we ever know that by preventing strollers and firearms from entering in the Armory did save me from gunshot wounds and being beaten to death by a 1,200 dollar stroller?

Over the past few weeks a lot of folks in the blogosphere, media, and government have been debating the fate of Citibank since its share price is around a dollar and the government has become the largest shareholder at 36%. By the way, the government's other big "investment" AIG, has now turned completely sour and will almost certainly end up being a huge money loser after some people argued the deal might actually turnout profitable.

The gist of the Citi debate, on the surface, is the "too big to fail" vs. "markets must have failure to function" argument. Because Citi is much more than just a bank, because it has operations in more than 100 countries, and because a very rich Saudi prince happens to have invested billions, the government can't let it fail. After all when it let Lehman die, look what happened!

There are two folks, Megan McArdle and Kevin Drum, who I read, and they have both posted on this issue over the weekend. I think both make reasonable opposing arguments on the matter.

I'm not an economist, although as I've noted before even if I was it would hardly make me authoritative on the issue of how the macro economy functions, so I have no particularly strong view on how bad a Citi shutdown or nationalization would really be. But I do know this - from a political standpoint the actual issue of causality and credit-claiming is central here.

Folks on the left argue that while the government sat around and "did nothing" during the Bush years the economy collapsed. Folks on the right have argued that the market's decline since Obama became President is "caused" by his policies. Harry Reid says the Stimulus Package will "create" 3 million jobs, and Richard Shelby isn't worried about letting Citi fail and says it would fit into the model of how we deal with smaller banks.

So here's what it comes down to - the left uses something called the "precautionary principle" when it makes most of these arguments. Whether it's about the stimulus, bank bailouts, or safety regulation, they argue that 1) past failure to act has caused problems and 2) current actions will solve and prevent problems. Generally speaking conservatives and/or libertarians argue the opposite that 1) past problems are caused by government actions and 2) government actions just exacerbate current problems.

Who's right? Well who knows because determining "causality" in statistical terms what causes something to happen, is really, really, really, difficult to determine in complicated systems. Try to determine in the real world what causes things and it gets even harder.

My general rule is that the precautionary principle overstates risk, BUT, and this is a huge but, most people are very risk averse during crises and willing to "pay" for risk abatement through future taxes. In English, yes I will mortgage part of my children's future even if there's a small chance this policy will prevent a horrible Depression. Interest groups (read here bond holders in AIG and Citi) know this and play up the fear.

But the right has never, NEVER done a good job acknowledging the potential risks and real costs that markets incur on losers during crises. That's why they are losing now, and that's why the costs of all this government "risk prevention" are so much more costly than they have to be because they have not offered a comprehensively less costly alternative set of plans.

And in four years when Obama is running for president again and the economy has turned around, which it will probably do, the two parties will have to fight over whether his plans helped spur the turn around or simply burdened us with higher taxes and debt. Either way the key issue of what actually "caused" the recovery won't matter - what will matter is who can make the better case politically, and that will probably, again, be the Democrats.

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