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“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”     Thomas Sowell

March 17, 2009

Spot The Flaw In Ezra Klein & Kevin Drum’s Reasoning

by Brad Warbiany

Here we go — unfortunately I have to quote this nearly in its entirety, or the error will not be quickly apparent.

Noam Scheiber says “our political system isn’t ideally suited to dealing with financial and economic crises.” Ezra Klein begs to differ:

Indeed, I think our political system is actually fairly well-designed for short-term crises. The problem is long-term crises like global warming or health costs. As Peter Orszag wrote back on his CBO blog, “our political system doesn’t deal well with gradual, long-term problems” that require “trading off up-front costs in exchange for long-term benefits.” Few Congressmen want to raise taxes tomorrow to reduce carbon a decade from now. Lots of Congressmen don’t want the economy to collapse if they have to run for reelection next year. For that reason, I’m much more confident in the system’s ability to react agilely and seriously to the economic crisis than global warming. The economic crisis, after all, threatens their reelection. Incumbents often don’t survive depressions. Conversely, I think conventional wisdom is that it’s fixing global warming, rather than global warming itself, that poses the largest political threat to incumbent legislators.

I think that’s right. In fact, I’d go further: not only can we respond fairly well to short-term crises, we actually have responded fairly well to the current economic meltdown. There have been plenty of miscues and half measures along the way, but in the space of 18 months the Fed has created an alphabet soup of term lending facilities; Fannie Mae, Freddie Mac, and AIG have been nationalized; interest rates have been reduced to near zero; TARP was passed and hundreds of billions of dollars pumped into the banking system; the Fed has launched plans to rescue the commercial paper market, the money market, and the consumer loan market; FDIC insurance has been raised to $250,000; Detroit has been bailed out; and an $800 billion stimulus measure has been passed. Some of these actions might have been late or misguided — it could hardly be otherwise considering the depth and freakishness of the financial implosion — but all things considered, the willingness of our political system to deal with this crisis hasn’t been all that bad. If we could muster half this much energy, mistakes and all, on behalf of global warming I’d be ecstatic.

A hole like this is big enough to drive a truck through.

Consider the premise that both of them seem to take for granted — Klein explicitly and Drum implicitly. Legislators, due to electoral incentives, are unwilling to take politically risky positions even if they’re in our long-term best interest. They fail to do so, even if it means letting festering problems* go unsolved, because the benefits are far off in the future but the cost and political risks are immediate.

So what’s the converse of this belief? Legislators will take short-term positions that are politically rewarding today even if it means that they will be creating or exacerbating problems for people down the road. That’s the flaw. You can’t accept the former paragraph without accepting this statement. Legislators and public officials are notoriously short-term thinkers. They’ve shown time and time again that they’re willing to spend today what need not be repaid until the next election cycle.

Drum quotes approving about the new alphabet soup of bailout and stimulus packages, and throwing billions after billions at shoring up AIG, Fannie and Freddie. In fact, his only criticism is that some of it might have occurred later than he would have liked. What’s noticeably missing from the analysis are questions of moral hazard and long-term debt. He seems to accept the rationale that it’s more important to start acting boldly and immediately, and only question whether we’re acting intelligently as a secondary matter. This is the exact sort of political incentive that our legislators and public officials are responding to. Spend today, and deal with it tomorrow.

When they suggest that our legislators ignore long-term problems for short-term politics, I completely agree. In fact, for that reason I suggest that their short-term actions are suspect as well, because they make those short-term decisions with a blind eye to long-term consequences.

Is government good at dealing with short-term or long-term crises? No. As with anything else, government is going to take the easiest and least painful way out, even if it’s not the best way.

* PS – The question of whether their chosen problem, global warming, is a real issue is not something I’d like to debate here. If you don’t like that example, substitute social security reform. Either way, it’s quite clear that government is willing to play “kick the can” with problems, letting someone else down the road take the responsibility of finding a solution — even if their delay makes the problem far bigger and more painful to solve at that time.

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4 Comments

  1. The reason politicians have difficulty with global warming is not because it’s “long-term” but because it’s a tragedy of the commons situation.

    The reason politicians have difficulty with the financial crisis or recession is not because they’re “short-term” but because government created them in the first place and the tools they hope to use to fix them are the same tools that created them in the first place.

    Two entirely different categories — a fact utterly lost on central planner wannabes like EK.

    Comment by KipEsquire — March 17, 2009 @ 5:01 am
  2. Umm, I fail to see how there is any hole in their reasoning?

    They say “Legislators don’t take risks to fix long term problems” and you say “Legislators avoid risk and cause long term problems”. They are two sides of the same coin. How bout we say it this way: “Legislators take the easy way out, thus allowing long term problems to fester and allowing new problems to form.”

    Unless the problem is “we can respond fairly well to short-term problems”, and in this case the “we” is the government. I think it has been shown through history that the government almost never gets it right.

    The only solution is to remove control from the government and return the power to the people. I just wish there was an easy way to do that.

    Comment by Peter — March 17, 2009 @ 12:30 pm
  3. The flaw is their assumption that the government can effectively respond to short-term problems — without screwing us in the long term.

    I.e. Kevin Drum talks about how quickly the government has responded to the economic collapse, but he hasn’t actually proven that the government has responded effectively or has done so in a way that won’t screw us in the long term.

    Comment by Brad Warbiany — March 17, 2009 @ 12:39 pm
  4. I’m sorry, but you are all wrong. The flaw is the belief that the politicians WANT to fix anything.

    In reality, (and they hint of this in the article, but ignore it at the same time,) politicians want to get re-elected.

    Comment by Merf — March 17, 2009 @ 8:03 pm

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