My work appears to be counter-cyclical. Last year was one of my busiest years ever and this year is right up there as well. I have a long, busy day ahead of me and this may be the only post I’m able to sneak in.
Recently I’ve been reflecting on the similarities among many of the issues of the day—global warming, the financial crisis, healthcare reform, and some foreign policy issues. One of the things that I see in common among them is that I’m really called to wonder how true all the hubbub about them is because of the way that people are behaving.
The easiest example of this to point out is the many advocates of serious reform in our production of greenhouse gases who in their own behavior from jetting off to conferences in the four corners of the world, frequently in private jets, to the homes they live in or the vehicles they drive don’t appear to reflect the sense of urgency that they’re preaching to the rest of us. But it isn’t the only example. Take the financial crisis, for example.
There’s almost no end to the culprits you can point a finger at in the still ongoing financial crisis: short sellers, investment banks, commercial banks, AIG, the ratings companies, the Fed, the SEC. You might think that the greatest attention would go to those who have the greatest fiduciary responsibility among whom I would think about the ratings companies, the Fed, and the SEC. We haven’t seen a wave of outrage directed against those (except, maybe, the Fed) and we certainly haven’t seen a wave of firings in those places. Quite the contrary, those most proximally responsible, e.g. Treasury Secretary Timothy Geithner, have received promotions.
That’s the relationship I see among these very different issues. The disconnect between individual behavior and presumed urgency.
I can think of lots of possible reasons for this. It’s frequently pointed out to me that people aren’t rational, in which case while, yes, they’re behaving irrationally but, then, that’s what people do. That strikes me as a cop-out. Are people really behaving that irrationally? Or are they merely responding in fairly expected ways to the incentives they have?
Another explanation I hear pretty frequently is that it’s all a plot. Increasing the regulatory power of the federal government in the financial markets, more federal intervention in the healthcare market, cap and trade, and so on are all power grabs. While they may all be instances of not letting good crises go to waste, the crises themselves are real. There really are serious difficulties in the financial sector, our healthcare system really does need substantial change, and we really are releasing too much carbon dioxide into the atmosphere (or, at least, we’re consuming too much in the way of fossil fuels). One does not preclude the other. Power grabs don’t rule out real problems.
It could be wishful thinking or stupidity. Or a belief in group action, a denial that the behavior of a group is the sum of the behaviors of the members of the group. Or a combination of all of the above.
I find this disconnect disheartening, even unsettling. I don’t see it as hypocrisy so much as a general failure of leadership. In our society leadership doesn’t just mean compelling people to do things or telling them to do things. From babyhood on we learn more by the behaviors that are modelled for us than by those we merely hear about.
When you practice expanding government power while preaching small government, practice profligacy while preaching thrift, practice elitism while preaching egalitarianism, or practice deceit while preaching openness, people will learn the expansion of power, profligacy, elitism, and deceit.
I’m hurried so I may not be articulating this too well. Or I may be unnecessarily concerned. I hope I’m not just disconnected.
The beauty of democracy.
Amirite?
Baloney. Is the War on Drugs real? Seriously, so a guy sits in his living room smoking a joint; we send in the SWAT unit? Really? WTF? How about Prohibition? A completely made up crisis again. Is the War on Terror really such that we have to take off our belts, shoes, and get rid of carry on liquids? I’m calling shennanigans on your assertion. Sure when there is a real crisis by all means use it. If not, make one up or exaggerate the danger of an existing threat.
Who said they did? Still, because there is a problem that means granting more power to the Federal government? Thanks for proving Professor Higgs correct, if indeed that is what you are implying.
Really I don’t see the big deal hear and why you are all maudlin. Its democracy, the worst form of government save for all others that have been tried. Think about that for a minute. Okay, here let me help. Consider the alternative forms of government:
Dictatorship,
Kleptocracy,
Oligarchy,
Communism,
etc.
Not much to say you are better than those. It is like saying, “Well a dog shit sandwhich is the best shit sandwhich to eat, so enjoy.”
It is still a shit sandwhich.
You have mountains of research in publich choice theory that says,
“Democracy has lots of serious issues with abuse.” You have Kydland and Prescott who point out that even in a world where the policy maker has the best of the best intentions you still get crap results. You have Kenneth Arrow’s research into voting mechanisms. But people seem to still think that democracy is some sort of wonderful thing. It sucks. It really sucks. We shouldn’t be handing over more and more of the decisions making on how to allocate resources to such a process, but we are. And you are surprised at the results. Why?
The bottom line is that when it comes to allocating resources the political process sucks. Yes, it sucks worse than the market process. Why? Our financial melt down wasn’t just a market failure. It was a failure of the regulatory establishment.
Read that and pick out all the government agencies. Consider about 12 years ago when the same set of agencies/people under Clinton intervened on the behalf Long Term Capital Managment. It sent a signal:
Private profit/public losses.
http://www.nytimes.com/2008/12/28/business/economy/28view.html
Why blame businesses for taking advantage of such a wonderful opportunity to loot?
Again, from the stand point of making money, its a brilliant move.
Yes, but if you know you are going to get bailed out, why worry about sound business practices.
Yeah, but the revolving door between DC and Wall Street says to me that it wont really address the problem. There is still going to be a huge incentive to take excessive risk. After all if the risk pays off, well then you are fabulously wealthy, if not well then another bailout. And if you toughen regulations then you can’t take those excessive risks for the big pay days and there is that revolving door.
I pointed to the Leamer-Kotlikoff article on limited purpose banking and how it would prvent these kinds of crises from happening. You rightly pointed out it would never happen.
So, get used to it. What you’ve seen in the past year will happen again. And again, and again, and again.
You said it yourself, “Rent seeking, its the new entrepenuership.” Why work hard earning a profit when you can simply appropriate other people’s money via the political process?
Let’s zero in on the financial crisis. I think that bank regulations are a pretty good idea. I also think that amending the existing bank regulations to deal with the problems that we’re actually facing are a pretty good idea. For example, the “Volcker rule” whereby commercial banks are prohibited from trading for their own accounts is a pretty good idea. Otherwise there’s a genuine conflict of interests.
Do I think that all financial problems can be solved with bank regulations? No.
I also think that we’re in desperate need of changing the incentives of regulators to reduce the likelihood of regulatory capture. I’ve already suggested approaches for doing that.
Dave,
You said limited purpose banking was never going to happen. The kind of reform you think would prevent further financial crises wont happen…for exactly the same reasons you say limited purpose banking wont happen.
By the way, the Volcker Rule sounds like a step towards limited purpose banking.
Its dead.
It depends on your definition of rational. To take an obvious example, most people behave in ways they hope will please a deity. That seems rational to them. To me it seems irrational. Their presuppositions are (to me) irrational, so (again to me) it follows that their attempts to rationally appease a god I believe to be non-existent cannot be considered fully rational. They can only be rational within parentheses, or with asterisks.
Without being overly snarky I would contend that attempts to find rationality in the bulk of human beings are themselves irrational. Very few of our decisions are rational. We are motivated by emotion — anger, greed, insecurity, fear. And by poorly thought-out presuppositions. Emotion and nonsense.
The actions that proceed from those emotions and presuppositions may appear to be rational — that is to say that they follow in a parody of logic from the presuppositions — but so long as the first motive is irrational, or so long as the first presupposition is unsupported, it’s hard to conclude that we are seeing genuine rationality in the subsequent behavior.
Humans are mostly motivated by fear of death, by fear of pain, by lust, greed and jealousy. Also by more admirable emotions like love.
I love my kids. If you told me I had a choice between seeing one of my kids die, and seeing a thousand strangers die in their stead, I’d pick option ‘B.’ That follows logically from my emotional state, but can hardly be defended as rational. The same irrational emotions, and irrational presuppositions, determine the behavior of people in power. John Edwards and Rielle Hunter. Mark Sanford and the Appalachian trail.
As a grace note I would offer that most of what’s wonderful about humans — opera, say — is also the result of emotions and irrationality. And maybe the price we pay for Mozart, Fitzgerald, Picasso and Michelangelo is a certain flailing human helplessness when we are required to behave rationally.
Michael,
Behaving rationally does not mean behaving like a Vulcan.
Steve:
Perhaps not Vulcan. But it’s hard to see how we can call a behavior rational which is based on irrational predicates.
If you wish to presuppose that gravity is an illusion then it is perfectly rational to jump off a cliff.
The problem is similar with emotion. Let’s say you have a choice between two candidates, one Asian, one Hispanic. The Asian is a 100% match with your positions. But you have a deep and abiding hatred for Asians. So you set aside your rational interests in order to satisfy your emotions.
A real world example was the Holocaust. Even as the German army was fighting for its life the SS diverted scarce resources to exterminating Jews. Emotion (hatred) trumped self-interest.
Of course one could still be rational if one was self-aware enough to compensate for the effect of emotions. But I’d say that capacity is present in less than 1% of people.
The conclusion is one that probably bothers economists but seems predictable to a writer: people are unpredictable. It’s not a rational world, a world of enlightened self-interest; it’s a world of connections only dimly perceived by people who are driven by passion and prejudice.
Michael,
I would submit that the love of your child is not irrational.
I’m not saying there are not irrational actions, but that simply because you base a decision on emotion is not irrational. Almost all of our decisions are to varying degrees based on emotion. It seems you are arguing that all emotion is irrational, I disagree with that.
In short, you are over stating your case.