Why Is This Time Different?

I strongly suspect that I will never read James Kwak’s and Simon Johnson’s book, 13 Bankers. If it’s as described by James Kwak in his post this morning:

In 13 Bankers, Simon and I argue that the key forces behind the transformation of the financial sector and the resulting financial crisis were political, not simply economic. To this argument, at least two good questions spring to mind: Why finance? And why then? Hacker and Pierson have good answers to both of these questions. Their answer to the latter question is better than (though not inconsistent with) the answer we gave in our book.

To the former question, their argument is simple: business interests in all sectors organized a takeover of political power that pushed organized labor and other groups protecting middle-class interests to the sidelines and made possible decades of policies that have enriched the super-rich at the expense of everyone else, including the merely affluent. Finance was simply the biggest and most profitable of these sectors–and, we would emphasize, the one best able to hold the government hostage in a financial and economic crisis.

The answer to the second question is a bit more involved but particularly important. Many people, including Simon and me, have observed that American politics and the American economy reached some kind of turning point around 1980, which conveniently marks the election of Ronald Reagan. (We also pointed to other factors such as the deregulation of stock brokerage commissions in 1975 and the high inflation of the 1970s.) Other analysts have put the turning point back in 1968, when Richard Nixon became President on the back of a wave of white, middle-class resentment against the 1960s. Hacker and Pierson, however, point the finger at the 1970s. As they describe in Chapter 4, the Nixon presidency saw the high-water market of the regulatory state; the demise of traditional liberalism occurred during the Carter administration, despite Democratic control of Washington, when highly organized business interests were able to torpedo the Democratic agenda and begin the era of cutting taxes for the rich that apparently has not yet ended today.

I agree with the timing he suggests but I find other things about his exegesis puzzling. For example, he characterizes the Nixon presidency as “the high-water market of the regulatory state” and notes the efforts of banks and other businesses to gain advantage through lobbying and political contributions. Do they not see the connections between these two?

Those in a position to exercise such influence know with a certainty born of experience that it’s cheaper to buy politicians and regulators than it is to comply with regulation. A stronger regulatory state goes hand in glove with greater influence of big business. Not only is buying influence more cost effective than compliance, it’s an opportunity to prevent upstarts and beat down smaller competitors, inevitably much less able to wield the tools that established power brings.

In the light of this I ask a series of rhetorical questions:

  1. Have they never heard of regulatory capture?
  2. In the light of the intimate relationship between increased regulation and greater influence for big businesses why would they propose increased regulation as a means of dealing with bigger businesses?
  3. What difference between the actions of the later Bush Administration and the early Obama Administration have driven them to conclude that there’s a marked difference between the two?
  4. Why is this time different?
  5. As I’ve said before here the reforms we really need are not increased regulation or more regulators but a different approach to regulation and different incentives for regulators. Barring that we can only see increasing concentration of power in Washington and in the boardrooms of the largest companies, reduced creativity, and a stagnating economy.

3 comments… add one
  • steve Link

    I read 13 Bankers. They do cite capture as a problem. They seem to also emphasize ideological capture. The idea that they all think alike, assuming that they knew the answers. That they could not be wrong. Their big push is to reduce the size of the banks. They actually concentrate entirely on the finance sector, they do not call for regulating other businesses as I recall (it has been a while.) I think they have been disappointed in the current administration, but think something is better than nothing.

    They make a decent case, I believe, that rewriting of regulations for the banking sector was a key factor in the financial crash. They make it clear that it was a bipartisan effort.

    “Those in a position to exercise such influence know with a certainty born of experience that it’s cheaper to buy politicians and regulators than it is to comply with regulation.”

    Better yet to have them rewritten the way you want.


  • and made possible decades of policies that have enriched the super-rich at the expense of everyone else

    This sentence looks to like it’s encapsulating a few logical fallacies in order to advance a point. The most obvious fallacy is that they are affirming the consequent. Exactly WHICH policies “have enriched the super-rich at the expense of everyone else” and why don’t they specify the details of these policies and explain exactly how they worked?

    Most wealth is created in commercial exchanges where two actors are voluntarily trading and both actors believe that they are benefiting from the exchange. What these authors seem to be arguing is that the wealth has accumulated by means of governmental manipulation. What exactly is the proof that they marshal in support of that hypothesis?

    Also, they point to the Reagan Administration as a turning point for the process that they hypothesize exists. Here’s a simple test – compare the US economy on a variety of metrics, to the economy of France, for instance, which did not undergo a “Reagan Revolution” and take a look at the performance of both economies from 1980 to as close to present-day as possible. What was the ratio of mean income between France and the US in 1980 and what is the ratio today? It seems that their argument is that greater regulation leads to greater economic efficiency because the presence of a regulatory state forces the economic actors to focus on process improvement in order to compete rather than on taking the path of least resistance and focusing on circumventing the wise regulations that have been imposed on economy. If this is really the reality of the world, then we should expect to see a high regulation state, like France, surge ahead of the US after the Reagan Revolution, because France had all those government policies and the bureaucratic enforcers to make sure that private economic actors took their medicine and did the right thing.

  • steve Link

    “and made possible decades of policies that have enriched the super-rich at the expense of everyone else”

    Privatized profits and socialized risks. The end result of the policies was the financial crash with the super rich remaining, for the most part, super rich, while the rest of us bail them out and unemployment goes to 10%.

    France? Why not Germany? Sweden or Norway or Switzerland? If you look at GDP per capita, and correct it for the way we calculate GDP (see Mish Shedlock), we are running about average for an OECD/European country.


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