Would It Matter If I Guaranteed You Would Enjoy This Post?

by Will Wilkinson on September 15, 2008

Maybe Yglesias tried to think of a more tendentious partisan angle to all this business about “bailouts,” but couldn’t come up with one, so instead of bothering to write a post, he just turned the crank on the PunditBot2008-D, which produced this for him while he was out getting a smoothie:

But conservatives don’t believe in that kind of safety net for regular people — just for the billionaires. Guaranteed health care? Forget it. Guaranteed retirement income? No way. Just let the market work, and when it stops working the executives will be okay and the rest of us will, oh, something or other.

Incisive! It seems that when Matt says “Progressives believe in a robust safety net for everyone,” the idea is we’re supposed to be in favor of bailouts for regular people and billionaires. That’s generous, but I’d drop safety nets for billionaires.

Anyway, institutions are institutions are institutions. Government institutions aren’t magical. Some institutions can indemnify others, but it can’t be turtles all the way down. Government is limited in capacity to insure individuals and corporations against loss. The widespread assumption that there is in fact some kind of unlimited, all-purpose backstop — that the U.S. government can simply guarantee itself against its own failure through magical fiscal and monetary willpower  (i.e., economic Green Lanternism) — seems to me a big part of the problem here. So, no safety net for billionaires. I’m sure that we can all agree that government action that would contain an economy-wide meltdown — when possible — may be desirable, even if it does incidentally help some billionaires as part of the effort to keep regular people from losing their shirts. What everyone needs, capitalist and prole alike, is better institutions, including a better regulatory framework for the financial sector, so that markets do work. So let’s have that.

But let’s also not pretend that the government’s attempt to “guarantee” that you will get your retirement income, or that you will get your heart surgery in a timely fashion, or that a functioning financial system will endure, actually makes these events more likely than they would be under alternative institutions that make no such guarantees.

Read David Schmidtz on safety nets and guarantees:

What do we want from a welfare state safety net? Is it enough for an economic system to help people become so prosperous that they can afford to carry those who truly cannot carry themselves, or must there be a guarantee that those who cannot carry themselves will be carried by someone else? Should we look at the actual history of charity and mutual aid, or is the bare lack of a guarantee sufficient grounds for denying that charity and mutual aid can serve as a safety net? If there has to be a guarantee, is it enough officially to guarantee that no one will ever have to carry himself in times of trouble, or should we insist on some level of actual performance as well? What if we have to choose between official guarantees and actual performance? What then?

What then? Forget guarantees and go for actual performance. I think the same thinking probably holds for much of the financial system. As Schmidtz puts it, the worst problems arise when we try to externalize responsibility for decisions. Our institutional choice isn’t between collective responsibility and individual responsibility. Our choice is between institutions that externalize responsibility and those that internalize it. Responsibility is very often internalized collectively — risks are successfully pooled — with insurance contracts, limited liability corporations, or associations of mutual aid. We need institutions of collective responsibility. But those institutions need reliable mechanisms that guard against adverse selection and moral hazard, and that’s the hard part. Official guarantees (implicit or expllicit) tend simply to create the sense that ultimate risk and responsibility rests elsewhere without doing enough (or anything) to prevent the guarantee from making itself more needed.

Viewing 7 Comments

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    If Calpers and other pension plans are significantly invested in Fannie, Freddy, Lehman, B of A, and/or etc., eliminating safety nets for "billionaires" constitutes eliminating safety nets for everyone else. D'oh!
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    priceless part about turtles all the way down...

    the most insightful comment of all (not just in your post, but of all the commentary everywhere) is about externalizing and internalizing responsibility.

    while everyone else is worrying about what regulation to have, you have to wonder what role regulation plays in creating a false sense of security.

    the real world is risky and imperfect, the sooner we learn that lesson, the less risky and imperfect it will be, because we will all act responsibly.

    can start by letting go of the illusion that government can solve all our problems (collective and individual ones)
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    speaking of better regulation, where the hell were the disclosure requirements on this one? a lot of this mess seems to have revolved around a sequence of events like

    (a) Institution A makes big bets on Complex Risky Instrument I, which has big profit potential but also big, big downside potential

    (b) Instrument I, being Complex and Risky and all, is hard to value

    (c) so Institution A doesn't put anything on its books about the potential upsides and downsides of its investment in Instrument I, it just shovels the cash from its profits onto the books in the good times

    (d) and oblivious investors keep on putting their money into A.

    What I want to know is, WHY THE HELL IS STEP (c) LEGAL??? That just seems like outright fraud. "You have to inform your investors of the potential risks and benefits of what you're doing with their money" is, like, Market Rule #5. Why aren't the people who did this on trial for fraud?
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    "But let’s also not pretend that the government’s attempt to “guarantee” that you will get your retirement income, or that you will get your heart surgery in a timely fashion, or that a functioning financial system will endure, actually makes these events more likely than they would be under alternative institutions that make no such guarantees"

    Well I guess the bit about the financial system is fair enough but the rest is just rubbish. Outside of the US there are a large number of countries where the Govt. guarantees the well being of its citizens and honours this promise. I suspect that your ability to comment is handicapped by the fact that you reside in the US. Citizens in Australia look with horror on a country that has been unable to institute a low cost or free health care system for all its citizens. Not only do these kinds of schemes deliver services they also create a sense of collectivity that the US appears to lack (except perhaps with regard to war) and is contributing to the fracturing and disengagment of it's population and its ruling classes.
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    Agree with patrict_b. You're making a factual claim here, against a lot of empirical evidence, but you present it as if it's an a priori truth.
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    This is a first , John Quiggin discussing empiricism in economics. Does John still think heavily regulated labor markets offer superior outcomes?
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    patrict_b:
    :Citizens in Australia look with horror on a country that has been unable to institute a low cost or free health care system for all its citizens. Not only do these kinds of schemes deliver services they also create a sense of collectivity that the US appears to lack"

    The US is not unable to institute a socialised health care system. It has chosen not to. As for the creation of a sense of collectivity, in Australia at least that's a stupid fantasy, and ironic with it because the standard leftist complaint about australians is that we are mcmansion inspired bogans who voted for john howard for 10 years because of our loathing of the other.

    And let's not forget the constant complaints here in australia about the crappiness of the public health system.
 

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