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November 02, 2010

Comments

Tom

Most of the TARP money has already been repaid, and there's a possibility that the government will make money on TARP.

Nathan Smith

But that doesn't mean that opposing TARP wouldn't have been a winning issue for McCain in 2008.

nato

It would have been disastrous, though. McCain's active opposition would probably have sunk TARP and we'd have all been screwed.

Nathan Smith

I don't think anyone understands the economics of it well enough to judge that for sure. There probably would have been more short run pain, but the *expectation* that the government will bail out the banks in extreme situations will have consequences that may play out for decades and probably won't be good. I'm agnostic on TARP, though I think it's far more defensible than the other measures that the government has taken since 2008.

That said, I'm sure that McCain *thought* TARP was good for the country, and inasmuch as he sacrificed his chance to be president for the sake of doing the right thing on this one big issue (though he probably didn't think of it that way at the time), he deserves a lot of respect.

nato

Maybe not "for sure," but I would say the sonsensus is very strongly in favor of that interpretation. Insofar as we can ever make confident counterfactual statements in economics, I think we can make that one.

Nathan Smith

re: " Insofar as we can ever make confident counterfactual statements in economics, I think we can make that one."

Ludicrous hyperbole! Balderdash! Here's a counter-factual of which we can be a thousand times more confident than in the idea that TARP prevented an economic meltdown. If you set a minimum wage of $15/hr, unemployment would rise.

nato

I don't think that's more certain at all, though I'd say it's probably *as* certain, depending on the location. That said, it may have no easily-discernible effect in some cities, and there are cases(see below) in which (smaller) minimum-wage rises didn't appreciably effect employment in the way simple models predicted. Obviously, there's a point at which minimum wage rises would *obviously* increase unemployment, but depending on the location I think it's quite possible that setting the minimum wage at $15 wouldn't do so. It's certainly not a matter on which "we can be a thousand times more confident." So, I think the ludicrous hyperbole is perhaps more on Nathan's side of this exchange.

http://emlab.berkeley.edu/~card/papers/njmin-aer.pdf

Nathan Smith

No, I'm definitely right on this one. Card's well-known paper deals with a very small rise in the minimum wage. $15/hr is clearly above the equilibrium wage and would definitely increase unemployment. That price floors cause surpluses and price ceilings shortages is the sort of thing economists can really know. The counter-factual about what would happen if TARP had not been passed is far more speculative. Neither (well-modeled, widely accepted) theory nor proper empirical work (with regressions!) can back up strong claims about the effects of TARP.

nato

"Clearly above the equilibrium wage" Are all the elements that establish equilibrium obvious, and is there one equilibrium across the market or many? I mean, the simple model of a credit crunch is both easy to model and widely accepted, though its applicability to any particular situation could be debated. In the case of a $15 minimum wage, I'd say the known dynamics would be so strong as to drown out any oversimplifications, as long as one was not in an very constrained labor market. In the case of TARP, it seems pretty clear by now that the pressures of deleveraging were indeed strong enough to crush the financial system, whatever else we might not understand about the situation. The weight of the write-offs in early 2009 were simply immense, and a great deal of 'wealth' is still gone. That said, we've not had the financial system collapse to that degree in about 140 years, so it's hard to predict what the consequences would be. Maybe we wouldn't be so screwed without functioning credit markets for a while after all. I think (for example) the Independent Institute arguments on the matter are astonishingly obtuse, to the point that I wonder if they're being honest in articles like these: http://www.independent.org/blog/index.php?p=3518

I think the argument that the long-term consequences of TARP will be worse than the short term* pain of financial collapse is plausible but weak, because it seems like the threat averted by TARP now is the same as the threat proposed for the morally-hazardous future. Perhaps the objection is that now we're going to try to prevent collapse through stifling regulation rather than through bankers' self-interested prudence. That would sort of fly with me, if the 19th century wasn't riddled with banking system collapses despite bankers of that era having no government-provided moral hazard to backstop their risk. Clearly some kind of regulation is going to be necessary. What kind, I don't know, because that's way past anything I can pretend to grasp.

*Would it really be short term? I tend to doubt it.

Nathan Smith

If you wanted to make the case that TARP was needless and/or harmful, a good historical analogy to use would be the Russian default in 1998. When the financial sector was allowed to melt down, the Russian economy, long staggering, finally turned the corner and started a phase of healthy growth (that lasted until it was mugged by Putin's power vertical).

nato

Was/is our growth unhealthy? I think there was an element of unhealth about the wealth-effect related, real-estate centered growth of 2004-2008, but based on rent-mortgage ratios it looks like the US at least is more or less back to equilibrium. I'm uneasy about what's going to happen to inflation once deflationary pressures ease and the financial system takes another look at the consequences of multiple rounds of QE. But, I'm not sure capital is really all that locked in unproductive firms. Are there warning signs in that direction that I'm missing? Or is it more that we still have a huge labor market mobility problem?* On that I agree, though I don't know what the solution is.

Well, allowing (and protecting) more immigration to is an obvious one, but I don't know 1) how fast it would work and 2)if it's politically available.

*I was recently noticing that long-term unemployment was already up significantly relative to historical levels in the last decade even when overall unemployment was historically low. Intuitively, this seems to indicate a problem that has been building for a long time, though I'm not sure exactly why.

nato

Or rather, I'm not sure if it's explainable by the obvious answers concerning changes in the US labor market

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