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Tuesday, July 27, 2010

David Henderson Proves He Can't Read

A response to Dave Henderson:

I knew Dave Henderson was challenged at times in breaking out of the pre-determined conclusions that his ideology gives him, but I thought he could at least read. Turns out he can't. He says:

Mark Thoma Doesn't Get It, by Dave Henderson: Government as Deux Ex Machina

Almost all economists recognize that there are some market failures that must be corrected by government intervention, the disagreement is over their prevalence. Some economists see widespread and costly market failures, and that government can intervene effectively to overcome them.
This is from Mark Thoma.

Notice a category missing? The category includes me. It's economists who do "see widespread and costly market failures" but don't see how "government can intervene effectively to overcome them." The debate between advocates of government intervention like Mark and critics like me is still unjoined--by Mark. What he has not shown us and, more upsetting, what so few advocates of government intervention even try to show us, is how a government regulator will have the right incentive to do the right thing. Will the government regulator be fired if he screws up? Not typically. Will he get a huge bonus if he does something right? Not typically. And how, with a centralized information system, will he get the information needed to make a good decision, something I wrote about in the context of dealing with terrorism? I don't read Thoma as much as Arnold does, but I read him a fair bit and I've never seen him deal with these issues. Have you?

Notice first that Henderson left this out:

More libertarian types tend to both see fewer market failures and, more importantly, believe that government is not very effective in intervening to correct problems. It's only very large, very obvious cases where government can help, and those are far and few between. Some never see them at all.

The "more importantly" part was intended to acknowledge precisely the point Henderson is making. So the first point to make in response is that Henderson seems to have tried to intentionally mislead people by only quoting part of what I said, or he didn't read carefully. I'll take the charitable interpretation that he cannot read. After all, it was hidden in the very next sentence.

Given that he's misrepresented what I said, I see no need to respond to the rest of his criticism, but the idea that I have never discussed the limitations and incentives regulators face is flat wrong. I don't have time to dig out more, and criticism from Henderson is not really worth devoting much time to it, so I'll just choose the very last thing I wrote on this topic a couple of days ago (the first entry in the "market failure" category):

The fact that Fannie and Freddie were allowed to follow private sector into risky markets when they began losing market share to private sector firms, and the failure to adequately regulate the risk that private sector institutions could take undermines faith in regulators and makes the case for Fannie and Freddie murky.
I still think that, overall, having Fannie and Freddie was beneficial, and I'll give lukewarm support for these institutions. But that support is conditional upon the expectation that regulators will do a better job of monitoring and regulating the amount of risk that is present in financial markets. ... We need to do a better job than we have in the recent past of regulating the amount of risk that banks can take in response to the insurance that they get from the implicit government support of Fannie and Freddie. If we can't, then the case for the existence of Fannie and Freddie is much harder to make.

That doesn't look like unqualified support for regulation to me, and, in fact, I think this will be a very hard case to make.

Oh, and about the "I don't read Thoma as much as Arnold does" part. I don't much read him much either, and quit linking to his writing altogether (I used to link to a few of his pieces at an anti-war site he contributed to, but that's it). For the most part, as I noted above, Henderson cannot break out of the ideological box he has placed himself in. Thus, what you see in his writing is often an ideological argument disguised as analysis. You already know what he will say before he says it, there's never any doubt, so why even bother to read? Am I surprised that he thinks that government cannot intervene and effectively overcome market failures? (Ever???) Not in the least. Am I surprised that he thinks everyone else is as ideologically rigid as he is and hence cannot allow for, say, the fact that regulators face poor incentives? No, I'm not surprised that he believes that, even when it's clear that it isn't true.

    Posted by on Tuesday, July 27, 2010 at 09:18 AM in Economics, Market Failure | Permalink  Comments (22)


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