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Archive for the ‘Financial Crisis’ Category

Ten days ago, I shared an interview in which I pointed out that President George W. Bush acquiesced to a flawed narrative about the 2008 financial crisis.

Bush and his team basically accepted the assertion of interventionists that it was the fault of “Wall Street greed,” when the crisis actually was caused by bad monetary policy from the Federal Reserve and corrupt housing subsidies from Fannie Mae and Freddie Mac.

(For what it’s worth, I don’t disagree that folks on Wall Street were greedy, but they were also greedy in the 1990s, 1980s, and other decades. The crisis was caused because foolish government policies made bad decisions profitable in the 2000s.)

The reason I’m raising this issue is because the Washington Post editorialized this morning in favor of the TARP bailout.

…support for TARP should be considered a basic demonstration of political maturity and pragmatism… Some relevant historical context: The outgoing Bush administration and the Democrats who controlled both houses of Congress had few good options for dealing with a once-in-a-century global financial collapse. As experts from the Federal Reserve and Treasury Department told the politicians, however, one sure way to turn the worst recession since the Great Depression into, well, another Great Depression, would have been to let the banking sector collapse and take millions of American households down with it. …TARP…was actually a major policy success.

Nope, that’s not true.

Tim Carney of the Washington Examiner wisely wrote about this issue a couple of years ago.

Under the guise of saving the U.S. economy, a bipartisan gang of powerful men decided to save a few failed or faltering banks. They posited a false dichotomy between “doing nothing” about the credit crisis rollicking markets, and saving the big banks. …The stated reasons for government intervention were…to prevent a disorderly fire sale of financial assets, which could cause a total market collapse… There are ways that government can do that without making it a point to save the banks. Bankruptcy often involves winding down failed firms in a manner that minimizes the losses taken by creditors and counterparties. It can be structured so as to prevent a disorderly liquidation.

Amen.

Tim hit the nail on the head when he pointed out that it wasn’t a TARP-or-nothing choice.

Lawmakers could have recapitalized the financial system using the “FDIC-resolution” approach, which basically means putting bankrupt financial institutions into receivership.

Depositors and investors are protected with this approach, even if it means taxpayers are picking up the tab.

What really matters, though, it that the poorly run institutions get shut down. The senior executives lose their jobs, and shareholders and bondholders are subject to losses. Which is exactly what should happen. After all, capitalism without bankruptcy is like religion without hell.

So why didn’t lawmakers adopt the FDIC-resolution approach?

They don’t have ignorance as an excuse. I spent a lot of time talking to policy makers at the time, both in the Bush Administration and on Capitol Hill. I begged and pleaded for them to reject a bailout and instead go with FDIC-resolution.

Sadly, I was ignored, and I think the reason was corruption. Tim elaborated on this hypothesis in his column.

You could call it cronyism if you want. After all, Ben Bernanke and Tim Geithner have both cashed out to financial institutions. Barack Obama fundraiser Warren Buffett made billions off his investment in Goldman Sachs based on his informed assumption the taxpayers would bail Goldman out. …Geithner and crew could have reduced the moral hazard and moral outrage of TARP had they wound down Citigroup. But Geithner wanted Citigroup to keep existing. It was pinstripe protectionism. …At nearly every turn, the bailout barons acted mostly to save the failed or wounded banks rather than to focus narrowly on preserving economic stability. …An economic system where the big guys are never allowed to fail precisely because they are big is not a just system. When you look at the revolving door actions of these guys—Rubin, Geithner, Bernanke, Orszag, and all the others—the unfairness is more obvious.

Kevin Williamson also wrote about how corruption was the dominant factor.

The bottom line is that narratives are important. Unfortunately, too many people accept the establishment’s flawed narrative about TARP – and plenty of Republicans have aided and abetted this false view.

The right lesson is that bailouts are bad economic policy and immoral as well.

P.S. I wrote about this issue for USA Today in both 2010 and 2012.

P.P.S. The only silver lining to the dark cloud of TARP (and the related European fiscal crisis) is that we got this humorous glossary.

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Notwithstanding dalliances in other fields, I’m a policy wonk.

But I will pontificate (often incorrectly) on politics when asked, which is what happened in this interview about the electoral impact of the coronavirus.

My basic point is that Trump is much better than the average Republican about “controlling the narrative.”

In other words, he doesn’t allow the media to frame issues in a way that is adverse to his interests.

Given Trump’s Jekyll-Hyde approach to economic policy, I have mixed feelings about his Jedi-like ability.

But I will point out why narratives are so important in public policy.

Since I’ve shifted to my comfort zone of public policy, I’ll also say something about trade.

One of the big risks from the coronavirus is that it will weaken global trade. Which led me to mention in the interview that hopefully Trump might learn from this growing crisis that expanded trade is good for prosperity.

Though I admit I’m not very optimistic given his mercantilist perspective.

P.S. Textbook discussions of “robber barons” and “sweatshops” are other examples of how bad narratives lead to distorted history.

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I have Republican friends who don’t trust Michael Bloomberg because he switched parties and Democratic friends who don’t trust him for the same reason. I tell all of them that it’s more important to focus on his policy agenda rather than his partisan identification.

Though that’s not a happy topic, at least from a libertarian perspective. For instance, I recently criticized his very bad tax plan.

And when he was mayor, I dinged him for his regressive views on the 2nd Amendment and his nanny-state approach to lifestyle choices.

Today, let’s consider his view on housing finance, which has generated controversy since video has surfaced with Bloomberg stating that the financial system got in trouble because anti-redlining policies required banks to make loans to customers in poor neighborhoods.

Other candidates, such as Elizabeth Warren, argue that this makes Bloomberg a supporter of racist practices (with the obvious implication that he might actually be a racist).

I’m reluctant to make such accusations, especially when I tracked down this longer version of the video and discovered that Bloomberg merely listed a bunch of policies that contributed to the housing bubble and financial crisis.

Redlining was the first thing he mentioned, but he also cites the Federal Reserve (dispenser of easy money) and Fannie Mae and Freddie Mac (dispensers of housing subsidies).

In the latter part of his answer, he focused on “securitization,” which is what happens when mortgages are bundled together and sold to investors (as “mortgage-backed securities”).

Much of what he says isn’t controversial.

But I want to point out a sin of omission.

Bloomberg mentioned Fannie Mae and Freddie Mac, but only in passing. This is troubling because these two government-created entities, as explained in this video, deserve much of the blame for both the bubble and the subsequent crisis.

Yes, the Federal Reserve also deserves criticism for flooding the economy with too much liquidity.

But it was the government’s housing intervention, specifically Fannie Mae and Freddie Mac, that channeled much of that excess liquidity into the housing market.

Simply stated, financial institutions were willing to make sloppy loans because they knew those mortgages could be bundled into securities and sold to Fannie Mae and Freddie Mac.

Though many banks were steered into also investing in mortgage-backed securities thanks to other misguided government regulations.

P.S. The wise approach, needless to say, is to shut down Fannie Mae and Freddie Mac as part of an agenda to end government intervention in the housing sector.

P.P.S. Obama was bad on this issue and Trump is bad on this issue, so I won’t be surprised if Bloomberg also is bad on this issue if he gets to the White House.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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One of the few theoretical constraints on Washington is that politicians periodically have to raise a “debt ceiling” or “debt limit” in order to finance additional spending with additional red ink.

I have mixed feelings about this requirement. I like that there is some limit on spending, even if it’s only a potential restraint.

On the other hand, fights over the debt limit are mostly just opportunities for Republicans and Democrats to engage in posturing and finger pointing rather than adopt positive reforms.

Moreover, the scholarly research clearly suggests that spending caps are the only effective fiscal rule, so what’s the point of having a debt limit if potential spending restraint never turns into actual spending restraint?

Catherine Rampell of the Washington Post looks at the current fight and opines that we shouldn’t even have a debt limit.

The government is about to run out of money because of an arbitrary cap on how much it can borrow… Lawmakers and the White House are haggling over  the conditions under which they will, once again, temporarily raise that cap, known as the debt ceiling. But the better solution would be to abolish it entirely… Most recently, the government hit the official debt limit on March 1 . Since then, the Treasury Department has engaged in “extraordinary measures” to shift money around and continue paying its bills… Initially Treasury predicted that its extraordinary measures would get us to October, but more recent forecasts suggest we will hit the wall as soon as early September. Which means the drop-dead deadline before we become global deadbeats could happen while Congress is away on summer vacation.

She worries that a failure to raise the debt ceiling could have very negative consequences.

So what happens if we default on our debt obligations? Well, for one, it would violate the Constitution, which says the “validity of the public debt of the United States . . . shall not be questioned.” No small thing. …U.S. debt instruments are currently considered the safest of safe assets because creditors believe they’ll be paid back on time and in full. …Calling our creditworthiness into question could therefore set off a chain reaction of global financial panic.

I agree.

Defaulting on the debt (i.e., not paying bondholders what they’ve been contractually promised) would be very damaging to financial markets.

In reality, however, what we’re really talking about is potentially a delay in making promised payments. Which would be harmful, though presumably not nearly as bad as long-run default.

And even a delay in payments might not happen if the Treasury Department made sure that tax revenue was set aside to make all promised payments to bondholders.

Though Ms. Rampell doesn’t like this idea, which is sometimes called “prioritization.”

Some right-wingers…have in the past suggested  that defaulting is no big deal, perhaps even desirable. They (mistakenly) think that a debt default would allow those in charge to unilaterally decide which bills deserve payment and which don’t, bypassing the democratic budget process.

I’m not sure why she says prioritization is a “mistaken” view.

I testified to Congress about this issue in 2013 and in 2016. If the debt limit isn’t raised, meaning no ability to issue new debt, that would be the same as an overnight balanced budget requirement (i.e., spending could only equal current tax revenue).

If that happened and Treasury made sure to prioritize interest payments (to avoid the potentially bad results Ms. Rampell and others warn about), who would have the power to stop that from happening?

I’m guessing lawsuits would be filed, but I can’t imagine a judge would issue an injunction to require a default.

Let’s dig deeper into this issue. Back in 2017, when a similar fight occurred, Heather Long of the Washington Post identified five reasons to worry.

Unless Trump and Congress pass a law raising the U.S. debt limit — a legal cap on how much the U.S. government is allowed to borrow — the Treasury Department will soon run out of money to pay its bills, triggering a first-in-modern-U.S.-history default that threatens to turn the world economy on its head. …The danger…is that at some point someone will miscalculate and the government will actually hit the debt limit, sparking a default, intentional or otherwise. Here are five reasons that would cause global panic.

How persuasive are these reasons?

First, it would trigger a wild ride for stocks and bonds. Wall Street doesn’t like bad surprises. …There would probably be an immediate, negative reaction in the markets.

If there’s an actual default, that would be horrible news.

If there’s a temporary default, that also would be bad news, though presumably far less catastrophic than a permanent default (though some will fan the flames of hysteria).

Second, America’s cheap funding source would end. …As soon as the United States actually defaults, investors would start suing the country, and they would almost certainly insist on much higher interest rates in the future.

Interest rates surely would climb because of the perception of added risk for investors.

Though I wonder by how much. I think Italy is heading toward a fiscal/financial crisis, yet investors are buying up plenty of that government’s debt at very low interest rates.

Third, real people won’t get paid. …The Trump administration would have to either stop payments to everyone or they would have to pick who gets paid and who does not. That means deciding between bondholders, Social Security recipients, welfare recipients, …etc.

Interesting, Ms. Long accepts that prioritization would happen.

For what it’s worth, I’m guessing bondholders and Social Security recipients would be at the front of the line.

Fourth, America’s global power would decline. …The U.S. dollar is the world’s reserve currency. People carry dollars and hold U.S. bonds all over the world because they believe America is their best and safest bet. A default would probably cause the value of the dollar to drop and global investors to shift some money out of U.S. assets.

This is an interesting claim.

The U.S. dollar is the world’s reserve currency.

Does drama over the debt limit, or even a temporary default, lead investors to shift, en masse, to another currency?

Perhaps, though I don’t see an alternative. The euro is compromised because the European Central Bank surrendered its independence by engaging in indirect bailouts of some of Europe’s decrepit welfare states.

The Chinese financial system is too debt ridden and too opaque to give investors confidence in that nation’s currency. And other nations are simply too small.

Fifth, a recession is possible. …hitting the debt limit could cause a sharp drop in markets and sentiment around the world as everyone worries that if the United States defaults, who’s next? Investors might start panicking and ditching bonds of other countries in Europe and Asia, too.

These are all reasonable concerns.

It all depends, of course, whether there’s a temporary default and how long it lasts.

And since we may be in the midst of a debt bubble fueled by easy money, any triggering event could lead to very bad outcomes.

Which is why it would make sense for lawmakers to embrace prioritization. There has been legislation to make that happen.

For what it’s worth, it should be quite feasible to prioritize.

Here’s the latest 10-year forecast from the Congressional Budget Office. As you can see from the parts I’ve circled, the government is projected to collect far more revenue than would be needed to fulfill obligations to bondholders.

To be sure, prioritization means that some recipients of federal largesse would have to wait in line. This would be unseemly and unwelcome, but it already happens in profligate states such as Illinois without causing any economic or fiscal disarray.

Who knows, maybe politicians would even decide that it’s time to jettison some federal programs. But since I understand “public choice,” I won’t be holding my breath awaiting that outcome.

I’ll close with two observations.

The first, which I’ve already discussed, is that a failure to increase the debt limit should not result in default. Unless, of course, the Treasury Department wants that to happen. But that’s inconceivable, which is why I fully expect prioritization if we ever get to that point.

The second is that debt limit fights are messy and counterproductive, but I don’t want it abolished since there’s a chance that one of these battles eventually may force politicians to deal with our fiscal mess – thus saving the country from a future Greek-style economic and fiscal meltdown.

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A few days ago, I shared some academic research investigating whether economic crises lead to more liberalization (Naomi Klein’s hypothesis) or more statism (Robert Higgs’ hypothesis).

Given the dismal long-run outlook for the United States and most other developed nations, this is not just a theoretical issue.

Well, the good news is that the evidence shows that economic turmoil appears to be associated with pro-market reforms. At least with regard to regulatory policy.

Today, I’m going to share more good news. We now have some empirical research from two Danish economists showing that voters like good policy.

Here’s what Niclas Berggren and Christian Bjørnskov wanted to ascertain in their research

Since the early 1980s a wave of liberalizing reforms has swept over the world. While the stated motivation for these reforms has usually been to increase economic efficiency, some critics have instead inferred ulterior motives…with the claim that many of the reforms have been undertaken during different crises so as to bypass potential opponents, suggests that people will dislike the reforms and even be less satisfied with democracy as such. We test this hypothesis empirically, using panel data from 30 European countries in the period 1993–2015. The dependent variable is the average satisfaction with democracy, while the reform measures are constructed as distinct changes in four policy areas: government size, the rule of law, openness and regulation. …We moreover include a set of control variables, capturing economic circumstances, political institutions and features of politics.

In other words, we’ve seen considerable liberalization over the past 20-plus years. Were voters happy or unhappy as a result?

Here’s a way of visualizing what they investigated.

For what it’s worth, I’ve argued that Reagan showed good policy is good politics.

And the good news is that this research reaches a similar conclusion. Here are their main results.

Our results indicate that while reforms of government size are not robustly related to satisfaction with democracy, reforms of the other three kinds are – and in a way that runs counter to the anti-liberalization claims. Reforms that reduce economic freedom are generally related to satisfaction with democracy in a negative way, while reforms that increase economic freedom are positively associated with satisfaction with democracy. Voters also react more negatively to left-wing governments introducing reforms that de-liberalize. …the hypothesis of a general negative reaction towards liberalizing reforms taking the form of reduced satisfaction with democracy does not stand up to empirical scrutiny, at least not in our European sample.

Wonky readers may want to spend some time with this table, which shows the results of the statistical analysis

I’ll close with a couple of specific observations from the research, all of which deal with whether some reforms are more popular than others.

The good news is that voters are most satisfied when there’s less protectionism.

It turns out that the most immediately important type of reform here is liberalizations that increase market openness, such as reductions in protectionism and removal of obstacles to capital movements.

(Methinks the folks in the White House may want to reconsider their protectionist policies. It seems people understand that trade wars cause blowback.)

The bad news is that voters don’t seem to get excited about reforms to restrain government spending, whereas other types of pro-market reforms are popular.

Reforms that involve government size are rarely statistically significant; reforms that involve the other three reform areas typically are.

Though voters sometimes aren’t happy when government gets bigger, so I guess that’s partial good news.

Crises only seem to matter when government size increases, and then they make the effect on satisfaction with democracy much more negative.

Perhaps this is evidence that people recognize Keynesian “stimulus” schemes aren’t a good idea? I hope that’s the right interpretation. Heck, maybe this is yet another reason to stop sending tax dollars to subsidize the OECD.

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When I give speeches about modern welfare states, I’ll often cite grim data from the IMF, BIS, and OECD about the very depressing fiscal consequences of ever-expanding government.

And if I really want to worry an audience, I’ll augment those numbers by talking about the erosion of societal capital and explain it’s very hard to adopt necessary reforms once the work ethic and self-reliance have been replaced by a culture of dependency and entitlement.

I basically warn people that many western nations (including the United States) are doomed to suffer Greek-style fiscal collapse. Depending on the type of speech, this is where I sometimes share a slide suggesting that there are two possible outcomes once an economic crisis occurs.

  • Does a crisis caused by bad government lead to even more bad government, which is the pessimistic hypothesis in Robert Higgs’ classic, Crisis and Leviathan?
  • Or does an economic crisis force politicians to actually scale back the size and scope of government, which is the hypothesis in Naomi Klein’s The Rise of Disaster Capitalism.

I’ve generally sided with Higgs, though there obviously are cases – such as Chile – where bad statist policies were followed by sweeping economic liberalization.

But, based on new research from the International Monetary Fund, it may be that Klein has a stronger argument (which would be a depressing outcome for her, since she favors bigger government).

Here are some of the issues that the authors investigated.

Relying on a new database of major past labor and product market reforms in advanced countries, we test a large set of variables for robust correlation with reform in each area. …structural reforms are notoriously difficult to implement…one of the most prominent hypotheses put forward in the literature, namely that crisis induces reform… we attempt to minimize value judgements and measurement error by employing a newly constructed “narrative” dataset of major reforms in four areas namely product market regulation (PMR) in network industries, EPL for regular workers, EPL for temporary workers, and unemployment benefit systems. … The large welfare costs of economic or financial crisis can break the deadlock over welfare-enhancing measures that could not be adopted otherwise due to conflict over their distributional consequences.

In short, they wanted to find out whether bad economic news (as captured by data on “GDP growth, deep recession, unemployment, crisis”) leads to pro-market reforms.

The answer is yes.

Our main result supports some form of the crisis-induces-reform hypothesis across all four reform areas. High unemployment, recession and/or an open economic crisis tend to be associated with a greater likelihood of reform. The effect is economically significant. For example, an increase of 10 percentage points in unemployment (as seen in several European economies in the aftermath of the Great Recession) is associated with an increase in the probability to undertake a major EPL reform for regular contract of about 5 percentage points — that is, about twice the average probability in the sample.

Here’s a chart from the report showing a big spike in deregulation in late 1990s/early 2000s.

And here’s a chart showing nations that took steps to cut back on unemployment subsidies.

Keep in mind, by the way, that some nations (such as Austria) may not have reformed because they never adopted bad policies in the first place.

Kudos to Denmark for implementing so much reform. And Greece wins a Booby Prize for failing to adopt desperately needed reforms.

I was also happy to see some results that bolster my argument in favor of jurisdictional competition as a tool to encourage better policy.

We also find evidence that outside pressure increases the likelihood of reform in certain areas. Reforms are more likely when other countries also undertake them.

Interestingly, it doesn’t appear that ideology plays a major role.

…we do not find any evidence for an ideological bias—there is no robust difference between left- and right-of-center governments’ propensity to undertake reform. …In the context of labor and product market reforms, while a reforming right-of-center government may face the combined resistance of the leftwing electorate, trade unions and other civil society groups, a left-of-center government will be less likely to be accused of pushing through reforms on ideological grounds and may therefore be more likely to succeed.

My two cents is that ideology can play a role (think Reagan and Thatcher, for instance), but that there are plenty of instances of putative right-of-center politicians making government bigger (Nixon and Bush, to cite US examples) and several instances of supposed left-of-center politicians overseeing pro-market reforms (Bill Clinton being the obvious example from America).

I’ll close with a very important caveat. The IMF study looked at regulatory policy. There are no lessons to be learned from this research about whether crises produce better fiscal policy.

For what it’s worth, based on all the post-financial-crisis tax increases that were imposed in Europe, I suspect that the Higgs hypothesis is still very relevant.

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