Politics Trumps Economics
8th December 2013
Russ Roberts lays out some inconvenient truth.
A Martian coming down to earth would see all of the minutiae of regulation as totally irrelevant. Forget what we say our policy is. What the politicians and bureaucrats do is to keep the borrowed money flowing. That’s what the incentives are for regulators and the politicians they report to. These incentives drown out the best intentions of economists. I closed my point by saying that until the political power of large financial institutions is reduced, we’re just fooling ourselves. The political power of large institutions is the problem that needs solving, rather than trying to figure out the best way to tweak the current system to work more effectively.
And of course, my preference is to live in a world where investors and financial institutions live and die on their own. Get some skin in the game. But that’s not a politically viable solution either. Until there is enough political support against the big banks, economists are just fooling ourselves. We’re playing intellectual golf.
If economists want to make the world a better place, we need to think about how to change the incentives facing politicians and not just the incentives facing investors and managers and consumers as if they exist in a political vacuum.