The Foolishness of Jonathan Chait

Talking about financial reform, Jonathan Chait over at TNR lamented on the lack of knowledge within liberal circles on how to move forward.  As he says,

We have some regulatory proposals that we think will help, but almost nobody thinks will fully insulate us from the risk of another shock, and could possibly prove useless. The confidence level is fairly low. Now, I still think these proposals are far better than nothing. They’re also the best chance we have to get the answer right. We could wait a few years until the debate has matured, but the truth is that only is the shadow of an economic crisis and a backlash over the bailouts does the political space exist to impose a reform that actually takes a bite out of Wall Street.

So at this point, the best bet is to pass the toughest, most anti-Wall Street reform possible while the window of opportunity remains open. Then, if it proves too tough, or if somebody comes up with a better way to regulate the system, you can bargain away the too-tough parts of the law for something better.

The belief that any regulation could prevent the next crisis is foolish.  Like clockwork, there has been an economic downturn every ten years for the last 400 years at least.  Even though he is not willing to come right out and say it, Chait does seem to admit the futility of tough regulation.  As he says, these reforms “could possibly prove useless.”  And yet, despite this, he calls for the “the toughest, most anti-Wall Street reform possible.”

Why?

This has always been one of the things I’ve wondered about outwardly partisan liberals like Chait.  Why, given the fallibility of the regulation, is it still pushed forward?  And more generally, why is some regulation better than none?  Chait is being quite disingenuous here, but I think his views aren’t far from those of the mainstream, which really scares me.

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Something to chew on

From Jonathan Hoenig:

As it currently stands, the tax system, all three million words — is virtually impenetrable without professional assistance, precisely the reason Americans spend 6.6 billion hours, and $200 billion, on tax compliance, simply figuring out how much tax they actually owe. Consider that the market capitalization of General Electric is also around $200 billion, meaning that the expense of paying taxes, not even the taxes themselves, amounts to the value of one of the world’s largest companies…year after year after year.

Oh taxes.

 

Financial complexity, simplified

In my ongoing work to understand the financial crisis through a communication lens, a colleague of mine suggested this piece by law professor Jeffrey Lipshaw.  Near the beginning of the paper, he notes that

Regulation needs to have an epistemological modesty about it, a certain lack of presumptuousness, all of which is belied by disciplines that think that complex causes can be reduced to (a) simple and singular utility function (rational actor economics), (b) complex functions that can actually model the world’s almost infinite contingency (behavioral economics), or (c) an after-the-fact ascription of blame (law).

Though it is not in a language most would use, Prof. Lipshaw nails it.  The words and arguments that we use to describe the crisis are themselves cognitive shortcuts, we will never be fully able to capture the complexity.  Consequently, our ability to prevent another financial crisis or future financial crises through regulatory measures (which is also subject to these oversimplifications) is also suspect.

And yet, it seems that people are blaming deregulation for the meltdown, which has been eliciting a pro-regulation policy response.  Hopefully cooler heads will prevail, but given some of the proposals by the Obama administation, my fears are not completely assuaged.

 

Oil has peaked my interest

In a recent editorial from Investor’s Business Daily, they ask,

If the world is running out of oil, why do we keep finding more of it?

This quote is obviously a reference to peak oil, which has received a boost in popularity because the top economist at the International Energy Agency insists that we’re going to reach the point of no return a decade sooner than most previous predictions. The problem, I think, stems from a misreading of history.

The Peak Oil Theory traces its origins to geophysicist M. King Hubbert, who was specifically looking at oil within the United States. For the most part, he was correct about the production of oil within a given field or region, there is a bell shaped path. But as this science went from the lab to the public, a good deal of contextual information was left out. As noted on this website about peak oil,

In this regard, the ramifications of Peak Oil for our civilization are similar to the ramifications of dehydration for the human body.

But what is missed by those that are filled with paranoia about peak oil is the role of technology (and also a good dose of economics).

Technology, believe it or not, has taken a giant leap forward since those first models. Oil that was once out of reach at 20-30 dollars a barrel, now looks appetizing. Capture rates have also gone up. But advances have not just been made in drilling.

Drilling technology has advanced to the point where offshore rigs can take the full force of Category 5 hurricanes and spill barely a drop of crude.

In other words, the risk of obtaining this oil in terms of environmental damage has gone down.  Thus, the overall costs to society have also taken a dive.  Regardless, even if we do take production as a static or declining number, we have to assume no one is going to try to develop a substitute for an commodity that, in the US alone, is worth 1.4 trillion dollars a year.  In a world based on profit incentives, its foolish to think we will not switch to some other more  efficient substitute when oil gets too costly.

Moral of the story to peak oil paranoids: don’t believe everything you think.