Nassim Nicholas Taleb of New York University:
The fiscal cliff is not really a “cliff”; the entire country won’t fall into the ocean if we hit it. Some automatic tax cuts will expire; the government will be forced to cut some expenditures. The cliff is really just a red herring.
Likewise, any last-minute deal to avoid the spending cuts and tax increases scheduled to go into effect on Jan. 1 isn’t likely to save us from economic turmoil. It would merely let us continue the policy mistakes we’ve been making for years, allowing us only to temporarily stabilize the economy rather than address its deep, systemic failures. …
Stabilization, of course, has long been the economic playbook of the United States government; it has kept interest rates low, shored up banks, purchased bad debts and printed money. But the effect is akin to treating metastatic cancer with painkillers. It has not only let deeper problems fester, but also aggravated inequality. Bankers have continued to get rich using taxpayer dollars as both fuel and backstop. And printing money tends to disproportionately benefit a certain class. The rise in asset prices made the superrich even richer, while the median family income has dropped.
Overstabilization also corrects problems that ought not to be corrected and renders the economy more fragile; and in a fragile economy, even small errors can lead to crises and plunge the entire system into chaos. That’s what happened in 2008. More than four years after that financial crisis began, nothing has been done to address its root causes.
Our goal instead should be an antifragile system — one in which mistakes don’t ricochet throughout the economy, but can instead be used to fuel growth. The key elements to such a system are decentralization of decision making and ensuring that all economic and political actors have some “skin in the game.” …
First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.
In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.
It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.
Consider the difference between Silicon Valley entrepreneurs, who are taught to “fail early and often,” and large corporations that leech off governments and demand bailouts when they’re in trouble on the pretext that they are too big to fail. Entrepreneurs don’t ask for bailouts, and their failures do not destabilize the economy as a whole.
Second, there must be skin in the game across the board, so that nobody can inflict harm on others without first harming himself. Bankers got rich — and are still rich — from transferring risk to taxpayers (and we still haven’t seen clawbacks of executive pay at companies that were bailed out). Likewise, Washington bureaucrats haven’t been exposed to punishment for their errors, whereas officials at the municipal level often have to face the wrath of voters (and neighbors) who are affected by their mistakes.
If we want our economy not to be merely resilient, but to flourish, we must strive for antifragility. It is the difference between something that breaks severely after a policy error, and something that thrives from such mistakes.
Readers may remember the term TooBToF: Too Big to Fail. The 2008 bailouts were of companies the George W. Bush administration deemed Too Big to Fail — specifically banks through the Troubled Asset Relief Plan, which included the biggest banks with a presence in this state — JPMorgan Chase, Wells Fargo and US Bank.
Back in 2010, Bob Atwell of Nicolet National Bank wrote:
Ending Toobtof subsidy will be a blow for economic freedom and decentralization. Systemic risk is not a naturally occurring market phenomenon; rather it is an unintended consequence of decades of increasingly centralized regulatory power. Regulation creates the systemic risk it seeks to manage. It is hard for this administration to admit that more smart guys in Washington, with even more regulatory power, are not the answer. We do well to remember that regardless of who is President, high-level regulators tend to be loaned executives from Wall Street. …
The nation will be well served by the position the President has expressed. To do this, the President will not only need to find a populist voice, he will need to change his thinking about business. His economic rhetoric to date reflects a disturbingly socialist perspective. It has been a kind of dreamy socialism with a smile. To many of us working amidst the rubble of the economic earthquake, he sounds like he believes the purpose of business is to fund the welfare state. To those of us facing investment and hiring decisions, he seems to be waiting to expropriate the fruits of the work we do and the risks we take. Until we hear something different, we will just hunker down, continue de-levering and spend more time on things we can’t be taxed for.
Wall Street invested heavily in Obama’s election. If he sticks to his current course, they will turn all their charm, their money and their formidable intellectual muscle on you. The problem you had on economic policy in 2008 is that you had exhausted your public credibility sheltering and defending economic abusers. It is your complicity that made Obama’s soft socialism seem like the least bad choice to many independents. Do not resume your customary role as Wall Street’s water boy. The natural conservative position is to reverse the public subsidy of the Toobtofs. Tea party conservatives and Scott Brown independents are waiting for you to explain what they know in their hearts. Decentralized financial intermediation is essential for economic revitalization. There is world of difference between the financial machinations of Wall Street and the hiring and investment decisions faced by the gutsy main street entrepreneurs recovery depends on.
You would think that, having watched as Wall Street gave lavishly to the Obama campaigns in 2008 and 2012, the Republican Party (specifically its tea party wing) would be looking to stick it to Wall Street, while trying to appeal to the much larger small business community and trying to convince voters the GOP has a better economic idea. Here’s the GOP’s chance. Not only should there be no more bailouts; there should be no more opportunities for companies to become TooBTofs.
Steve Prestegard.com: The Presteblog 