The conventional wisdom on KP seems to be that individuals are better suited to efficiently allocate their wealth than the Federal Government. I submit that if you goal is to maximize individual utility, KP is right. If, however, your goals are to help the economy to regain its feet and to foster long-term economic growth, then KP is wrong.
Maximizing Individual Utility
If there is one thing that Americans do particularly well, it's doing stuff that is going to make them feel good. Americans are self interested machines, both rapacious and ruthlessly efficient. We see that in the Country's spending trends. For example, as the US's coffee pallet has become more refined, our need for fine coffee outlets has increased dramatically. As a result, we have channeled our dollars and focused our spending to facilitate the creation of a vast, private coffee delivery infrastructure never thought possible in this country. Our Starbucks-to-consumer ratio that is the envy of the java swilling world.
Similarly, many Americans are exceptionally good at making money. Eschewing such antiquated asset valuation models like the CAPM, our brave equity warriors learned that intrinsic asset value is much less important that perceived value. Of course, the obviously excessive P/E rations of the .com era served to stem some of the irrational exuberance inherent to the greater fool model. Thus, traders came to rely upon delicate, intricate, and sophisticated computer models put together by some of the best quants money could buy. The realities of stated income loans, interest-only ARMs, and refinance opportunities without end took a back seat to the highly crafted superior wisdom bestowed upon the few by their eight flat panel monitor arrays: these were worth something and there was money to be made.
But even those Americans who may not be financial wizards know how to make for a happy holiday. Both parents and their kids can recite from memory the relative merits of newest generation of ipod nanos when compared to say, the Zune or even the Touch. Both are probably aware of the new "it" toy, i.e. that toy which is most calculated to bring delight to the kids and make them the envy of their classmates. Never mind if the kid's 529 hasn't seen a contribution in 18 months. Never mind if you have to finance the purchase. It's the holidays: a time during which we are all entitled to a little joy.
Okay, you get the point. The truth is that people aren't even good at maximizing their own individual long term utility. If behavioral economics has shown us anything, it's that people will usually take the quick payoff at the expense of greater reward in the future. CEOs do it. Traders do it. Everyone does it. Compounding the issue is that people, at times, don't even know what will make them happy. They underestimate the utility of future rewards and over estimate the pain of certain trade offs. Sometimes, it's not their fault - they lack sufficient information about their consequences of their choices.
And here is ugly truth for all of those libertarians who want to live in a country of hundreds of millions: people make bad decisions and do it often. Efficient market theories assume perfect information and rational actors. Neither exist nor will they ever exist. Dreams of unfettered markets self-regulation are as unrealistic and as Utopian as anything dreamt up by the left.
Case in point: civil suits. Civil litigation is the ultimate in open market, government-free regulation. Someone rips you off or sells you a bum steer - don't go to government for help! Rather, settle the matter one-on-one, citizen-to-citizen before a neutral with a jury of your rational-acting, efficiently resource-allocating peers. Worried that some new food additive might cause cancer? Why wait for the government to waste millions of taxpayer dollars or burden industry with even more regulations when you can rely upon private individuals using private funds to research the issue and arrive at an answer? Do you think private corporations have a duty to make their products safer with newfangled improvements like seat belts? Why wait for government to decide the issue when you can quickly create an economic incentive for companies to behave responsively.
The truth is that every single one of KP's so called free market proponents would love nothing more than use more government regulation to reign in the US plaintiffs' bar. They would love to rip apart privately-negotiated contingency fee agreements and to prevent average Americans from playing their role in the resolution of private disputes. Somehow the very same people that libertarians believe should make their own decisions about savings, retirement, insurance, and capital investment become blithering idiots once they step into the jury box.
Even with government assistance, the markets failed to allocate sufficient investment in infrastructure and growth to tackle issues such as energy independence, math & science education, and basic road maintenance. Take energy independence for example. The markets failed us in the 1970's. After the embargo and after the Reagan administration took Jimmy Carter's solar panels off the White House's roof, the private failed to allocate sufficient resources to prevent future shocks. Even after 9/11, SUV sales continued to rise in the US. Neither the public nor US industry were committed to doing what needed to be done in order to properly tackle the issues.
I will acknowledge that a number of externatilites may distort the energy markets, so it's not a "pure" example. But we have one example of a regulation-free market: CDSs. The government was actually prohibited from regulating this market. Look where that got us.
Thursday: Unemployment Claims, Flow of Funds
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