Monday, February 2, 2009

Market Imperfections & Policy Specificity

Two things I'll never understand about the debate over the current intervention package. One, why are conservatives parroting for nothing more than blanket tax cuts? Two, why are liberals doing little more than ranting about income distribution?

Financial markets are rife with potential market imperfections: asymmetric information, moral hazard, etc. When the whole crisis was getting revved up, I never understood why there wasn't more effort, not to bail out folks who were now sinking, but to secure traditionally-available lines of credit for individuals and businesses who have always been able to get loans. We did amazingly little to target the core problem then, and we're paying for it now.

So now the problem has spread. People are losing their jobs because of the same problem, and it seems to me, the most direct way to deal with that particular problem is to take this opportunity to increase investment in certain types of "public goods" - infrastructure, etc. - that will at least be there for us when we come out of this mess. It doesn't seem like 1-2 percent in business tax cuts are going to keep the private sector in business when they can't secure the tens of thousands, hundreds of thousands, or millions of dollars in short term credit they're used to taking out for day-to-day operations (the timeline for revenue streams seldom match one-to-one with costs).

It's called policy specificity. Credit markets don't work right? Direct policy towards those (not just bailing out the firms that broke those markets either). High unemployment? Direct policy towards that, and don't just give a payout to firms who may or may not need it and may or may not use it to expand production and employment.

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